Earnings season is starting to wind down, but we still have some important companies reporting.
This week brings Baidu, Snowflake, Target, Palo Alto Networks, Medtronic, Zoom, and Lowe’s all stepping into the spotlight.
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 delve into 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.
Daily Expected Volatility
PANW – 9.6%
EL – 10.6%
Tuesday
MDT – 4.3%
LOW – 4.5%
Wednesday
SNOW – 11.4%
TGT – 8.4%
ZM – 8.7%
TJX – 4.7%
Thursday
BIDU – 6.9%
CAVA – 11.0%
WDAY – 8.3%
INTU – 5.7%
TD – 4.3%
Friday
Nothing of note
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 explore 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.
High Implied Volatility Stocks
We can use Barchart’s Stock Screener to find other stocks with high implied volatility.
Last week’s performance compared to expected moves:
GOLD +9.1% vs 5.0% expected
BEKE +5.5% vs 8.5% expected
Overall, 8 out of 13 stocks stayed within the expected range.
Unusual Options Activity
PLTR, DELL, F, MSTR, and TSLA all experienced unusual options activity last week.
Other stocks with unusual options activity are detailed in the attached image.
Remember that options are risky, and investors can lose 100% of their investment. This article is for educational purposes only and not a trade recommendation. Always conduct your due diligence and consult your financial advisor before making any investment decisions.