How market makers price earnings

[Kevin Schmit]

I have purchased data that gives me the last 50 quarters of company's price move, estimate and surprise. !

From what source is this available? And how much did it cost you?

I have some earnings estimate/actual data but it is unreliable pre-2013. I am looking for a second source to fill in and cross check my data.

 

[newwurldmn]

Newwurld you would never hold the position for longer than a day. Lets say on average you did 5 earnings a day and you are trading with a low cost broker (.50 - .70 a contract). FL had pre earnings jump vol of 136%(annualized) I would have sold the straddle because I believe FL should only have jump vol of 100% thats locking in 36% vol (if i am right). There will be HUGE variance with this strategy even if you are only using 3% of capital per trade. But it should return very good results if you have the stomach. You could also do 1% of capital pertrade which would actually give you a nice pnl line. Im working on a simulation right now and will post when I am done. any tips would be wonderful.

Also here is a link to where I am going to get most of my data. They provide what you need for only $20 a month. https://www.optionslam.com/

Let me ask you this: why would there be misprocings in earnings that would be significant? And why would you be able to identify them over a market maker who has every conceivable dataset out there?

I’m not saying that there aren’t opportunities. There are. But not as many as you are making out to be.

 

[TheBigShort]

From what source is this available? And how much did it cost you?

I have some earnings estimate/actual data but it is unreliable pre-2013. I am looking for a second source to fill in and cross check my data.

For earnings estimates and surprises I access to a Bloomberg terminal. Estimates/surprises up to 2006. What stock/stocks would you like? I'll send the data on monday

 

[TheBigShort]

Let me ask you this: why would there be misprocings in earnings that would be significant? And why would you be able to identify them over a market maker who has every conceivable dataset out there?

I’m not saying that there aren’t opportunities. There are. But not as many as you are making out to be.

Supply and demand. I might be focused on the long term expected value, while a big fund is coming into the market to buy puts on their long stock position. Throwing it out of whack. That was the question I was thinking when i started this thread. Why in heavens name would a market maker price the move wrong.

 

[srinir]

After running regressions on MANY companies here is what I found. Earnings surprise has very little correlation to stock move after earnings

Here is the data from recent Factset report.

There is definite correlation between earnings surprise and price % change. Here is another chart from old study comparing growth vs value stocks earnings surprise.

Whether we can exploit this ex-ante systematically is a different question.

 

[TheBigShort]

Here is the data from recent Factset report.
View attachment 186603

There is definite correlation between earnings surprise and price % change. Here is another chart from old study comparing growth vs value stocks earnings surprise.
View attachment 186604

Whether we can exploit this ex-ante systematically is a different question.

Thanks for sharing this post!! This is interesting, maybe my data set was not large enough as some stocks show close to 0 correlation. In this study what is classified as a growth stock? Some stocks earnings surprises demonstrate autocorrelation I will post a photo

 

[TheBigShort]

So top row(left) is Macy vs surprise we can see 0 correlation. However on the right we have its autocorrelation. So we could pretty much have a good guess if there will be a surprise or not. Only bad thing is it wouldnt matter!(Macy show 0 correlation with surprise)

Bottom is Tif vs surprise. We can clearly see a correlation HOWEVER there is not auto correlation with it's surprises. Market will never give you a break LOL.

 

[srinir]

Thanks for sharing this post!! This is interesting, maybe my data set was not large enough as some stocks show close to 0 correlation. In this study what is classified as a growth stock? Some stocks earnings surprises demonstrate autocorrelation I will post a photo

Factset data is for last 5 years.
Other one is very old study.
http://webuser.bus.umich.edu/tradingfloor/earningstorpedo/research/torpedoreportbysloan.pdf
Value/growth stocks are divided based on P/B. Top quintile is growth and bottom is value.
Even though it is old study, based on current small cap growth vs value returns it still persists imo.

If you want systematically exploit, you have to group the returns instead of looking individually

 

[TheBigShort]

Factset data is for last 5 years.
Other one is very old study.
http://webuser.bus.umich.edu/tradingfloor/earningstorpedo/research/torpedoreportbysloan.pdf
Value/growth stocks are divided based on P/B. Top quintile is growth and bottom is value.
Even though it is old study, based on current small cap growth vs value returns it still persists imo.

If you want systematically exploit, you have to group the returns instead of looking individually

Can you explain what you mean by group returns?

 

[newwurldmn]

Supply and demand. I might be focused on the long term expected value, while a big fund is coming into the market to buy puts on their long stock position. Throwing it out of whack. That was the question I was thinking when i started this thread. Why in heavens name would a market maker price the move wrong.

Fair point. But how do you know it’s supply and demand vs a real fundamental issue?

If you trade it systematically then the supply/demand return will be low as you will be forced to trade a lot of “pushes.”