Earnings Season still hot!

The market has been dramatically unchanged YTD, with all the major averages within 1.5% of the unchanged mark as we plod through January earnings season. Over the next 4 days 65 names from the S&P 500 index will be announcing earnings and the focus will stay on the micro individual stock action on those reporting earnings. IBM disappointed traders last night, as did AMD. However, in spite of these technology sector stocks’ performance today, the NDX tech index has been the better performer recently, closing yesterday at a 14 year high! When the focus is on individual companies, as it often is during earnings season, the overall volatility of the indexes can actual be subdued, as the individual winners offset the companies reporting corporate results which fall short of analyst’s estimates. This can partly explain why the VIX index has remained near the recent historical lows of right around 13%.

SPX Earnings Highlights

Tonight, after the market close, all eyes will be on SPX members, Netflix (NFLX), F5 Networks (FFIV) and eBay (EBAY). One of the great uses of weekly options is that the investing public can really get a focused view of what the options market is pricing for an expected move due to the earnings releases by these companies. The weekly options have such short expiration terms post the release — in this case only two days — that the straddles (buying or selling the at the money call and put) can indicate what type of percentage and dollar move is being priced in.

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So very quickly, option users can see that NFLX options are indicating over a 10% move coming from tonight’s release. If you remember last earnings day for Netflix, the stock moved from a prior day closing of roughly 355 to open and trade up to 389.60 only to close the day down near 321. That is a whopping 20% intraday move!

Thursday: 21 more members of the S&P 500 will release including Microsoft (MSFT), McDonalds (MCD) and Starbucks (SBUX).

Friday: 10 more companies, headlined by Honeywell (HON) Procter & Gamble (PG) and Bristol-Myers (BMY).

Monday: (drum roll) the world is waiting for Apple (AAPL), who are scheduled to release after the market closes.

Weekly options allow traders to focus their exposure to just a particular event as post release you expect the implied volatility to collapse. Shorter dated options have less exposure to Vega, this implied volatility component since they have such short time until they expire. Trading events like earnings are a very advanced concept and if done at all should only be done with a very small percentage of your investing capital. Using limited risk/limited reward trade strategies, such as debit and credit spreads, are more critical for event driven trade ideas.

Individual stock stories could be in for an exciting next couple of days before trader’s attention turns to Ben Bernanke’s final Fed meeting on January 28-29th.

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