By the end Explain why a company can beat expectations and fall, and how event risk should shape position sizing.
Stocks +10
Risk +10
An earnings result is not judged against last year. It is judged against what the market had already priced. This is why a company can report record profits and fall 8% on the day: the record was expected, and something in the detail was worse than assumed.
Earnings dates are scheduled, which makes the associated risk unusual: you know exactly when a large, unpredictable move may occur. That is different from ordinary market risk and deserves to be treated differently in position sizing.
The direction of an earnings move is not reliably predictable, even with a correct forecast of the numbers.
The magnitude is somewhat predictable — options markets price expected move, and it is usually larger than a normal day.
A position sized comfortably for normal volatility may be sized badly for an earnings day.
Choosing to hold through an earnings release is a decision. Doing it without noticing is not.
Common belief
"If I can forecast the earnings correctly, I can forecast the reaction."
What is actually true
Professional analysts frequently forecast the numbers accurately and still get the reaction wrong, because the reaction depends on positioning and expectations that are not published. Getting the fundamentals right and the trade wrong is an ordinary outcome, not a failure of analysis.
Example — A beat that fell
A company reports earnings 12% above consensus. The share falls 9%. In the call, management guides next quarter’s revenue below expectations and notes margin pressure. The market had priced the beat and repriced the future, which is where most of the value sat.
Glossary
Consensus
The average of analyst forecasts. The benchmark a result is judged against.
Guidance
Management’s own forecast for future periods. Often moves the price more than the reported result.
Expected move
The magnitude of move options markets are pricing around an event.
Event risk
Risk concentrated at a known point in time, such as an earnings date.
Check your understanding
0 of 3 answered
Pass mark 70%: at least 3 of 3 correct.
Challenge — Size a position around an event
You hold a position worth 15% of your portfolio in a company reporting earnings next week. Historically it moves about 9% on results day. Work out the portfolio-level impact of a 9% adverse move, then state what you would do and why — including the option of doing nothing.
What a good answer contains
Calculates the portfolio-level impact correctly
States a decision and its reasoning rather than a general principle
Treats holding through the event as a deliberate choice with a stated rationale
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