- Four of the largest tech companies in the world report earnings after the bell, Alphabet, Amazon, Apple and Facebook.
- A look at expected moves and corresponding bullish and bearish consensus.
We enter the biggest day of the earnings season with extremely elevated implied volatility across the market. The VIX is near 40, and that means expected moves for all stocks have expanded. To illustrate the difference now, here's a comparison of 7 day expected moves for Apple, Amazon, Microsoft, Alphabet and Facebook from last week, and now, via the Options AI expected move calculator:
So earnings are still the big driver with most of the expected move expected over the next 2 days but market volatility is affecting all expectations of movement, over the next week and, now to a lesser extent, over the next few months.
What that means for earnings reports is traders need to take into account the event, and also what market volatility means until any chosen expiration.
We can look at each stock individually and see how that corresponds to current stock levels into tonight's earnings events, with the expected move for tomorrow's close (via Options AI):
Amazon / 4.9%
Alphabet / 4.0%
Facebook / 5.3%
Apple / 4.2%
Using Apple, currently trading $114 as an example, we can see corresponding strikes for those looking to spread trade the event, or looking out a few weeks.
First, income generating strategies or "Selling the move":
A closer look at the Iron Condor based on the expected move shows max gain between $109 and $119, with max loss below $108 or above $120:
The risk reward on the trade is risking 57 to make 43. Because it is based on tomorrow's expiration it is very binary, with implied volatility a non factor as much as realized move versus expected.
Looking directionally and out a bit, other factors beyond the earnings event become factors. Next week's election, broader market volatility etc. But debit spreads can help alleviate some of the issues of elevated vol when looking directionally. And credit spreads can look to take advantage by being short premium in a high vol environment.
Here's an example of a bullish price target in line with the expected move, with a November 20th expiration, with Apple $114, the expected move for November 20th is about $10 higher in the stock:
The +114/-124 debit call spread risks just better than 4 to make 6 with the -114/+105 credit put spread risking closer to 6 to make 3. The credit put spread takes advantage of elevated vol by being short premium, with much higher probability of profit, but much worse risk reward.
The debit call spread takes advantage of elevated vol to sell a call at the expected move and help finance the at the money call buy:
Here's the breakdown of the strikes, with the 3.70 cost achieved by selling the 124 call:
With a bearish target on the same timeframe, here are the corresponding spread trades to the bearish expected move, about $10 lower for a November 20th expiration:
Again, the choice between debit and credit spreads depends on a view of directionality, am I bearish (debit put spread? Or simply not bullish (credit call spread). The same is true for bullish targets.
There's a lot going on in the market, with multiple events and larger themes affecting options prices. Earnings trades, and even trades with a slightly longer time frame can incorporate the option market expectations to help with strike selection.