5 Reasons Why Now is the Time for Earnings Derivatives

2020-08-31T17:43:30+00:00August 31st, 2020|Earnings Derivatives, Indexes|

In recent years investors have become ever more sophisticated at predicting future company earnings.  Yet there hasn’t been any way to invest directly in company earnings streams, until now.

The invention of any new product is ultimately a response to latent demand or overt demand. Accordingly the latent demand for new markets in the financial sector typically follows a period of major structural economic change.

-Robert Shiller, Financial Innovation: Too Much or Too Little?

Here are 5 reasons why now is the time for earnings derivatives.

Democratization of Investment Research

It used to be that […]

5 Reason PE Ratios Change

2020-08-17T21:11:58+00:00August 17th, 2020|Earnings Derivatives, Indexes|

Historically, PE ratios have varied widely for the broader market, and for individual stocks and sectors. For example, the trailing PE  ratio of the S&P 500 has ranged from 5.9 to 122, between 1927 and 2019.  Why do PE ratios fluctuate so much? In this article we summarize 5 main drivers influencing changes in PE ratios.

Expected Growth Rate

Changes in earnings expectations are the most direct drivers of PE multiples. When management reduces or eliminates future guidance, the stock will often react negatively. Similarly, PE ratios often react to analyst commentary […]

Inflation and PE Ratios: The Role of Earnings Derivatives

2020-08-17T21:11:20+00:00June 10th, 2020|Earnings Derivatives, Indexes|

Most hedge fund analysts and investors working today have never experienced inflation.  It’s trended downwards over the past few decades.

Long term inflation trends Source: Horizon Kinetics, BLS

Yet the new global rise of populism has led to a dramatic reversal of key factors that kept inflation low for so long. The buildup of new inflationary pressures is being amplified by the policy response to Covid-19 around the world.   Although we are experiencing short term deflation, the greater risk as the world […]

Earnings Season Will Never be the Same

2020-06-02T19:05:37+00:00June 2nd, 2020|Earnings Derivatives, Earnings Season|

Recent media coverage highlighting big changes coming to capital markets as a result of earnings derivatives: “Earnings Derivatives” Could Change Wall Street Earnings Season. 

From the article:


What has played out over the last few months is a stock market that has been subject to whipsawing prices based on news headlines, political uncertainty and the daily whims of market sentiment. Some stocks are having unexplainable plunges or surges in price.

One company has stepped in to provide a solution by creating an investment product that gives funds and portfolio managers […]

Earnings Uncertainty: The Old Tools Don’t Work Anymore

2020-04-20T12:58:44+00:00April 20th, 2020|Earnings Derivatives, Earnings Season|

This is the most challenging earnings season in history.    Amidst the covid-19 induced earnings uncertainty, the old tools for trading earnings season won’t work anymore.  How can investors adapt?

Investing in a time of suspended earnings guidance

Most publicly traded companies have traditionally provided earnings guidance to help investors forecast near term performance, and estimate company valuation.  Although this practice is far from perfect, many investors rely on it in order to build forecast models and make decisions.  Yet management teams at most companies have no way of predicting how […]

Earnings Power Indexing

2020-04-27T14:19:15+00:00March 17th, 2020|Earnings Derivatives, Indexes|

Click here to download Earnings Power Indexing as a PDF. 

BLX Global Indexes provide pure exposure to the aggregate financial statement performance of select industries and sectors. Our patent pending methodology turns bottom line financial metrics into an investable asset, creating new opportunities for speculation and hedging.

The basic concepts are similar to traditional stock indexes: a list of companies and a normalized number to describe the aggregate performance. However, the methodology behind our indexes is different than traditional stock indexes. The calculation methods for our indexes are based on the […]

Investing and Risk Management With Earnings Derivatives

2020-03-17T16:43:46+00:00March 17th, 2020|Earnings Derivatives|

This post is an excerpt from  Earnings as an Asset Class 

The dynamics of earnings trends create opportunities across asset classes. Generating alpha requires looking beyond basic equity positions to exploit the rich opportunity set in every earnings announcement. Earnings derivatives can be used by sophisticated investors as a tool for alpha generation and risk management.


Maximize Risk/Reward Tradeoff from Fundamental Analysis

Earnings derivatives are a pure, leveraged bet on business fundamentals. If one has a unique edge in predicting upcoming earnings, then buying a put or call on the earnings number […]

How Earnings Derivatives Work

2020-03-17T20:27:20+00:00March 16th, 2020|Earnings Derivatives|

This post is an excerpt from  Earnings as an Asset Class 

Earnings derivatives function as cash-settled options, with expiration dates that coincide with the release of company earnings reports.

Example(Call Option Investment)

John Jones is bullish on a company’s earnings and wants to isolate his exposure to earnings growth. Sell-side analysts expect the company to report $10 million in annual earnings, but he believes it will be significantly higher. He can buy a call option on the earnings stream 20% above the projected earnings ($12m) for $10. This $10 option premium entitles […]

Different Drivers of Equity Returns

2020-03-17T16:25:22+00:00March 15th, 2020|Earnings Derivatives|

This post is an excerpt from  Earnings as an Asset Class 

Investment analysts are intensely focused on quarterly earnings; yet the relationship between earnings and stock returns is volatile and inconsistent, especially over shorter time periods. At long last, Earnings Derivatives®  turn earnings into an investable asset class. The same tool works for other financial metrics such as revenue, EBITDA, and operating income. This makes it possible to invest in value drivers individually or to hedge stock portfolios against earnings surprises. Earnings Power Indexing extends this tool to […]

How Top Investors Hedge Long Term Stock Positions

2019-12-27T12:16:11+00:00December 22nd, 2019|Earnings Derivatives|

The nation’s greatest achievements have always derived from long-term investments. In both national policy and business, effective long-term strategy drives economic growth and job creation.

-Jamie Dimon and Warren E. Buffett Wall Street Journal Editorial June 6, 2018.

Important developments in business occur over many years and decades. Yet companies report financial information every quarter. Oftentimes, important company initiatives negatively impact short term earnings, but lead to long term company outperformance. This creates a paradox for investors that want to hold a long term stock position for many years. […]

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