Earnings Season: Look To Options For Profit Clues

For most traders and investors earnings season remains an important indicator for the obvious reasons of financial results, forward guidance, and a peak into the minds of executives and managements.  The more experienced market participants monitor and participate in the more nuanced aspects of the spectacle. Leading up to and during earnings season, we begin to see the importance of watching a number of items; i.e. option activity that expire on a weekly basis, insider transactions and company filings and technical levels. 

Traders and investors that take on positions in options during earnings season, both on the call and put sides, tend to wager what some refer to as a binary bet.  If for example, a company is due to report on earnings in two weeks time and a trader buys a significant amount of call options that expire at the same time as the financial reporting, market participants typically assume that the trader is making a bullish assumption on not just the financials but the possible guidance and market reaction.

We typically see a significant increase in activity in shorter term plays on both the put and call options during earnings season.  While we must consider that some of these plays maybe to hedge the underlying equity position, the size of the bets remain impressive.  

While the reporting of financials by public companies continues to be a spectacle, the greater drama is in the options arena in determining whether traders have placed the right side of the bet.

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