Using thinkorswim® to Analyze Earnings

August 28, 2023 Advanced
Learn how to use thinkorswim® to research the effects earnings announcements can have on a company's share price.

Earnings season is often viewed as a major event for active traders.

Each quarter, publicly traded companies are required to share fundamental information on the state of their business, including earnings and revenue the company produced. As this financial information is released publicly, a company's price per share is often (but not always) subject to large price swings as the market reacts to the newly reported data.

Price moves can be up or down, big or small, immediate or delayed. For active traders, an earnings release can present both opportunity and risk.

During earnings season, one tool traders can use to evaluate this opportunity and risk is by using the Earnings subtab on the thinkorswim® platform. The Earnings subtab is one way to analyze price and volatility movements of a given stock around its historical earnings events.

Let's review some ways traders can use the Earnings tool to navigate upcoming earnings announcements.

Earnings overview

The Earnings subtab is the blue lightbulb icon on the Analyze tab. To find info on a specific company's earnings, type its stock symbol into the box in the upper-left corner.

Earnings analysis on thinkorswim

Chart shows the earnings analysis toolkit as seen under the Analyze tab on thinkorswim.

Source: thinkorswim platform

As identified in the chart above, five important thinkorswim features traders can use during earnings announcements include:


1. MMM. Get a current reading of the Market Maker Move (MMM) indicator, a measure of volatility implied by current options prices. In the chart above, an MMM of 9.728 means the options market is implying a move, up or down, of about $9.73. However, the MMM's results are theoretical in nature. They're not guaranteed and do not reflect any degree of certainty of an event occurring. But the information can be useful.

2. Price chart. Traders can review a stock's quarterly price history covering five days before and five days after each earnings release. Did the price have a gap move up or down (or not at all)? Was there any follow-through? Being able to see this information can help inform a trader’s next move.

3. Historical1 and implied volatility2. Historical volatility is based on actual data, whereas implied volatility is an estimate of future price movement. As you look at the period five days before and after the earnings release, note the interplay between the two measures. Implied volatility typically falls after earnings are released, but not always. At the start of the five-day period, where is implied volatility relative to the historical? Did these numbers match up? Or do you see a divergence?

4. At-the-money (ATM) straddle3. Because a straddle is price reflects market uncertainty, and after earnings are released much of the uncertainty diminishes, a short-dated straddle can potentially lose much of its value at that time. Choosing a straddle strategy during earnings season depends on which a trader thinks might be greater—the movement of the stock versus the amount the straddle will likely lose after the release.

5. Quarterly earnings data. View up to two years of quarterly earnings-per-share (EPS) data, including the projected consensus from third-party Wall Street analysts and the actual earnings for the stock.

Choosing an earnings view

The Earnings subtab allows traders to choose between three separate views. Depending on trading objectives, a trader can use one, two, or all three of them as part of the trading strategy process.

  • Fit all is the default choice when selecting the Earnings subtab. It allows a trader to see all data in one place, which allows for a big picture perspective.
     
  • Zoom is a view that shows intraday (30-minute aggregation) data for the stock price and options volatility. Although past performance is not necessarily indicative of future results, looking at price movement during and after past earnings releases can certainly help a trader spot trends and formulate objectives.
     
  • The Compare view allows traders to overlay the most important price and volatility measures of each historical quarter. The different measures of volatility and pricing can be filtered using the checkboxes on the left side. There's also a set of checkboxes to control which quarters are displayed. Quarters can also be filtered by whether they "beat," "met," or "missed" the consensus estimates from Wall Street analysts as shown in the image below.

Compare view on thinkorswim

This chart demonstrates how to use the Compare view on thinkorswim to look at specific, filtered data, such as "just Q1 of each year" or "only in quarters where the company missed earnings." It also illustrates how to add a filter or make manual selections.

Source: thinkorswim platform

Bottom line

Earnings season can offer different potential trading opportunities and strategies. No matter the objectives and risk tolerance of a trader, the Earnings subtab on thinkorswim can provide information that an experienced trader might be able to use as they prepare to actively trade during earnings season.

1Also called actual or realized volatility, historical volatility is computed as the annualized standard deviation of prices of a security over a specific period of past trading days, such as 20, 30, or 90 days. Standard deviation is a mathematical measure used to quantify the amount of variation (dispersion) of a set of data values.

2The market's perception of the future volatility of the underlying security directly reflected in the options premium. Implied volatility is an annualized number expressed as a percentage (such as 25%), is forward-looking, and can change.

3A straddle is an options strategy that involves the simultaneous purchase (or sale in a short straddle) of a call option and a put option on the same underlying asset, at the same strike price and expiration. An ATM straddle is an at the money straddle, meaning the calls and puts are bought at the strike prices equal to the current price of the underlying asset. In a short straddle, potential profit is limited to total premiums received, minus fees paid (and each leg can generate fees). The maximum profit is achieved if the short straddle, held to expiration, closes at the strike price. However, potential losses are unlimited if the stock price keeps rising, and potential losses if the underlying falls to zero can be significant. The two potential breakeven points are represented by the strike price plus total premium and the strike price minus total premium (not including fees to close the trade). In order for a long straddle to be profitable at expiration, the price of the underlying security must be below the lower break-even price or above the higher break-even price.  The maximum loss potential for a long straddle is 100% of the premium paid.

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Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options." Supporting documentation for any claims or statistical information is available upon request.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

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