Earnings Season Is Here, but What Exactly Are Quarterly Reports?

But are options a good play while considering corporate earnings?

Deputy Editor
Oct 15, 2020 at 1:44 PM
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    It's that time of year again... Pumpkins sporting menacing grins, polka-dotting yards, scary stories are told around the bonfire, old Slasher films make their return. And it all leads up to ghouls and goblins -- and maybe the occasional superhero -- knocking on your door in search of delicious treats. The spooky season is truly upon us in full; but something else is weighing on investors' minds during this time, something much more eerie. Of course, we're talking about...the pre-holiday earnings season.

    Yes, another corporate earnings season is officially in full swing, with a slew of banks and blue chips already reporting. With the days already moving by fast, we'd like to take a minute to quickly rehash what these reports entail and why they're relevant. 

    First things first: publicly traded companies file an earnings report each quarter, as an event with a set date. The quarters are simply three-month periods, with reports being released every January, April, July, and October (for those not under their own fiscal schedule). The reports break down each company's quarterly profits/losses, revenue, expenses, and any other financial metrics deemed materially relevant by the company's big wigs. Quarterly reports may also include a forecast for the coming quarter or the remainder of the fiscal year, and could even list something like a dividend increase or decrease. Sometimes big updates or news from the reporting company may also be added to the mix (such as c-suite updates).

    These financial updates are extremely relevant, as they give shareholders an in-depth look at how the company managed over the past few months and allow the opportunity to compare to previous quarters, so as to better understand how the company may fare going forward. Sell-side analysts, meanwhile, chime in before the release of such reports, and issue their estimates or a company's expected earnings or losses in the relevant quarter. The estimates are gathered, averaged, and put into a consensus forecast which is used as a benchmark against the final results. 

    For the most part, publicly traded companies report their earnings according to Generally Accepted Accounting Principles, or GAAP, which simply refers to a uniform standardized set of industry-wide accounting procedures -- just ensuring a consistent methodology. However, a company may also issue non-GAAP, or "adjusted," results, which often exclude certain one-time events, charges, or financial gains. The non-GAAP figure is what's typically compared against analysts' estimates. 

    As previously mentioned, earnings releases more often than not have a set date. So, investors can take advantage of that by playing options before the earnings announcement, or after the report has been released. The former can be risky, though it can yield large profits if the directional move is correctly predicted. Meanwhile, jumping in with options after the release could set the investor on track with long-term directional movement. As such, initiating an options trade beforehand can be just as profitable as a pre-earnings move. 


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