Even Cheaters Don’t Always Win

Here’s an insider trading hypothetical for you. It’s not a legal hypothetical but a trading one. The question is: If you got a company’s earnings release a day before it became public, what are the odds you could make money with it? You can trade any instruments you want — buy short-dated out-of-the-money options, whatever — and don’t worry (for now!) about the legal issues. You have all the normal public information (a Bloomberg terminal, analyst research reports, whatever) that you’d have anyway, plus a complete, accurate earnings release that no one else will see for 24 hours. Can you make money? How confident are you of that?

You can’t be 100 percent confident, right? I mean, sure, there are some pretty obvious cases. If a company doubles Wall Street expectations on the top line, bottom line, margins, future guidance, everything, you can probably buy the stock and be confident it will go up. If the announcement says “we misplaced all our money and our factory blew up and we are going out of business, surprise,” you can probably short the stock and make money.