Extreme Ways: Trends & Consequences in Preliminary Earnings Events
Abstract
Industry and academic research has focused on the timing of preliminary earnings announcements as predicting—and if not also immediately causing—volatility events. This effect has institutional investors on alert and in search of the preliminaries as they aim to properly line up their trades to reflect the latest adjustments and revisions.
The following paper takes an in-depth look into preliminary earnings announcements and other trends around earnings, discusses their potential consequences for equities and options traders, and posits the data requirements for an effective institutional response.
Topics covered include:
- How to avoid significant losses incurred every quarter because of inaccurate assumptions in preliminary earnings announcements —because these early signals around earnings now augur increasingly extreme outcomes.
- How timely earnings information impacts the implied volatility (IV), including potential mispricing and issues around contract expirations
- Why options desks, risk managers and their buy-side clients need to examine preliminaries, what the change or deviation is, how it plays into or against typical communications and the strength of signal it may represent about upcoming earnings.
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