Option Volatility And Earnings Report For Jan 30 – Feb 3

Earnings season continues in earnest this week with big name tech companies in focus. The Nasdaq 100 Index ($IUXX) (QQQ) has been outperforming in recent weeks, so earnings for Amazon (AMZN), Apple (AAPL), Alphabet (GOOGL), Advanced Micro Devices (AMD) and Meta Platforms (META) could have a big bearing on market direction this week.

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

SOFI – 14.6%

Tuesday

XOM – 3.7%

UPS – 6.3%

GM – 6.9%

PFE – 4.4%

CAT – 4.6%

MCD – 3.2%

SPOT – 11.4%

AMD – 8.2%

AMGN – 3.9%

Wednesday

WM – 2.9%

MO – 2.7%

T – 2.3%

PTON – 18.7%

HUM – 7.6%

GSK – 4.1%

META – 9.8%

Thursday

MRK – 2.9%

COP – 4.4%

AMZN – 8.4%

AAPL – 4.7%

LLY – 3.7%

BMY – 2.9%

HON – 3.5%

GOOGL – 5.8%

F – 6.5%

QCOM – 6.4%

SBUX – 5.4%

X – 7.5%

TEAM – 15.2%

GILD – 4.7%

Friday

CBOE – 3.5%

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, ranked by implied volatility 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:

GE +1.2% vs 5.2% expected

ISRG -5.5% vs 5.4% expected

JNJ 0.0% vs 2.4% expected

LMT +1.8% vs 3.6% expected

MMM -6.2% vs 4.2% expected

MSFT -0.6% vs 4.9% expected

HAL -1.8% vs 5.0% expected

RTX +3.4% vs 4.9% expected

VZ +2.0% vs 4.4% expected

BA +0.3% vs 4.8% expected

T +6.6% vs 4.6% expected

NOW +3.2% vs 7.7% expected

TSLA +11.0% vs 9.6% expected

IBM -4.5% vs 4.8% expected

ABT -1.6% vs 3.6% expected

AAL +2.2% vs 6.2% expected

LUV -3.2% vs 4.6% expected

VLO +4.6% vs 4.6% expected

MA -1.4% vs 4.0% expected

BX +5.6% vs 5.7% expected

NUE +8.4% vs 4.6% expected

INTC -6.4% vs 7.9% expected

V +3.0% vs 4.1% expected

DOW 0.4% vs 4.9% expected

AXP +10.5% vs 4.6% expected

CL -5.2% vs 4.5% expected

CVX -4.4% vs 3.4% expected

Overall, there were 19 out of 27 that stayed within the expected range.

Changes In Open Interest

PFE, ET, AMC, LVS, INTC, PYPL 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.

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