WHY EPS and not total profit? A company earning $1 billion sounds huge, but if it has 10 billion shares, each share earned only $0.10. EPS normalizes by share count so you compare apples to apples.
The sudden collapse of implied volatility (and option premiums) right after earnings resolve the uncertainty.
Why the √T in the expected-move formula?
Price variance grows linearly with time, so the standard deviation (move size) grows with √time — the Brownian-motion fingerprint.
How do you quickly estimate the expected move from options?
It ≈ price of the at-the-money straddle (call + put at current strike).
What do BMO and AMC mean?
Before Market Open and After Market Close — the two common times earnings are released.
Can you be right on direction and still lose on a long option?
Yes — IV crush can deflate the premium more than the directional move gains.
Why use EPS instead of total net income?
EPS normalizes profit per share so companies of different sizes are comparable.
Recall Feynman: explain to a 12-year-old
Imagine every kid in class has to show their report card 4 times a year. Before report-card day, everyone bets on what grade you'll get. If everyone bets you'll get 90 and you get 92, people are happy — but only a little, because they almost guessed it. If you get 70, everyone who bet high gets shocked and dumps you. So the surprise, not the grade itself, changes how excited people are. And right after the card is shown, all the betting excitement (the "maybe" energy) suddenly disappears — that vanishing excitement is the IV crush.
Dekho, har company ko saal me 4 baar apna "report card" dikhana padta hai — isko earnings season kehte hain (US me roughly January, April, July, October ke middle me). Report me sabse bada number hota hai EPS (earnings per share), yaani per share kitna profit hua. Lekin yahan asli twist ye hai: stock ka price pehle se hi market ke andaaze (consensus estimate) ko contain karta hai. Isliye stock upar-neeche isliye nahi jaata ki profit accha tha ya bura — balki isliye jaata hai ki actual result andaaze se kitna alag nikla. Isko earnings surprise kehte hain.
Yahi wajah hai ki company record profit bana ke bhi 8% gir sakti hai — agar guidance weak ho ya beat expected se chota ho. To rule number one: hamesha actual vs consensus compare karo, aur next quarter ki guidance zaroor dekho.
Ek aur important cheez hai IV crush. Earnings se pehle uncertainty high hoti hai, isliye option prices mehnge ho jaate hain (implied volatility pump ho jaati hai). Jaise hi result aata hai, uncertainty khatam, aur option premium dhadaam se gir jaata hai. Isliye bahut log direction sahi bolte hain phir bhi option me paisa haar jaate hain — kyunki stock ko "expected move" se zyada hilna zaroori hai tabhi profit hota hai. Expected move aap at-the-money straddle ke price se estimate kar sakte ho.
Aur last cheez: zyadatar US earnings market open se pehle (BMO) ya close ke baad (AMC) aati hain, regular hours me nahi. Matlab move tab hoga jab aap trade nahi kar sakte, aur agli subah gap up/down mil sakta hai. Isliye earnings calendar dekhna aur risk manage karna trader ke liye must hai.