How to Trade an Earnings Event
Whether you are a seasoned trader or not, jumping into a trade during the company’s earnings announcement is a bit risky… if you don’t know how to trade an earnings event the right way.
Earnings season is usually a time during January, April, July and October when companies release their quarterly earnings report (investors use this to view how well off a company is financially and if they are worth the investment).
The hours, and even days, leading up to an earnings event is where you’ll see investors trying to predict what the report is going to look like and how the news is going to affect the stock.
This, of course, causes stocks to peak and plummet as all this speculation creates an extremely volatile market. But while there’s no guaranteed method to know if an investor’s prediction about the company is true until the report comes out, there is still a way to make a significant amount of profit if you learn how to trade an earnings event the smart way.
How to Trade an Earnings Event
Traders, in today’s video we really want to cover how you can trade an earnings event using General Mills Inc. (NYSE: GIS) as an example:
The first thing you want to do is figure out when the next earnings report is going out. As you can see on General Mills chart, its most recent earnings report was on Dec. 17.
The next thing we like to do is check out the stock’s past performances and how the name trades on earnings.
Going from right to left: The last report saw barely any movement, the report prior to that had slight upside, the move before that was extremely volatile (however you have to factor in that this was in March when the pandemic truly hit) and the other report didn’t cause much movement.
So at first glance, we think it’s safe to say that the General Mills stock isn’t much of a mover when it comes to earnings season.
Next, make sure to check out the implied volatility.
Implied volatility is extremely important when looking at how a stock is going to react during its earnings event. It helps traders calculate probability and how volatile the stock will become.
This is a great way for you to figure out how likely your stock is going to reach a price in a certain amount of time.
On the chart above you can see that the implied volatility is very low and (after looking at the 200-day moving average) the price looks really flat.
Simple enough so far, right? Well… this is when things start to get a little tricky and we need to pull out our calculators to crunch some numbers.
Check out our short video below to get the rest of the steps on how to trade an earnings event and share your thoughts below.