This week brings a much quieter week on the earnings front, but we still have a some key stocks set to report.
This week we have Monday.com (MNDY), Home Depot (HD), Alibaba (BABA), Walmart (WMT), Cisco (CSCO), Sea Ltd (SE) and Deere & Company (DE) all reporting.
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
GOLD – 5.0%
BEKE – 8.5%
MNDY – 13.8%
Tuesday
NU – 8.7%
HD – 5.8%
SE – 12.5%
ONON – 11.4%
Wednesday
CSCO – 6.6%
Thursday
BABA – 5.8%
WMT – 5.3%
JD – 7.3%
AMAT – 7.1%
DE – 5.9%
Friday
Nothing of note
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 call volume: Greater than 2,000
- Market Cap: Greater than 40 billion
- IV Percentile: Greater than 70%
This screener produces the following results sorted by IV Percentile. Last week there were 129 stocks fitting this criteria, this week we have 66.
You can refer to this article for details of how to find option trades for this earnings season.
Last Week’s Earnings Moves
Last week’s actual versus expected moves are shown below:
PLTR +10.4% vs 13.6% expected
O +2.1% vs 3.2% expected
TSN +2.1% vs 6.8% expected
SMCI -20.1% vs 13.8% expected
RIVN -6.9% vs 13.4% expected
UBER +10.9% vs 8.8% expected
KVUE +14.7 vs 6.6% expected
DVN +2.8% vs 5.7% expected
CELH -2.4% vs 14.1% expected
ABNB -13.4% vs 9.5% expected
CAT +3.0% vs 6.2% expected
AMGN -5.0% vs 5.4% expected
FTNT +25.3% vs 11.1% expected
DUK +1.7% vs 3.7% expected
HOOD +3.6% vs 14.2% expected
DIS -4.5% vs 7.6% expected
OXY +4.3% vs 4.3% expected
ET +4.0% vs 3.8% expected
SHOP +17.8% vs 12.8% expected
CVS -3.2% vs 8.6% expected
LLY +9.5% vs 8.4% expected
PBR +2.5% vs 4.7% expected
DDOG +5.6% vs 12.2% expected
TTD +6.2% vs 12.9% expected
GILD -0.2% vs 4.7% expected
EXPE +11.5% vs 12.5% expected
Overall, there were 18 out of 26 that stayed within the expected range.
Unusual Options Activity
NVDA, BYND, UPST, NEE, PLTR and NU 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.
On the date of publication, Gavin McMaster had a position in: BABA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
