Earnings season kicks off this week with banks and a few other big companies reporting their quarterly results. So, could traders learn any interesting information before the results hit the news among growth stocks today? Certainly.
It is shaping up to be a busy week. The reports could give traders an early indicator of how the third-quarter earnings season will measure up. Traders and investors wondering what sort of stock moves we might see can use the options market to gain an insight into the market's expectation.
Specifically, when it comes to options trading, we can use what is called the expected move. This tells us the market's expected price range for an underlying stock, including top growth stocks, for a specific period.
Growth Stocks To Watch When Earnings Arrive
We have Delta Air Lines, Citigroup, Bank of America, Wells Fargo, JPMorgan Chase and UnitedHealth Group) all due to report. Most of these companies will report on Thursday and Friday.
The quickest way to work out the expected move is to look up the option chain and add together the price of the at-the-money put option and the at-the-money call option. We use the first expiry date after the earnings date.
While this approach isn't as accurate as a detailed calculation, it does serve as a reasonably fair estimate.
Key Expected Moves This Week
Let's take a look at the expected price moves, in percentage terms, for these stocks this week:
Tuesday
- PepsiCo: expected move of 3.7%
Thursday
- Domino's Pizza: 7.1%
- Walgreens Boots Alliance: 7.9%
- DAL: 5.2%
Friday
- JPM: 3.7%
- UNH: 3.2%
- C: 4.6%
- WFC: 5.0%
- PNC Financial: 4.8%
- BlackRock: 3.9%
Option traders can use these expected moves to structure trades. For instance, bearish traders can look at selling bear call spreads outside the expected range.
Strategies To Consider
Bullish traders can sell bull put spreads outside the expected range or look at naked puts for those with a higher risk tolerance.
Neutral traders can look at iron condors. For iron condors, it is best to keep the short strikes outside the expected range.
When trading options in growth stocks around earnings, it is best to stick to risk-defined strategies. Also, keep the position size small. If the stock makes a larger-than-expected move and the trade suffers a full loss, it should not have more than a 1%-3% effect on your portfolio.
Good luck this week, traders.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
