Customer Reviews

Trading on Corporate Earnings News: Profiting from Targeted, Short-Term Options Positions

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Save yourself the time and money, here's the meat of the entire book;

It's very difficult to predict earnings, and even if you could, its just as difficult to predict the markets reaction to those earnings. So buy a straddle or strangle just before the market close the day before the earnings annoucement, then dump the position before the market closes the day of the actual earnings announcement. That's it! That's essentially the entire book!

The authors like true accedmic types present wads of supporting studies to back up their claim that its difficult to predict both earnings and the subsequent market reaction to those earnings, but they fail in providing a trading plan that's been shown to make money over time. To be fair, the authors give guidelines for which options (those with small bid/ask spreads) or which types of stocks should be used in executing this plan, but outside of a small set of guidelines, the "plan" is largely to just blindly buy a straddle or strangle the day before a company announces its earnings then dump the position the day of the actual announcement. Is this a long term profitable stratedgy? I dunno, but I am not about to invest my money in a plan that I "hope" works.

One could argue,as other reviewers have, that to employ this method, you should study the company, analyze its earnings, etc, etc....not be lazy as one reviewer has suggested, but that goes against the entire crux of this method in that you can't predict earnings and even if you could, you can't predict the markets reaction to those earnings, that's why you buy a straddle!

Traders who want to cash in on the huge swings that growth stocks have after earnings are announced will find this book very informative and interesting. The authors show through statistics and empirical data how traders can make money in option plays that are held through a company's earning announcement.

Half of the earnings announcements made by companies have market returns that are 30 times as large as a typical non-announcement day. These kind of moves make volatility driven option strategies successful many times. The research shows that companies that have surprised the market with better than expected earnings will continue to do so. The research also shows that it is very difficult to predict how the market will react to good or bad surprise earnings. Sometimes it sells the news even when it is good and sometimes it goes up on bad news, the complexity of the reports also come into play where revenue is not what the market wanted so it sales off even though the earnings beat expectations.

The book recommends buying options that are very close to at-the-money on both sides both a call and a put where the delta is near 1 in the closest month to expiration. This is an option straddle where you profit on a sharp move in the underlying stock regardless of which way it moves as long as it is a big move. This is where you want to be to get the maximum response to price movement with the option that occurs in the equity. This is a very short term strategy buying the day of the earnings announcement and only holding to the next day. This limits any deterioration in the option through losing the theta value through time. You want to sell the options on both sides the next day to lock in profits after the move before the stock retraces. Growth stocks often have the torpedo effect when they miss earnings and fall dramatically, this would be profitable for this straddle strategy.

However for this strategy to work you must buy options that trade enough contracts to have a tight bid and ask spread so you do not lose your profits going in and out of the trade of a stock with illiquid options. If the stock does not move fast enough after earnings to cover both premiums then you will sell the next day for a loss because of collapsing volatility value in Vega. However if the stock does move farther than the premiums of both the call and the put you will have a profit on the side that was hedged for that direction that will cover the loss of the other side of the straddle that will be almost worthless after the trend.

This strategy caps your down side risk but gives you the potential for unlimited profits theoretically in a strong trend after earnings.

One problem with this strategy is the efficiency of pricing in implied volatility. You must have that greater than expected move to be profitable. The book does a good job of showing option traders how to locate these specific types of trades. The winning trades on the right trades are in the high double digits on the capital used.

These trades are non-directional which increases your odds, you do not have to predict the direction of a big move you just need a big move. Great book for people learning about option strategies, great food for thought.

In a sense, if you already know about straddles and strangles, one could be forgiven to think that the book doesn't offer anything new. If all you are looking for a "new" trading strategy, this book will disappoint. However, this short, easy-to-read book should be mostly viewed as understanding the dynamics of earnings announcements - right from what is included in earnings report and which numbers matter (and why) to post earnings drifts and specific strategies trade around such events.

A recent article in a leading financial weekly cited a research firm that over 75% of the straddles/strangles lost money in the ongoing earnings season (Jan-Feb 2011) - mostly attributed to the collapse of the implied volatility (the authors do explain this phenomenon very well). As such there is obviously no guaranteed results - but this book provides almost everything a trader would want to develop a comprehensive checklist in entering into trades around earnings (in fact, this strategy is not limited to earnings seasons - pharma/biotech companies facing FDA action dates are also viable candidates for this strategy). The authors cite one of my favorite books in option trading - The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets whose discussion on volatility collapse is a must-read for any trader. In fact, this book joins another favorite of mine - Trading Options at Expiration: Strategies and Models for Winning the Endgame in devising and refining my strategies.

