Trading around an earnings report carries elevated risk — the outcome is fundamentally binary and largely unknowable in advance, unlike most other trading decisions with more gradual information flow.
The Risk-Aware Approach
Given the ~76-78% historical beat rate, a straightforward directional bet purely on "will they beat" carries less edge than it might seem, since that expectation is typically already priced in. More sophisticated approaches include checking options market implied volatility for the market's own priced-in expected move, sizing any position small given the binary risk, and — for risk-averse investors — simply avoiding new positions in the days immediately before a report rather than gambling on the outcome.
A common and reasonable approach for long-term investors (as opposed to short-term traders) is simply holding through earnings without adjusting the position at all — since a single quarter's surprise rarely changes a long-term investment thesis, actively trading around every report can add transaction costs and risk without a corresponding edge.
A Long-Term, Buy-and-Hold Investor: Consider simply holding through the report rather than actively trading around every quarter.
An Active Trader Wanting Earnings Exposure: Size any position small given the binary risk, and check implied volatility for the priced-in expected move first.
Trade Around Earnings the Way
- Check options implied volatility for the priced-in expected move.
- Size any position small given the genuine binary risk.
- Consider simply holding through the report if you're a long-term investor.
See the earnings season calendar to anticipate upcoming reports.
