Earnings season is one of the most exciting and volatile times for traders. Four times a year, publicly traded companies report their quarterly results, creating massive price movements and trading opportunities. In this guide, we will explain everything you need to know about trading during earnings season.
What is Earnings Season?
Earnings season is the period when most publicly traded companies release their quarterly financial reports. These reports include revenue, earnings per share (EPS), forward guidance, and other key metrics that investors use to value stocks.
Key insight: Earnings season typically lasts about six weeks each quarter. The bulk of reports come in the first three weeks, with major companies often setting the tone for the entire market.
When Does Earnings Season Occur?
Earnings season happens four times per year, starting about two weeks after each quarter ends:
- Q4 Earnings (January-February): Reports for October-December
- Q1 Earnings (April-May): Reports for January-March
- Q2 Earnings (July-August): Reports for April-June
- Q3 Earnings (October-November): Reports for July-September
Why Earnings Season Matters for Traders
Earnings reports create unique trading conditions that differ from normal market periods:
Increased Volatility
Stocks often move 5-15% or more after earnings reports. This increased volatility creates opportunities for both directional and options traders. The implied volatility of options increases dramatically before earnings, making premium selling strategies attractive.
High Volume
Trading volume spikes significantly around earnings announcements. This means tighter bid-ask spreads and easier order execution, but it also means faster price movements that can catch traders off guard.
Market Correlation
Major companies like Apple, Microsoft, Amazon, and Google can move the entire market with their earnings reports. When these bellwethers beat or miss expectations, it often affects sentiment across all sectors.
How to Prepare for Earnings Season
1. Build Your Earnings Calendar
Before earnings season begins, create a calendar of companies you want to trade. Focus on stocks you understand and have traded before. Note the report date, expected EPS, and expected revenue for each company.
Essential Calendar Information
- Report date and time (before market open or after market close)
- Consensus EPS estimate
- Consensus revenue estimate
- Historical earnings surprise percentage
- Average post-earnings move (past 4-8 quarters)
2. Understand the Expected Move
The options market prices in an expected move for each stock around earnings. You can calculate this by looking at the at-the-money straddle price for the expiration immediately after earnings. This tells you how big of a move the market expects.
3. Review Historical Patterns
Look at how the stock has reacted to earnings in the past. Some stocks consistently beat estimates but still sell off. Others tend to gap up on any positive news. Understanding these patterns gives you an edge.
4. Check Sector Performance
If several companies in the same sector have already reported, their results can hint at what to expect from similar companies. Semiconductor companies, for example, often have correlated earnings trends.
Common Earnings Season Trading Strategies
Pre-Earnings Volatility Play
Buy options before earnings to capture the increase in implied volatility. Sell before the actual report to avoid the earnings outcome risk. This strategy profits from volatility expansion rather than directional moves.
Post-Earnings Momentum
Wait for the earnings report and trade the trend that develops after the initial reaction. If a stock gaps up on strong earnings, it often continues higher for several days as analysts upgrade their targets.
Earnings Straddle
Buy both a call and a put at the same strike price before earnings. You profit if the stock makes a big move in either direction. The challenge is that options are expensive before earnings, so you need a larger than expected move to profit.
Iron Condor
Sell an out-of-the-money call spread and put spread to collect premium. You profit if the stock stays within your range. This strategy works well when you believe the market is overpricing the expected move.
Risk Management During Earnings
Earnings trades carry unique risks that require careful management:
- Position sizing: Never risk more than 2-5% of your account on a single earnings trade
- Gap risk: Stocks can gap beyond your stop loss, so plan for worst-case scenarios
- Liquidity risk: Avoid illiquid options that have wide bid-ask spreads
- Correlation risk: Do not have too many similar earnings positions at once
Pro tip: Many experienced traders reduce their position sizes by 50% or more for earnings trades because of the binary nature of the outcome.
Key Metrics to Watch in Earnings Reports
Not all earnings numbers are created equal. Here is what matters most:
- Revenue growth: Top-line growth shows demand for company products
- EPS vs estimates: Beating or missing the consensus estimate drives immediate price action
- Forward guidance: What management expects for next quarter often matters more than current results
- Margins: Gross and operating margins show profitability trends
- Key performance indicators: Metrics specific to the industry, like subscriber counts or same-store sales
Common Earnings Season Mistakes
Avoid these pitfalls that trap many traders during earnings season:
- Overtrading: Not every earnings report is a trading opportunity
- Ignoring guidance: Focusing only on the EPS beat or miss
- Fighting the trend: Trying to fade strong earnings moves too early
- Overleveraging: Taking too large positions because of FOMO
- Holding through earnings unintentionally: Forgetting you have positions in reporting stocks
Track Your Earnings Trades
Pro Trader Dashboard automatically identifies your earnings-related trades and shows your win rate by strategy. See which approaches work best for you during earnings season.
Summary
Earnings season offers exceptional trading opportunities for prepared traders. Success requires understanding the earnings calendar, managing volatility, and having clear strategies before entering positions. Start with small positions, focus on stocks you know well, and always define your risk before the trade.
Ready to dive deeper? Learn about specific strategies like earnings straddles or explore pre-earnings trading strategies.