The book is written in a very down-to-earth manner with not much technical vocabulary assumed. For a more serious reader, the authors provide citations of some of the foundational academic research in this space. Overall, a very crisp, well-organized book. I just wish they had hypothesized on specific strategies and performed some back-testing to give the reader a better understanding of the odds. 4.5*

Have you ever thought that you had a pretty good idea as to what the results of a company's upcoming earnings announcement would be and then purchased either calls or puts based upon your expectations? Have you been surprised when the stock's price went in an unexpected direction after the announcement even when you had guessed correctly about the actual earnings numbers? Have you been burned so often that you have even given up holding options positions heading into earnings? Don't feel alone.

The authors of this book have researched the stock price action up until and then after earnings dates for many companies over many years and provide the results of their research in an easily understandable book. Basically their research shows that predicting earnings numbers is so difficult that even professionals are wrong a good percentage of the time. If that weren't sobering enough, they also provide convincing data to show that there is seemingly little rhyme or reason to explain the different ways that stock prices move following earnings surprises, whether those surprises are to the up side or to the down side. After reading the book one is left to conclude that you might as well make your trading decisions around earnings announcements by flipping a coin; but if that is the case, what can a trader realistically do? Fortunately the authors do provide some recommendations and they do so in an easily understandable fashion.

They ultimately conclude that the best strategies involve purchasing either straddles or strangles trades on the day just prior to earnings announcements and then exiting those trades the following day. Since large stock moves provide better results for straddles or strangles, these strategies work better with growth stocks than with value stocks, and smaller, less followed stocks may be more appropriate than large, stodgy ones. There are some additional suggestions mentioned in the book to tweak these strategies but these are the basic recommendations in a nutshell.

I can only shake my head thinking about how much money could have been made by following their advice and taking a position this week with Netflix!

"Trading on Corporate Earnings News" presents a clear and concise strategy for profiting from options trades around quarterly earnings news. John Shou is a professor of accounting at Fordham University; Ping Zhou is a "true quant" and portfolio manager for the Quantitative Investment Group at Neuberger Berman. Both authors strive to "keep it simple" by presenting the types of trades most likely to be profitable, supported by data from over 100,000 stocks, usually taken from the Russell 1000, 1984-2009. The book's goal is "to describe the incredible potential profitability that exists for short-term options positions that are specifically targeted at earnings announcements", as well as the pitfalls.

Of course, if a trader is confident that a stock price will move in a particular direction, he or she can do a directional trade, and there is a chapter dedicated to long calls and long puts. But the principle strategies outlined by the authors are designed to cope with the fact that good earnings news produces negative market reaction 40% of the time, so a directional bet may be quite risky. The authors recommend long straddles and strangles, which will be profitable no matter the direction of the market reaction. "Earnings surprises", usually defined as a difference between earnings per share announced and what was expected, often produce significant price movement and so present ideal conditions for this strategy.

Shou and Zhou take the reader through long straddles and strangles: which contracts to buy, trading volume, entry and exit points, transaction costs, etc., with examples of specific trades that have worked or not worked and why. They touch on the more complex short iron butterfly and short iron condor trades and on short straddles and strangles, but the authors don't really recommend them. They think the simpler, long trades have a higher chance of being profitable. The last section of the book offers some tips for choosing stocks most likely to experience earnings surprises that result in big price moves. "Trading of Corporate Earnings News" is helpful, well-researched, and easy to understand, which makes it ideal for beginning options traders as well as those looking for new opportunities.

Many investors, me included, look forward to earnings season; it can seem like Christmas the way it makes your favorite stocks move, but unlike Christmas you get four earnings seasons per year. But your investments don't always go as planned; certainly this past winter I found myself wishing I had set up my investments a little differently. This book seeks to present both a method and a rationale for profiting from earnings announcements regardless of which direction your stocks move post-earnings.

The authors, one an active trader and the other an academic researcher, and both with doctorate degrees; are well-teamed and, perhaps surprisingly, have written an approachable, easy-to-read book with many recent examples of actual stock performance around earnings. Much of their findings and recommendations, however, are not based solely on selected examples but rather inspection of results from many years of earnings announcements by a large set of companies.

The book presents characteristics of earnings announcements, particularly with respect to actual versus expected earnings; and then examines the market's reaction to the announcements. The salient points made are that first, it is difficult to predict whether earnings surprises will be positive or negative; second, the market often moves in the opposite direction (generally due to other factors in the announcement; for instance, the announced outlook for future earnings). So it can be doubly difficult to correctly predict which way the stock price will move post-announcement.

The authors also present data showing that; first, big moves after earnings announcement are common; and second, the magnitude of such moves has increased over time. Thus a strategy that takes advantage of such big moves, without necessarily predicting the direction, would be in order.

The authors' basic recommendation is to open a straddle or strangle just before an announcement and close it shortly after. This is profitable if the stock moves sufficiently post-earnings, in either direction. It would be a money loser if the stock does not move post-earnings.

A working knowledge of options contracts is required to follow the concepts.

I find myself persuaded to try the method, and as luck would have it, another earnings season is about to commence!

