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Trading on Corporate Earnings News: Profiting from Targeted, Short-Term Options Positions by Ping Zhou, John Shon

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Chapter 3. Earnings Surprises: Definition and Measurement

In the previous chapter, we discussed why earnings announcements are so important. This chapter defines what an earnings surprise is. On the surface, it sounds straightforward. However, both components of the earnings surprise—the actual earnings and the market’s expectations of earnings—are rife with ambiguities that are worth clarifying. The actual earnings and the expected earnings come in different flavors that can affect how we view an earnings surprise. Sometimes, a positive earnings surprise defined in one way turns into a negative earnings surprise when the definition is tweaked.

Definition of an Earnings Surprise

An earnings surprise is the difference between the actual earnings ...

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