It was a huge week last week on the earnings front and that theme continues again this week with lots of big names set to report. This week we have Apple (AAPL), Eli Lilly (LLY), McDonald’s (MCD), Pfizer (PFE), Advanced Micro Devices (AMD), Amgen (AMGN), Caterpillar (CAT), Starbucks (SBUX), Palantir (PLTR), PayPal (PYPL), Coinbase (COIN) and Shopify (SHOP) 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
MCD – 3.6%
WDC – 7.1%
ON – 8.3%
PINS – 11.5%
HSBC – 4.8%
ANET – 9.5%
Tuesday
AMD – 8.2%
PFE – 4.6%
FSLR – 10.1%
CAT – 5.7%
AMGN – 3.9%
MPC – 4.7%
Wednesday
PYPL – 10.1%
ET – 3.1%
QCOM – 7.4%
ABNB – 9.4%
KHC – 4.5%
Thursday
AAPL – 4.5%
PLTR – 13.7%
SQ – 14.5%
COIN – 13.2%
SHOP – 11.0%
MRNA – 10.7%
GOLD – 4.9%
PBR – 6.5%
DKNG – 12.6%
LLY – 6.0%
SBUX – 6.1%
COP – 4.1%
FTNT – 9.5%
NET – 12.8%
IRM – 5.9%
TEAM – 11.9%
Friday
ENB – 5.4%
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 sorted by IV 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 we only had one company of interest report earnings:
ADM -4.1% vs 4.4% expected
DHR -3.5% vs 5.0% expected
DOW +2.1% vs 4.5% expected
GE +6.5% vs 6.4% expected
GM -2.3% vs 6.3% expected
GOOGL -9.5% vs 5.7% expected
HAL -3.4% vs 5.2% expected
KMB -1.1% vs 4.1% expected
KO +2.9% vs 2.8% expected
MMM +5.3% vs 5.1% expected
MSFT +3.1% vs 5.0% expected
TXN -3.5% vs 5.1% expected
V +0.9% vs 4.3% expected
VZ +9.3% vs 4.4% expected
BA -2.5% vs 5.8% expected
IBM +4.9% vs 4.9% expected
META -3.7% vs 9.5% expected
NOW +3.9% vs 7.2% expected
TMUS -0.1% vs 4.8% expected
AMZN +6.8% vs 7.4% expected
BMY -6.4% vs 3.8% expected
BSX -0.4% vs 4.3% expected
CAT +8.9% vs 6.8% expected
CMG +4.5% vs 7.6% expected
F -12.3% vs 5.8% expected
INTC +9.3% vs 7.6% expected
MA -5.6% vs 4.3% expected
MRK +1.9% vs 3.9% expected
RCL +0.8% vs 8.2% expected
UPS -5.9% vs 5.7% expected
ABBV +4.9% vs 4.7% expected
CL -1.8% vs 5.2% expected
CVX -6.7% vs 3.5% expected
XOM -1.9% vs 3.8% expected
Overall, there were 21 out of 34 that stayed within the expected range.
Changes In Open Interest
SOFI, BAC, TSLA, KO, PLTR, GOOGL and AMZN 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.
More Stock Market News from Barchart
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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.
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