It is another big week on the earnings front with a lots of big name companies reporting. This week could make or break the market. This week we have SpaceX (SPCX), Advanced Micro Devices (AMD), Palantir Technologies (PLTR), Sandisk (SNDK), Uber Technologies (UBER), McDonald’s (MCD), Caterpillar (CAT), Merck & Company (MRK), Disney (DIS), Shopify (SHOP) and Arista Networks (ANET) all reporting in what shapes as a busy and pivotal week for stocks.
Before a company reports earnings, implied volatility is usually high because the market is unsure about the outcome of the report. Speculators and hedgers create huge demand for the company’s options which increases the implied volatility, and therefore, the price of options.
After the earnings announcement, implied volatility usually drops back down to normal levels.
Let’s take a look at the expected range for these stocks. To calculate the expected range, look up the option chain and add together the price of the at-the-money put option and the at-the-money call option. Use the first expiry date after the earnings date. While this approach is not as accurate as a detailed calculation, it does serve as a reasonably accurate estimate.
Monday
PLTR – 11.4%
Tuesday
SPCX – 16.6%
AMD – 9.9%
PFE – 3.5%
MCD – 3.8%
ALAB – 18.3%
ANET – 11.2%
CAT – 7.2%
SPOT – 9.1%
MRK – 4.8%
Wednesday
SNDK – 18.9%
OXY – 5.5%
UBER – 7.0%
APP – 13.8%
SHOP – 12.5%
LLY – 7.5%
DIS – 6.3%
DASH – 10.2%
Thursday
DDOG – 14.4%
COP – 4.4%
NET – 12.1%
ABNB – 7.1%
Friday
BRK.B – 2.1%
VST – 7.9
Option traders can use these expected moves to structure trades. Bearish traders can look at selling bear call spreads outside the expected range.
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. When trading iron condors over earnings, it is best to keep the short strikes outside the expected range.
When trading options over earnings, it is best to stick to risk defined strategies and keep 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.
Stocks With High Implied Volatility
We can use Barchart’s Stock Screener to find other stocks with high implied volatility.
Let’s run the stock screener with the following filters:
- Total options volume: Greater than 10,000
- Market Cap: Greater than 40 billion
- IV Rank: Greater than 70%
This screener produces the following results sorted by IV Rank.
You can refer to this article for details of how to find option trades for this earnings season.
Last Week’s Earnings Moves
PYPL +4.0% vs 8.8% expected
BE -11.3% vs 27.0% expected
KO +5.0% vs 3.2% expected
F +2.1% vs 6.5% expected
BA +4.8% vs 6.0% expected
GLW -12.1% vs 12.6% expected
STX -8.5% vs 14.4% expected
UPS -6.6% vs 7.0% expected
V +0.6% vs 3.9% expected
MSFT +15.5% vs 7.2% expected
META -8.0% vs 8.4% expected
HOOD -3.2% vs 11.5% expected
CVNA -7.4% vs 13.4% expected
QCOM -2.6% vs 9.7% expected
ARM +7.4% vs 15.2% expected
PG -1.9% vs 3.8% expected
LRCX +18.0% vs 12.8% expected
CMG +12.5% vs 9.6% expected
VRT -17.3% vs 11.9% expected
FTNT +2.2% vs 12.8% expected
BSX +0.0% vs 8.3% expected
AEM +4.4% vs 5.8% expected
SBUX +1.6% vs 6.4% expected
AMZN +15.3% vs 7.2% expected
AAPL -7.4% vs 4.3% expected
COIN -10.6% vs 10.7% expected
VALE +0.5% vs 3.9% expected
BMY +2.8% vs 4.8% expected
MO -9.3% vs 4.6% expected
KKR +1.7% vs 6.0% expected
VLO +3.5% vs 6.0% expected
XOM -1.0% vs 4.2% expected
CVX +2.4% vs 4.0% expected
ABBV -2.5% vs 4.8% expected
Overall, there were 26 out of 34 that stayed within the expected range. 19 out of 34 moved higher following their announcement.
Unusual Options Activity
AAPL, MSTR, TSLA, MRNA, NVDA and AMD and all experienced unusual options activity last week.
Other stocks with unusual options activity are shown below:
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.
