Earnings season can offer a great trading opportunity as individual stocks and the broader market generally see an expansion in volatility. However, even veteran traders may feel a bit uneasy trading a stock only one or two days each quarter as the increased volatility causes larger than normal price movements.
Moving the Entire Market
Stocks such as AAPL, AMZN and MSFT, to name a few, are components of numerous industries and a sharp move in any one of these particular stocks may have an overall impact on the entire market. Netflix began the most recent tech earnings season with a disappointment, sending shares lower. While the Nasdaq 100 still closed higher that day, the disappointment no doubt had an intraday effect on the broader index.
An example of how to approach these kinds of quarterly situations comes from something I wrote about in May: using micro e-mini contracts for an earnings situation that have the potential to move the market. Rather than trading NFLX, AAPL, AMZN or MSFT, an investor could use the Micro E-mini Dow Jones, Nasdaq 100 or S&P 500 contract to take advantage of a market-changing move in either direction.
Equity Index Futures
There can be cost advantages to this approach. If an active trader wanted to trade 100 shares of MSFT stock, the cost would be approximately $14,000. The cost of using a Micro E-mini contract would be considerably less.
Micro e-mini contracts allow an active trader to participate in strategies to capture market moves or to hedge more precisely since they are one-tenth the size of regular e-mini contracts.
NFLX reported much weaker than anticipated subscriptions and the stock declined over 10 percent. Other tech heavy names and FAANG stocks, such as Amazon.com and Alphabet Inc. (Google), moved in tandem on this news. This was a prime example of how a position in the Micro E-mini Nasdaq 100 could have either hedged a position or a new position could have been executed prior to the earnings release at a substantially lower cost than just trading a $350 stock.
Earnings season is a mainstay of market activity and has the potential to move the overall market in either direction. Since futures can be traded nearly around the clock and either just prior to or following a big earnings report, they may just be one of the best avenues for market participants to use when looking for earnings season opportunity.