Option Volatility And Earnings Report For October 21 - 25

It’s a busy week of earnings, with a lot of big names due to report including Tesla (TSLA), Boeing (BA), Newmont Mining (NEM), International Business Machines (IBM), and United Parcel Service (UPS) 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. 

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

NUE – 4.9%

SAP – 7.9%

 

Tuesday

VZ – 3.9%

GM – 5.5%

GE – 4.9%

ENPH – 12.6%

RTX – 4.3%

MMM – 7.3%

TXN – 5.2%

PM – 3.9%

KMB – 3.6%

LMT – 3.6%

 

Wednesday

TSLA – 7.4%

BA – 5.5%

NEM – 5.3%

T – 4.8%

NEE – 4.6%

VRT – 10.9%

KO – 2.7%

IBM – 5.7%

BSX – 4.4%

LVS – 5.5%

NOW – 6.2%

CME – 4.3%

 

Thursday

LUV – 5.8%

UPS – 6.0%

KKR – 4.2%

HON – 3.6%

DOW – 3.2%

UNP – 3.3%

 

Friday

VALE – 4.0%

 

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 5,000
• Market Cap: Greater than 40 billion
• IV Percentile: Greater than 80%

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 actual versus expected moves are shown below:

 

UAL +12.4% vs 6.8% expected

BAC +0.6% vs 3.9% expected

IBKR -4.1% vs 4.5% expected

PNC +2.0% vs 4.4% expected

GS -0.1% vs 3.6% expected

SCHW +6.1% vs 6.2% expected

JNJ +1.6% vs 2.7% expected

UNH -8.1% vs 4.8% expected

C -5.1% vs 3.9% expected

USB +4.7% vs 5.1% expected

ASML -16.3% vs 6.4% expected

LVS -2.4% vs 4.2% expected

KMI -0.4% vs 3.0% expected

TSM +9.8% vs 5.7% expected

TFC -3.6% vs 4.0% expected

NFLX +11.1% vs 7.9% expected

BX +6.3% vs 4.4% expected

ISRG +10.0% vs 5.7% expected

MS +6.5% vs 3.9% expected

FCX -1.6% vs 7.2% expected

PG 0.0% vs 3.1% expected

SLB -4.7% vs 4.1% expected

AXP -3.2% vs 4.7% expected

Overall, there were 13 out of 23 that stayed within the expected range.

Unusual Options Activity

JBLU, COST, AAL, LCID, WBA and PDD 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.

More Stock Market News from Barchart

• Why Understanding Investor Psychology Is Your Secret Weapon In A Noisy Market
• Earnings, IMF Meeting and Other Can't Miss Items this Week
• Is It Time to Invest in Software Stocks? 3 ETFs to Consider Now
• Netflix Stock Looks Cheap to Value Investors Based on Its Huge Free Cash Flow

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.