Option Volatility And Earnings Report For Dec 20 - 23

Even though the bulk of earnings season has passed, we still have a few big names reporting earnings this week.

This week we will see Nike, Micron and a few others report earnings. 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. Here are the main stocks reporting earnings this week:

• Nike (NKE)
• Micron Technology (MU)
• BHP Billiton (BHP)
• Cintas Corp (CTAS)
• Paychex Inc (PAYX)
• General Mills (GIS)

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

Nike – 7.0%

MU – 7.9%

Tuesday

BHP – 7.7%

GIS – 5.5%

Wednesday

CTAS – 8.8%

PAYX – 6.3%

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 that are not due to report earnings. Some traders may prefer to avoid earnings announcements due to the potential for the stock to make a larger than normal move.

Let’s run the stock screener with the following filters:

• Most recent earnings date: Nov 1st – Dec 17th
• Total options volume: Greater than 20,000
• Market Cap: Greater than 40 billion
• IV Percentile: Greater than 70%

This screener produces the following results, ranked by implied volatility percentile:

• Nvidia (NVDA)
• Pfizer (PFE)
• Alibaba (BABA)
• Activision Blizzard (ATVI)
• Coinbase Global (COIN)
• Adobe Systems (ADBE)
• Qualcomm (QCOM)
• JD.com (JD)
• Costco (COST)
• Roblox (RBLX)
• Uber (UBER)
• Home Depot (HD)
• Oracle (ORCL)
• Nio (NIO)

You can refer to this article for details of how to generate iron condor ideas on stock with high implied volatility. 

Stocks With High Implied Volatility

Running the same screener to find stocks with low levels of implied volatility yields just three results. This is not surprising given the market generally has been quite volatile lately.

• Rivian Automotive (RIVN)
• Coupang (CPNG)
• CVS Corp (CVS)

For stocks with low implied volatility, traders may like to consider long straddles and long strangles or even a long iron condor. A long straddle involves buying an at-the-money call and put while a long strangle uses out-of-the-money options. The maximum loss is limited to the credit paid and losses will accrue if the underlying stock does not move much, and / or implied volatility falls. Unlike income-based strategies, time decay works against you with long straddles and strangles. For this reason, it is better to stick with longer-term trades to minimize the impact of time decay.

Changes In Open Interest

Apple (AAPL) options saw some of the largest changes in open interest on Friday. Of particular interest were the large changes seen in the December 23rd 175 and 177.50 strike calls. There was also large volume in the December 23rd 180 strike calls. Other stocks with large changes in open interest included:

• American Airlines (AAL)
• Snap Inc (SNAP)
• Tal Education Group (TAL)
• Bank of America (BAC)
• Citigroup (C)

Below you can find the full report:

If you have any questions on the above, please feel free to reach out to me on Twitter.

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.

*Disclaimer: On the date of publication, Gavin McMaster did have (either directly or indirectly) positions in some of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, Dec 19, 2021.