1

Is there a typical price movement behaviour seen before the earnings announcement?

Which of my following happens often? As the announcement approaches,

  1. Stock holders mostly hedge the uncertainty using options and hence the stock price won't see much movement. 2.Stock holders smell the announcement to be mostly positive/negative and start buying/selling the stocks making the price fluctuate.

Thanks.

3

This depends entirely on what the market guesses the news will be and how much of that guess has already been factored into the price. There is no general answer beyond that.

Note that this explains the apparently paradoxical responses where a stock good down on good news (the market expected better) or up on bad news (the market expected worse).

2

In principle, the stock price should see no change in the days leading up to an earnings announcement, and then at the moment of the announcement, the stock price should move in the direction of the earnings surprise (relative to the market's belief of what earnings were going to be).

In practice, stock prices tend to drift a little in the direction of the surprise shortly before the announcement and the associated price jump. This could be because smart investors were able to replicate the computations to predict the announcement or because information gets illegally leaked ahead of the announcement. So I guess your bullet point B is a likely scenario.

Note that hedging activity in the options market will not affect stock price one way or another. Options transfer risk from one party to another but net to zero. Intense hedging activity may be able to push up the price of options (increasing the implied volatility), but it shouldn't affect the price of a stock one way or the other. For this reason, bullet point A is not the case.

Note that price behavior after the announcement is also interesting: it seems to take some time to reach the correct price instead of jumping directly to it as economists would predict. This phenomenon is known as post earnings announcement drift.

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