WhatIF Earnings

Earnings season happens 4 times a year. This gives investors a quarterly update about how a company is financially performing and what's in store for the next quarter.

Earnings also give traders the chance to make a quick buck based on their hypothesis on how a company has performed.

For example, you think Netflix will beat EPS expectations because of the recent demand for its TV shows and cheaper ad-supported tier, but you have no idea what to expect from the stock.

Enter: Reflexivity’s WhatIF Earnings Tool!

Reflexivity aggregates the movement in Netflix stock after historically beating or missing EPS expectations, on a 1 week, 2 week and 1 month trading horizon.

The tool also highlights the aggregated trading range of the stock in each horizon post the result, as well as the median return (the most likely outcome).

As you can see from the above chart, Netflix stock on average falls 2.32% even after beating EPS expectations. However, the large green line (versus the size of the red line) shows us that historical returns have been skewed more to the upside post an EPS beat. Previous episodes have even led to upside as much as 20% in 1W.

After 1W, the stock price typically rises (as shown by the rising median return as time progresses) but some occurrences have led to downside. Yet again, the size of the green line versus the red line shows higher probability of upside in the long term.

To dig deeper into the data, users can click “dig into the beats” to learn more about the individual earnings episodes which generated the projection.

The list can be sorted by time, EPS $ difference or a specific horizon’s return. If a user believes that an earnings release could be similar to one already reported, this feature helps them see exactly how the market responded to that earnings result.

How can I use this information?

Prior to an earnings release, traders tend to enter a position based on their hypothesis. Sticking with ours, we believe that Netflix will beat EPS expectations because of the popular content it has generated over the quarter.

When we plug an EPS beat into the WhatIF earnings widget, we see that historically on median, the stock falls ~2% on a 1W horizon after the announcement.

Therefore sticking with our original hypothesis, we buy Netflix stock but put in a stop loss at 2% below the purchase price, in the case history repeats itself.

Fortunately the company announced a large increase in subscriber numbers which sent the stock higher and the stop-loss was not triggered.

And that’s an example of how you can use the WhatIF earnings tool to safely trade an earnings release.