Volatility is back in a big way! Last week we saw a hug number of companies reporting. This week is a little quieter, but we still have a lot of stocks of interest reporting.
This week we have Palantir (PLTR), Super Micro Computer (SMCI), Robinhood Markets (HOOD), Disney (DIS), Uber Technologies (UBER), Caterpillar (CAT), Eli Lilly (LLY) and Amgen (AMGN) 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.Â
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.
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Monday
PLTR – 13.6%
O – 3.2%
TSN – 6.8%
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Tuesday
SMCI – 13.8%
RIVN – 13.4%
UBER – 8.8%
KVUE – 6.6%
DVN – 5.7%
CELH – 14.1%
ABNB – 9.5%
CAT – 6.2%
AMGN – 5.4%
FTNT – 11.1%
DUK – 3.7%
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Wednesday
HOOD – 14.2%
DIS – 7.6%
OXY – 4.3%
ET – 3.8%
SHOP – 12.8%
CVS – 8.6%
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Thursday
LLY – 8.4%
PBR – 4.7%
DDOG – 12.2%
TTD – 12.9%
GILD – 4.7%
EXPE – 12.5%
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Friday
Nothing of note
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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.Â
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.Â
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. With the fireworks of last week, there are 129 stocks that meet this criteria!
You can refer to this article for details of how to find option trades for this earnings season.Â
Last Week’s Earnings Moves
Last week’s actual versus expected moves are shown below:
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MCD +3.7% vs 4.7% expected
AMD +4.4% vs 9.0% expected
ANET +11.3% vs 9.2% expected
BP -0.4% vs 3.9% expected
MRK -9.8% vs 4.5% expected
MSFT -1.1% vs 5.2% expected
PFE +2.2% vs 4.4% expected
PG -4.8% vs 3.0% expected
PYPL +8.6% vs 8.7% expected
SBUX +2.7% vs 7.5% expected
ADP +1.9% vs 4.4% expected
ARM -15.7% vs 12.2% expected
BA +2.0% vs 5.2% expected
HUM -10.6% vs 6.2% expected
KHC +4.1% vs 4.8% expected
MA +3.6% vs 4.2% expected
META +4.8% vs 9.4% expected
MO -3.1% vs 2.9% expected
QCOM -9.4% vs 8.3% expected
AAPL +0.7% vs 4.5% expected
AMZN -8.8% vs 7.8% expected
COIN -3.9% vs 11.6% expected
COP -2.5% vs 3.4% expected
DASH +8.4% vs 12.5% expected
INTC -26.1% vs 8.3% expected
MARA -5.2% vs 13.5% expected
CVX -2.7% vs 3.0% expected
XOM -0.1% vs 2.9% expected
Overall, there were 19 out of 28 that stayed within the expected range.
Unusual Options Activity
INTC, AMZN, MSFT, TSLA, MU and PG 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.
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