Earnings season continues this week, but it’s not too busy because of the Martin Luther King Jr. holiday on Monday. This week we have Goldman Sachs (GS), Morgan Stanley (MS), PNC Bank (PNC), Prologis (PLD), Charles Schwab (SCHW) and Schlumberger (SLB) all set to report.
Before a company reports earnings, implied volatility is usually high because the market is uncertain 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 falls back to normal levels.
Let’s take a look at the expected range for these stocks. To calculate the expected range, look at the option chain and add the price of the at-the-money put option and the at-the-money call. Use the first deadline after the winning date. Although this approach is not as accurate as a detailed calculation, it works as a fairly accurate estimate.
tuesday
GS – 3.1%
IBKR – 4.0%
MS – 3.6%
PNC – 3.8%
wednesday
DFS – 4.9%
BMI – 2.1%
PLD – 2.9%
SCHW – 5.1%
USB – 4.5%
Thursday
TFC – 3.9%
friday
SLB – 3.5%
Options traders can use these expected moves to structure trades. Bearish traders may look at selling bearish call spreads outside the expected range.
Bullish traders can sell bullish put spreads outside the expected range, or look at bare trades for those with a higher risk tolerance.
Neutral traders can look at iron condors. When trading iron condors above 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 bigger than expected move and the trade suffers a total loss, it should not have more than a 1-3% impact 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 provider screen with the following filters:
- Total call volume: Greater than 2,000
- Market value: Greater than 40 billion
- IV Percentile: Greater than 50%
This screen produces the following results sorted by IV Percentile. Not many stocks with high volatility at the moment.
You can refer to this article for details on how to find option trades for this winning season.
Last Week’s Earnings Moves
Last week we had only one company report interest income:
TSM + 3.7% vs. 5.6% expected
DAL -9.0% vs. 5.6% expected
JPM -0.7% vs. 3.2% expected
UNH -3.4% vs. 3.0% expected
C + 1.0% vs. 5.0% expected
WFC -3.3% vs. 3.9% expected
BLK + 0.9% vs. 3.2% expected
Overall, there were 5 out of 7 that remained in the expected range.
Unusual Option Activity
CVS, COIN, BAC, DB and LCID all experienced unusual election activity last week.
Other stocks with unusual pick activity are shown below:
Please remember that options are risky, and investors can lose 100% of their investment. This article is for educational purposes only and not a business recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
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At the date of publication, Gavin McMaster did not hold (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see Barchart’s Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.