Last week was quite eventful on the earnings front with Tesla (TSLA) and Netflix (NFLX) suffering large drops. This week we have more big names such as Microsoft (MSFT), Alphabet (GOOGL), Meta Platforms (META), Boeing (BA), Visa (V), Exxon Mobil (XOM) and Verizon (VZ) all set to report.
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
DPZ – 5.8%
Tuesday
VZ – 4.3%
MMM – 4.4%
GM – 5.1%
GE – 4.6%
SPOT – 10.5%
NUE – 4.5%
MSFT – 5.8%
GOOGL – 6.1%
V – 3.3%
SNAP – 22.3%
Wednesday
T – 5.5%
BA – 4.8%
KO – 2.0%
META – 9.9%
CMG – 6.7%
Thursday
RCL – 7.3%
MCD – 2.8%
LUV – 4.8%
MA – 3.4%
CROX – 10.0%
VLO – 3.8%
ABBV – 3.9%
BMY – 2.8%
HON – 3.4%
ENPH – 12.2%
F – 5.6%
INTC – 7.2%
ROKU – 12.8%
FSLR – 8.0%
X – 6.6%
Friday
XOM – 3.0%
PG – 3.0%
CVX – 2.8%
CL – 3.1%
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.
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:
BAC +4.4% vs 4.3% expected
MS +6.5% vs 3.7% expected
SCHW +12.6% vs 4.6% expected
LMT -3.0% vs 2.9% expected
PNC +2.5% vs 4.5% expected
TSLA -9.7% vs 8.0% expected
NFLX -8.4% vs 8.8% expected
IBM +2.1% vs 3.8% expected
GS +1.0% vs 3.6% expected
LVS -5.4% vs 4.6% expected
HAL -2.9% vs 4.1% expected
UAL +3.2% vs 6.2% expected
TSM -5.1% vs 5.4% expected
ABT +4.2% vs 3.2% expected
JNJ +6.1% vs 2.3% expected
ISRG -3.2% vs 5.4% expected
BX -0.6% vs 4.6% expected
FCX +3.0% vs 4.6% expected
AXP -3.9% vs 3.6% expected
SLB -2.2% vs 3.9% expected
Overall, there were 11 out of 20 that stayed within the expected range.
Changes In Open Interest
LUMN, SIRI, WBD, LAZR, ENVX and TSLA saw some of the largest changes in open interest last week.
Other stocks with large changes in open interest 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 did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
