Understanding Earnings Season Through Option Volatility

Written By Michael Gary Scott

As the familiar drumbeat of earnings season grows louder, the financial world braces for impact. This week, titans of industry prepare to release their quarterly reports, triggering waves of speculation and anticipation.

Among the illustrious names on the lineup are Taiwan Semiconductor, Bank of America, United Airlines, Netflix, Goldman Sachs, Johnson & Johnson, and Morgan Stanley.

Before the curtain rises on the earnings stage, a mystical phenomenon occurs in the options market. Like a swirling vortex of uncertainty, implied volatility surges. Speculators and hedgers flock in droves, creating an unwieldy demand for options, and in the process, inflating their prices to lofty heights.

However, once the earnings declamation is made, the fog of uncertainty begins to dissipate. Implied volatility, akin to a deflating balloon, reverts to its calm, customary levels.

To gauge the potential magnitude of these post-earnings tremors, one must peer into the crystal ball of the expected range. By summing the at-the-money put and call options after the earnings date, a rough estimate of the stock’s movement can be gleaned.

 

The Glimmer of Monday

 

Goldman Sachs – 3.8%

BlackRock – 3.3%

 

The Luminescence of Tuesday

 

UnitedHealth – 4.7%

Bank of America – 3.9%

Morgan Stanley – 3.8%

Charles Schwab – 5.1%

PNC Financial – 4.4%

 

The Brilliance of Wednesday

 

AMETEK – 6.8%

Johnson & Johnson – 2.7%

U.S. Bancorp – 4.3%

Kinder Morgan – 2.2%

Las Vegas Sands – 2.9%

United Airlines – 8.7%

 

The Sparkle of Thursday

 

Taiwan Semiconductor – 7.5%

Netflix – 8.8%

Abbott Laboratories – 4.3%

Intuitive Surgical – 5.4%

The Blackstone Group – 4.5%

D.R. Horton – 4.9%

Domino’s Pizza – 5.5%

 

The Radiance of Friday

 

American Express – 4.8%

Schlumberger – 4.0%

Travelers – 4.0%

Halliburton – 3.5%

Gleaning insights from these expected moves in the options market, traders can deftly shape their strategies. Bears may eye selling bear call spreads beyond the anticipated range, while bulls could consider selling bull put spreads or even venture into the daring realm of naked puts.

For those seeking neutrality amidst the tumult, iron condors beckon. Crafting iron condors during earnings season demands a cautious approach, with the short strikes prudently placed outside the expected range.

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When treading the intricate maze of options during earnings releases, prudence reigns supreme. Sticking to risk-defined strategies and maintaining modest position sizes guard against the maelstrom of unexpected price movements. A rule of thumb advises that losses from a single trade ought to cap at a prudent 1-3% of one’s portfolio.

A Glimpse at Stocks Enveloped in Intense Volatility

Enter Barchart’s Stock Screener, a treasure trove for discovering stocks embroiled in high implied volatility. By fine-tuning the filters to call volumes above 2,000, market caps exceeding 40 billion, and an IV Percentile surpassing 70%, a hidden world of volatile equities emerges.

The resulting list, sorted by IV Percentile, offers a tantalizing peek into the domain of high-stakes trading.

For a deeper dive into the art of finding option trades during earnings season, a helpful guide awaits.

Reflecting on Last Week’s Earnings Overture

The grand spectacle of earnings unveiled various surprises last week, as actual moves clashed with expectations:

 

Conagra Brands -1.5% vs. an anticipated 4.5%

Delta Air Lines -4.0% vs. an envisioned 6.3%

PepsiCo +0.2% vs. an expected 2.6%

Citigroup -1.8% vs. a projected 3.5%

JPMorgan Chase -1.2% vs. a forecasted 3.2%

Wells Fargo -6.0% vs. a predicted 3.9%

In a symphony of market moves, 8 out of 14 performances adhered to the script.

Tales of Uncommon Options Enchantment

Rivian, Rocket Companies, Kinder Morgan, Alcoa, Pfizer, and Tesla all danced under the spell of unusual options activity in the bygone week.

Enigmatic whispers of other stocks harbouring peculiar options movements waft through the air:

Grounded in the realm of caution, it’s prudent to bear in mind the precarious nature of options trading. As the wise counsel reminds, investments are akin to a high-wire act, with losses lurking as a stark eventuality. Therefore, perchance to trade should be undergirded by meticulous study and the sage advice of financial advisors.

For keen investors hungry for more, satisfy your appetite for Stock Market News at Barchart.