Trading stocks around earnings announcements is complicated. Nevertheless, we’re going to take advantage of lower- than-average longer-dated options premiums in an e-commerce payment services company to frame a modestly bullish bet going into earnings. Stock investing is challenging. Investing ahead of a catalyst, such as earnings, even more so. Some of the more significant challenges associated with trying to trade stocks ahead of, or going into, earnings include: Volatility Increased price swings: Earnings announcements can lead to heightened volatility in a stock’s price. Positive or negative surprises in earnings results can cause sharp moves in either direction, which can be difficult to predict and manage. Options pricing: For options traders, this volatility can lead to increased options premiums, making it more expensive to enter long positions ahead of earnings or occasionally tempting traders to “yield chase” by selling premium the trader perceives as rich because it is higher than usual. Uncertainty and Surprises Unpredictable outcomes: Predicting what a company will report for earnings or what management might say on an earnings call is hard enough. Correctly anticipating how the market will react to what they report or say is harder still, even with a thorough analysis. Companies might beat earnings expectations but still see their stock price fall due to other factors like future earnings guidance, revenue quality, or broader market conditions. Guidance: Companies often provide forward-looking statements or guidance about future earnings and performance during their earnings calls, which can have an immediate and unpredictable impact on their stock price. Market Expectations Already priced in: Sometimes, expectations of strong or weak earnings are already priced into the stock by the time the announcement is made. This can lead to a “sell the news” response, where the stock moves opposite to what one might expect from the earnings outcome. Analyst…
2024-02-05 10:44:00
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