Weekly Options and Earnings

We are in entering the heart of the corporate earnings season with IBM and Google announcing their quarterly results after the close tonight. Many other highly traded stocks report next week including NFLX, MSFT, AAPL and AMZN to only mention a few.

You can gain a look into the future by checking the Options markets. The premiums on the options are often great indicators for what the expected move will be due to the earnings event. With the proliferation of weekly options you can see a short dated options market on practically every symbol you care about. When the option is short dated, the value of the premium is largely defined by the earnings event.

For example, IBM has been in the news recently with their deal with Apple. Their stock has rallied almost 10 points this week alone. After that move this week the at-the-money (ATM) strike is currently the JULY 195 strike. The calls are 3.35 bid 3.40 offer. The puts on this line are 3.65 bid 3.75 offer. Combining the call and the put creates a straddle position. The straddle in July options which expire tomorrow will only have 1 trading day of life remaining before these options expire. Adding the Call and the Put creates a straddle market of 7.00 (bid+bid) | 7.15 offer (ask+ask). This is the expected movement that the Options market is predicting for IBM from its announcement tonight.   This equates to a 3.6% move.

If you look at GOOGL with the same analysis, you see that the ATM straddle is 24.70 mid market in the 580 strike. This equates to a 4.25% potential move from earnings.

Next week NFLX which has been an earnings mover in the past, seems to be expecting an 8.5% move. The weeklys expiring next week will give a better view just prior to the earnings event on 7/24.

Remember the straddles don’t predict the direction of the move from earnings but rather just the extent of the move. Traders who play the options over earnings are expressing whether they believe that the stock will announce earnings in line with expectations and that premium will collapse, or the company will surprise with great or poor earnings relative to the estimates on the Street.

Even if you don’t trade the options make sure you use the information the options market is giving you about what is expected for movement through the earnings announcements.

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