Earnings season ramps up this week with some big names set to report. This week we have Netflix (NFLX), Intel (INTC), Johnson & Johnson (JNJ), Freeport McMoran (FCX) and 3M Company (MMM) all reporting in what shapes as a busy and pivotal week for stocks.
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
Martin Luther King Jr Holiday
Tuesday
USB – 3.8%
FAST – 7.3%
MMM – 5.6%
NFLX – 7.7%
Wednesday
KMI – 2.8%
JNJ – 3.2%
SCHW – 4.8%
TFC – 6.2%
Thursday
INTC – 8.7%
FCX – 5.3%
COF – 4.8%
PG – 3.8%
GE – 5.5%
CSX – 3.7%
Friday
SLB – 4.1%
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 Rank: Greater than 50%
