Option Volatility And Earnings Report For October 16 - 20

Earnings season kicked off last week and it’s stepping up a gear this week with a huge number of big names set to report. This week we have Tesla (TSLA), Johnson & Johnson (JNJ), Bank of America (BAC), Netflix (NFLX), Morgan Stanley (MS), American Express (AXP), Lockheed Martin (LMT) and Goldman Sachs (GS) 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

SCHW – 7.6%

Tuesday

JNJ – 2.9%

BAC – 5.2%

LMT – 3.8%

GS – 4.3%

IBKR – 4.9%

UAL – 7.2%

Wednesday

TSLA – 7.0%

PG – 3.9%

ABT – 5.1%

NFLX – 8.3%

MS – 4.9%

USB – 6.1%

LVS – 5.5%

Thursday

TSM – 5.0%

PM – 3.4%

UNP – 4.1%

T – 5.1%

ISRG – 8.5%

BX – 5.0%

FCX – 5.3%

Friday

AXP – 4.4%

SLB – 4.6%

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 50%

This screener produces the following results sorted by IV Percentile. Not many stocks with high volatility at the moment.

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 we only had one company of interest report earnings:

PEP +1.9% vs 3.7% expected

DPZ -1.1% vs 7.1% expected

WBA +7.0% vs 7.9% expected

DAL -2.3% vs 5.2% expected

JPM +1.5% vs 3.7% expected

UNH +2.6% vs 3.2% expected

C -0.2% vs 4.6% expected

WFC +3.1% vs 5.0% expected

PNC -2.6% vs 4.8% expected

BLK -1.3% vs 3.9% expected

Overall, there were 10 out of 10 that stayed within the expected range.

Changes In Open Interest

DAL, META, AAPL, GOOGL and AAL 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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