This is a really simple blog post - Earnings reports matter because the market tells us they do. We could end this after one sentence and we wouldn’t be wrong (and we thought about it, to make a point), but there’s more to say, so we’ll say it.
We’re taught in business school that the market is made up of rational investors, consistently making decisions with their best interest in mind, decisions based on universally-available information shared instantaneously with the entire market in a format easy to understand. It turns out that’s not exactly the way it happens.
When companies report quarterly earnings, it’s usually the first chance investors have to hear first-hand how a company has performed. This information is compared with the public expectations for performance - guidelines and estimates usually provided by the companies themselves in previous earnings reports - and the evaluation then drives investors to react to that information with buying or selling.
For traders (different than investors!), we recognize periods of increased activity and uncertainly as being nice opportunities for gain. When lots of people are paying attention there are usually many more opportunities to find good trades, so as traders we pretty much follow the volume and implied volatility to find the products we trade.
For everyone in the market, these moments when information asymmetry (it’s a real term!) is reduced are extremely important, as they provide the bevy of “rational” investors a chance to respond to real information with changes in preference. We try to predict ahead of time what those changes will be, based on the exact same information as everyone else - we use our previous experience to help guide us through decision-making in volatile environments.
If you’ve never traded earnings announcements before, it can seem a little scary, but don’t worry, we’re here to help. If you have traded earnings annoucements before, then you know what we’re talking about - it’s a ton of fun, but also stressful and occasionally very frustrating (like when a company beats its estimates but the price drops anyway!).
If you’re in either of these camps, we encourage you to become an Earnings Trade Alerts member, and let us guide you through the season with trade ideas, knowledge, and a friendly ear for the good trades and bad.
That’s all there is to say about that!