Market Volatility and Earnings Summary for August 11 to August 15
In the world of stock trading, earnings season can be a particularly volatile period. However, savvy traders can leverage this volatility to their advantage by employing risk-defined options strategies. Here's a breakdown of some common strategies and key considerations for trading options during earnings season.
Last week, several stocks showed unusual options activity. Notably, SHOP had a move of 22.0%, higher than the expected 11.6%, while ABNB had a move of -8.0%, lower than the expected 7.9%. On the other hand, PLTR had a move of 7.9%, higher than the expected 12.1%, and DDOG had a move of -0.4%, lower than the expected 8.7%.
Using a Stock Screener, other stocks with high implied volatility can be found by filtering for total call volume greater than 5,000, market cap greater than 40 billion, and IV Percentile greater than 50%. Last week, TTD, WBD, TSLA, AAPL, MSTR, CRWV, CVNA, and UPST all experienced unusual options activity.
Risk-Defined Strategies
During earnings season, it's crucial to prioritize controlled risk exposures. Common strategies include:
- Vertical Spreads: Buying one option and simultaneously selling another option at a different strike price reduces the overall cost and caps maximum loss. This limits downside risk compared to buying naked calls or puts around earnings.
- Selling Options Prior to Earnings: This strategy captures high implied volatility premiums and then buys them back post-earnings after the volatility crush reduces premiums. However, it requires careful risk management since price moves can be large.
- Buying Straddles or Strangles: These strategies potentially profit from big directional moves either up or down. However, buying these naked options is expensive due to elevated implied volatility and can result in losses if the stock does not move enough to cover the premium paid.
Key Considerations
- Earnings season increases implied volatility (IV), inflating option premiums. Strategies that reduce exposure to IV crush risk are preferred.
- Spreads limit max loss and reduce capital outlay compared to outright option purchases, offering a favorable risk/reward balance during volatile earnings events.
- Risk can be further managed by combining diversification, using stop-loss orders, and carefully selecting strike prices and expirations relative to expected earnings moves.
When trading options over earnings, it is best to stick to risk-defined strategies and keep position size small to minimize potential portfolio impact. After earnings announcements, implied volatility typically drops back to normal levels.
This week, earnings reports are limited to Cisco Systems (CSCO), Applied Materials (AMAT), Sea Ltd (SE), Petroleo Brasileiro (PBR), Nu Holdings (NU), Coreweave (CRWV), and JD. Before earnings reports, implied volatility is usually high due to market uncertainty and demand for options.
Remember, these strategies are designed to help manage risk during earnings season. As always, it's essential to do thorough research and consider your risk tolerance before making any investment decisions.
Sources: 1. Investopedia 2. Investopedia 3. Investopedia 4. Investopedia 5. Investopedia
- Incorporating technology in finance, such as using Stock Screeners to find stocks with high implied volatility, can aid traders in identifying potential investment opportunities during earnings season.
- Practicing risk-defined options strategies like vertical spreads, selling options prior to earnings, and buying straddles or strangles can help investors manage financial risks associated with technology and investing during earnings season.
