Option Volatility And Earnings Report For May 13- 17

Earnings season is slowing down, but we still have a few big names reporting. This week, we have Alibaba (BABA), Home Depot (HD), Walmart (WMT), Cisco (CSCO) 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

Nothing of note

 

Tuesday

PBR – 4.1%

BABA – 6.8%

HD – 4.2%

ONON – 12.0%

SE – 13.4%

 

Wednesday

CSCO – 5.7%

TJX – 4.6%

 

Thursday

WMT – 4.4%

JD – 8.4%

BIDU – 6.6%

AMAT – 5.8%

DE – 4.7%

 

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 thestock screenerwith the following filters:

  • Total call volume: Greater than 5,000
  • Market Cap: Greater than 40 billion
  • IV Percentile: Greater than 70%

This screener produces the following results sorted by IV Percentile. There are quite a few stocks showing elevated volatility, mainly due to earnings.

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 -15.1% vs 14.7% expected

WMB +0.1% vs 3.0% expected

TSN -5.7% vs 5.6% expected

DIS -9.5% vs 6.4% expected

DDOG -11.5% vs 11.2% expected

OXY -2.1% vs 4.0% expected

BP -3.7% vs 4.5% expected

TWLO -7.5% vs 11.1% expected

ANET +6.5% vs 9.3% expected

UBER -5.7% vs 8.4% expected

SHOP -18.6% vs 11.8% expected

ARM -2.3% vs 11.7% expected

ET -0.1% vs 3.4% expected

TTD +3.1% vs 11.5% expected

BUD +4.0% vs 3.2% expected

ABNB -6.9% vs 8.1% expected

HOOD -3.1% vs 13.8% expected

WBD +3.1% vs 10.3% expected

AKAM -10.9% vs 8.4% expected

RBLX -22.1% vs 13.8% expected

ENB +1.2% vs 3.9% expected

Overall, there were 13 out of 21 that stayed within the expected range.

Unusual Options Activity

COIN, RIOT, GSK, ZM, CCJ, TSLA, CHWY and C 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 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.

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

Tags

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.