I have traded directional options around corporate earnings and have experienced the frustration of getting the beat or miss correct, only to see the option move in the opposite direction. The authors explain that this phenomenon occurs about 40% of the time for a variety of reasons. Even if one does their due diligence, it can be tricky trying to guess a company's future guidance and the consequent market reaction. John Shon and Ping Zhou recommend straddles and strangles to hedge your investments. Their underlying principle is that you can achieve more consistent returns by playing volatility over direction. The last section of the book attempts to narrow the earnings field by giving a checklist of criteria to employ when choosing companies that are best suited for this strategy.

Overall, Trading on Corporate Earnings News is written in a clear, concise, straight forward style that is easy to follow. Numerous examples are given to support the underlying theme of this book. For anyone trying to work through the earnings maze, I highly recommend this interesting, enjoyable book.

If you're a stock market trader I think you'll want to pick up a copy of Trading on Corporate Earnings News. It's a book that's focused on short-term options trading, but which could have a fair bit of value to non-options traders and general market watchers as a whole. The authors are a pair of PhDs (Shon is an academic, Zhou a portfolio manager) who really get into the numbers about what stocks do around earnings announcements. It's interesting and potentially quite useful stuff if you track stocks at all.

Don't worry about the PhD thing, though. This isn't an academic paper. The language is very easy to read and there isn't a bunch of Greek in the text. What they have done is incorporate a considerable amount of academic research (7 pages of references) about earnings forecasts, price performance, and related subjects into a pretty well done discussion which features loads of visuals.

The book starts by taking an in-depth look at earning surprises, including empirical evidence of how they are distributed and how their patterns have tended to change over time. It then moves on to look at how stock prices react to earnings surprises. The rest of the book focuses on options trading strategies.

By the way, there's nothing too complicated about the option strategies, so even if you're not an experienced options trader you shouldn't have any trouble following the discussion. There are lots and lots of examples provided and explained. I would have liked to have seen some empirical data on the performance of the strategies outlined, though.

Short-term options trading is not my personal thing, and I was well aware of the different types of options strategies that could be employed for the type of trading the authors discuss in this book. Still, I found it a very worthwhile read for the information presented on earnings estimates and how the markets react to earnings releases. It's information I could very likely put to use in other ways in my market analysis and trading. From both perspectives I think it's a good read.

My negative review is primarily that it does not provide what its title suggests - there is no strategy for profiting from earnings news in this book.

What it does provide is a lot of good information about earnings and backs it up with solid research. But its primary finding is that even if you are successful in predicting earnings results better than market estimates, you still have only a 50/50 chance of predicting market direction even if you are correct - a positive earnings surprise is as likely to cause a jump as a decline in the stock price (the same for negative earnings surprises).

Don't get me wrong, that is valuable information in itself.

The book then goes on to describe various option methods for trading earnings, promoting long straddles and strangles primarily (and warning against short straddles/strangles), and points out how if you traded the top or bottom 25% of earnings suprises you would benefit. It fails though to provide any indication of how to select these better performers.

What I found particularly odd was that Jeff Augen writes some lines of praise for this book, and the authors reference him a few times in the text, yet he promotes the exact opposite strategy in his Volatility Edge book. Augen recommends short straddles and strangles to benefit from the implied volatility increase and volatility collapse after earnings are announced (the strategy the authors specifically note as "these risks and the potentially large downsides make the appeal of exploiting volatility collapse relatively small").

There was the possibility of redemption in the final chapter where the authors discuss the findings of other researchers and hint at the possible outperformance of long puts (ie., not the primary strategy they recommend through the majority of the book) on growth stocks that can drop sharply on earnings failures. I would be quite convinced though that the market will be well aware of this potential and pre-earnings implied volatility will on average cancel out any benefit.

My take on this book is that a couple of researchers have spent a lot of time coming up with information that is of no use for providing any edge in picking bigger post-earnings price movements so they decided to write a book to at least generate some revenue for their efforts.

If I sound annoyed it is because I became more and more so as I progressed through the book. I have ready many trading books and this is only my second review (and my first negative review). I kept waiting for the next chapter to go beyond telling me "earnings are great to trade because prices can really move" and to tell me how to pick those stocks where the profitable movements were more likely and not already priced into the options, but it never did.

If you are reading "Trading on Corporate Earnings News" then you should already be familiar with trading, in particular options trading. This book is well written and thoroughly researched. The authors have clearly shown a well-supported and proven method. This book assumes you know about options trading to begin with, so if you do not please do some reading prior to reading this book. If you are familiar with the financial terms used in the book then it's an easy read written in a down to earth fashion.

Now "Trading on Corporate Earnings News" is not a buy and leave it strategy. If you plan to follow this book you need to put in the effort. There are earnings releases to be tracked, analyst reports to study, and crucial timing. The methods these authors are supporting are not for the lazy trader but for the investors who enjoy researching and playing the market daily.