For Options Traders, Earnings Season Presents Opportunities

For option traders earnings season is a great time to take advantage of quick shifts in expected volatility and potential outlier price moves from stocks. These outlier moves may be higher or lower, depending on investor expectations relative to the actual earnings release. Between October 20 and November 8, eight of the top ten components of the Nasdaq-100 report earnings with six large firms reporting the week that ends on October 29. The table below lists the eight companies reporting over the next three weeks along with their respective price reactions to earnings over the last two years.


Data Sources: Bloomberg & EQDerivatives Calculations

The data in the table show what the average post earnings one-day price change for each stock regardless of direction. Option trader use this figure when trading earnings based on the potential magnitude of moves. It also is useful when comparing option pricing just before earnings to historical price moves to gain insight into what the market is thinking with respect to potential price reactions to earnings.

Something that sets the Nasdaq-100 apart from other broad based indexes is that option implied volatility is sensitive to earnings season. The chart below shows how the expected volatility for at-the-money NDX options reflects higher volatility expectations for options expiring just after trading days that include earnings reactions dates.

NDX - ATM implied volatility

Data Sources: OIC & EQDerivatives Calculations

Note the October 22 expiring options are pricing in higher implied volatility than the expirations just before and after this date. This reflects the market’s expectation associated with TSLA reporting earnings after the close on October 20. The most dramatic part of the chart comes at the end, where at-the-money implied volatility is around 15% for options expiring October 29. This higher figure is associated with several large NDX stocks (FB, GOOG, GOOGL, MSFT, AAPL, and AMZN) all reporting their earnings the week of October 25 to October 29.

Option traders like to play earnings season due to the excess volatility associated with events where the timing is known, but the price reaction is not. One of the interesting aspects around the Nasdaq-100 is a pattern with heightened implied volatility priced into NDX options when earnings season is approaching. Starting with TSLA this coming week we plan on closely monitoring both NDX option trading as well as trades on the individual stocks leading up to their respective announcements.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Russell Rhoads, CFA

Russell Rhoads is a highly regarded strategist, educator and consultant – among other things he is perhaps best known as the author of Trading VIX Derivatives, the textbook in the space

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