Option Volatility and Earnings Report for February 5 - 9

Earnings season continues is earnest this week with plenty of big names reporting. This week, we have Walt Disney (DIS), Alibaba (BABA), Eli Lilly (LLY), Amgen (AMGN), Caterpillar (CAT), Paypal (PYPL) and McDonald’s (MCD) 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

MCD – 3.0%

CAT – 5.5%

VRTX – 4.7%

SPG – 4.9%

PLTR – 13.7%

ON – 9.5%

Tuesday

LLY – 5.6%

AMGN – 3.7%

UBS – 6.6%

BP – 4.0%

GILD – 3.8%

CMG – 6.4%

FTNT – 9.5%

F – 6.7%

SPOT – 9.4%

ENPH – 14.8%

Wednesday

BABA – 6.6%

DIS – 5.8%

UBER – 7.5%

CVS – 4.8%

ARM – 8.2%

PYPL – 8.0%

RBLX – 13.6%

WYNN – 5.8%

Thursday

AZN – 4.0%

PM – 2.9%

COP – 4.1%

KVUE – 3.5%

ADM – 3.8%

NET – 11.4%

PINS – 10.7%

EXPE – 9.3%

AFRM – 17.2%

Friday

PEP – 2.9%

ENB – 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 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:

NUE +6.9% vs 5.3% expected

SMCI +3.5% vs 12.2% expected

AMD -2.5% vs 9.5% expected

DHR +4.7% vs 4.3% expected

GM +7.8% vs 5.1% expected

GOOGL -7.5% vs 5.5% expected

MSFT -2.7% vs 4.6% expected

PFE -1.7% vs 4.6% expected

SBUX -1.1% vs 5.8% expected

UPS -8.2% vs 5.5% expected

BA +5.3% vs 4.8% expected

MA +0.9% vs 3.2% expected

QCOM -5.0% vs 6.0% expected

AAPL -0.5% vs 3.7% expected

AMZN +7.9% vs 6.6% expected

CLX +5.6% vs 5.8% expected

HON -2.5% vs 3.2% expected

META +20.3% vs 7.1% expected

MO +4.0% vs 2.8% expected

MRK +4.6% vs 2.7% expected

RCL -0.4% vs 7.4% expected

ABBV +0.6% vs 3.4% expected

BMY +0.1% vs 5.2% expected

CVX +2.9% vs 3.0% expected

XOM -0.4% vs 3.1% expected

Overall, there were 15 out of 25 that stayed within the expected range.

Changes In Open Interest

T, QCOM, BAC, AMZN and MSFT 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.

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