Earnings season is starting to slow down now, but we still have some important companies reporting this week. These include Walmart (WMT), Alibaba (BABA), Baidu (BIDU), Carvana (CVNA), Occidental Petroleum (OXY) and Arista Networks (ANET).
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
President’s Day holiday
BHP – 3.6%
Tuesday
BIDU – 7.8%
OXY – 4.9%
ANET – 11.1%
MDT – 3.7%
DVN – 5.5%
Wednesday
CVNA – 14.1%
TOST – 13.6%
Thursday
BABA – 8.9%
RIVN – 14.0%
WMT – 5.2%
NU – 7.3%
CCJ – 7.3%
NEM – 7.0%
XYZ – 9.2%
SO – 2.7%
Friday
AKAM – 10.7%
BKNG – 6.4%
MELI – 8.2%
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 10,000
- 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
ALAB -10.9% vs 18.4% expected
MCD +4.8% vs 3.7% expected
ON -8.2% vs 9.7% expected
SHOP +3.1% vs 13.6% expected
SMCI +2.8% vs 19.9% expected
ET -0.8% vs 3.1% expected
KO +4.7% vs 2.9% expected
DASH +0.2% vs 10.0% expected
HUM -3.6% vs 8.6% expected
GILD +7.5% vs 4.4% expected
MAR -5.4% vs 4.3% expected
Z -9.4% vs 10.4% expected
HOOD +14.1% vs 12.4% expected
CVS +15.0% vs 7.7 expected
GOLD +6.4% vs 5.3% expected
RDDT -5.3% vs 16.5% expected
KHC -3.3% vs 4.4% expected
CSCO +2.1% vs 5.3% expected
APP +24.0% vs 19.1% expected
VRT -9.7% vs 11.5% expected
TTD -33.0% vs 12.1% expected
COIN -8.0% vs 10.2% expected
DKNG +15.2% vs 9.7% expected
PANW +2.6% vs 8.2% expected
ROKU +14.1% vs 14.4% expected
ABNB +14.5% vs 9.0% expected
TWLO -15.0% vs 9.7% expected
MRNA +3.4% vs 11.1% expected
Overall, there were 16 out of 28 that stayed within the expected range.
Unusual Options Activity
CVNA, HIMS, SNAP, WYNN, MSTR, COIN 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.
