Understanding Implied Volatility and Earnings
Earnings season, the Wall Street equivalent of a climactic grand finale, appears to be winding down. Still, a handful of key players, including Crowdstrike, Target, Broadcom, and Costco, remain in the spotlight. Before an earnings report, the market, akin to a fickle soothsayer, grapples with uncertainty, causing the implied volatility to soar. Speculators and hedgers, much like a whirlwind, whip up demand for company options, thus inflating the prices.
Post the earnings reveal, the volatile tides ebb, bringing the implied volatility back to calm waters, as the market course corrects itself.
Calculating Expected Stock Ranges
By considering the option chain’s at-the-money put and call prices post the earnings date, traders can extrapolate the anticipated stock range. While not infallible, this estimation method plays the role of a precise compass in the uncharted seas of stock price predictions.
Monday
SE – 17.6%
GTLB – 18.4%
Tuesday
CRWD – 11.9%
TGT – 7.2%
Wednesday
CPB – 4.6%
JD – 9.4%
Thursday
AVGO – 8.3%
COST – 4.2%
MRVL – 11.6%
Friday
Nothing of note
Trading Strategies and Risk Management
Strategizing trades around these expected moves is akin to setting sail with wind-filled trading ships. Bearish traders can cast their nets with bear call spreads, while their bullish counterparts might find harbor with bull put spreads or daring naked puts.
For those charting a neutral course, iron condors provide a structured safety net. Over volatile earnings waters, keeping the short strikes beyond the anticipated range acts as a sturdy anchor.
Prudent traders, much like seasoned sailors, adhere to risk-defined strategies, keeping their portfolio lifeboats afloat in the choppy seas of unexpected stock movements. A full loss should hardly capsize more than 1-3% of their financial vessel.
Stocks with High Implied Volatility
A dive into Barchart’s Stock Screener uncovers a trove of high implied volatility stocks. Running the screener with stringent filters reveals a treasure trove for seasoned traders and novices alike, a modern-day map to potential stock treasures.
Looking back at last week’s earnings escapades, only a handful dared to stray beyond the expected confines whereas the majority danced within the predicted range, showcasing the market’s surprising adherence to rationality.
Tracking Unusual Options Activity
Significant shifts in open interest among stocks such as AMD, SQ, PLUG, C, F, MSFT, and RIVN set off alarm bells for astute traders. The financial tide can change swiftly, and being attuned to these subtle shifts is akin to owning a sixth sense in the trading realm.
The specter of risk always looms over the horizon of options trading. Much like navigating through treacherous waters, investors must exercise caution, seeking counsel from their financial navigators before embarking on any trading expeditions.