Anticipating Earnings Impact on Option Volatility
As we approach the tail end of earnings season, the spotlight may not shine as brightly on the stage, but a few key companies are still ready to take their place in the earnings report arena. Among those stepping into the spotlight are Crowdstrike (CRWD), Target (TGT), Broadcom (AVGO), and Costco (COST).
Before the earnings drumroll begins, the implied volatility drums up a cacophony of uncertainty in the market. Speculators and hedgers come rushing in, creating a symphony of demand for the company’s options, resulting in a crescendo of implied volatility and subsequently, option prices.
But as the post-earnings fanfare fades away, the implied volatility curtain drops back down to normal levels, leaving investors to ponder the aftermath of the financial performance on stage.
Forecasting Expected Stock Movements
For those eager to cast their predictions, calculating the expected range for these stocks becomes the next act in this financial drama. By delving into the option chain and adding together the prices of the at-the-money put and call options, investors can craft an estimate of the expected range post-earnings performance.
Let’s peek behind the curtain into the crystal ball for the week ahead:
Monday
SE – 17.6%
GTLB – 18.4%
Tuesday
CRWD – 11.9%
TGT – 7.2%
Wednesday
CPB – 4.6%
JD – 9.4%
Thursday
AVGO – 8.3%
COST – 4.2%
MRVL – 11.6%
Friday
Nothing particularly noteworthy
Strategies for Options Trading and Risk Management
Traders can use these expected moves as their guiding star in structuring their trades. From bear call spreads to bullish put spreads and iron condors, a treasure trove of strategies awaits those seeking to navigate the choppy waters of post-earnings stock movements.
As the curtain rises on the stage of options trading, it’s paramount to adhere to risk-defined strategies and maintain a conservative position size. A prudent approach ensures that even if the stock takes an unexpected leap or nosedive, the impact on your portfolio remains a mere footnote, not a catastrophic ending.
Reflecting on Last Week’s Earnings Roster
After the dust settled on the previous week’s earnings performance, a handful of companies made moves that caught our attention:
LI +18.8% vs 10.5% expected
ZM +8.0% vs 8.2% expected
U -6.1% vs 15.0% expected
FIS +4.7% vs 7.4% expected
DPZ +5.9% vs 6.0% expected
WDAY -4.0% vs 8.8% expected
DVN -0.7% vs 5.1% expected
FSLR +2.9% vs 9.6% expected
Among a lineup of 20 companies, 14 managed to stay within the confines of the expected range, highlighting the capricious nature of post-earnings stock movements.
Unusual Options Activity and Changes in Open Interest
Companies like AMD, SQ, PLUG, C, F, MSFT, and RIVN seized the spotlight last week with unusual options activity, drawing attention to their potential earnings performances. The stage was set for intriguing developments in the realm of stock options.
And as the drama of earnings continues to unfold, it’s crucial for investors to remember that options trading comes with its share of risks. Losing 100% of your investment is a reality that looms large in this financial theater. Hence, it’s essential to approach each trade with caution, armed with due diligence and guidance from a trusted financial advisor.
