Stocks Rally In Anticipation Of Earnings: Next Week’s The Test With AAPL, AMZN, GOOGL and FB

Despite a negative report from Netflix regarding subscribers and a positive earnings report from IBM after Monday's close, the earnings with the most impact will arrive next week. Apple, Amazon, Facebook and Google, all highly capitalized stocks, will be closely monitored. Netflix fell 15% in after-market trading on Monday and continued its standing as a market leader in earnings volatility. Despite that, the E-mini S&P Futures were scarcely changed on the re-open in Monday night’s session.

Given the stock market’s recent ascent, it seems likely that a strong, one-sided collection of results would likely be an impetus for the next move of the S&P 500. Stocks with large market capitalization like Apple, Amazon, Google and Facebook, which have a potential for volatility that is not likely in ExxonMobil, could certainly make the market move unless the earnings reports were a wash.

There are options trading strategies which can set you up for an either bullish or bearish scenario given your market sentiment. For those of you interested in establishing a long position based on pending news, the E-mini S&P and SPY (S&P 500 ETF Trust) both offer calls with implied Volatilities which are very reasonably priced in today’s volatile environment. With the VIX (CBOE Volatility Index) trading at historically low levels in combination with the Implied Volatility Skew of the stock market, prices of out-of-the money calls may be inexpensive enough to speculate in if you have a strong bullish sentiment.

The Table below shows the four stocks mentioned above and some pertinent information about their Historical and Implied Volatility, Relative Strength and Average Trading Range. During earnings season all bets are off, but the implied Volatility premium is indicative of the market’s willingness to pay inflated premiums for protection and speculation. During earnings season, there is frequently an incorrect assessment of the potential for movement in the stock price. For example, options on NFLX expiring on Friday priced the at-the-money $99 straddle at around $10 at the close.  Netflix fell in the aftermarket by about $16. It will be interesting to see where the stock trades on Tuesday morning.

 

If you are interested in trading the E-mini S&P or SPY in anticipation of a dramatic movement based on the earnings of Amazon, Apple, Facebook or Google then the following series of prices, shown in the Table below, gives you an idea of the Implied Volatility Skew and some of the tools to derive an Options Trading Strategy which may be useful when trading Stock Indices and other futures contracts. The Implied Volatility Skew listed on the left shows the curve of the supply and demand for puts and calls in the index. In addition, if you compare the prices of the out-of-the money options of puts and calls approximately equidistant from the current trading price, you get a feel for just how interesting the market is for options on stock index futures.

 

One important thing to make note of is that the implied volatility of all of the options displayed is less than the 20-Day Historical Volatility of the underlying futures contract shown in the upper left hand portion of the Table. If you would like to know more about trading options contracts: Contact Us. Every trader of options should be completely familiar with synthetics, in and out of the money options, liquidity, historical and implied volatility, risk management and the appropriate options trading strategy to meet their needs. Understanding value and risk provide traders the opportunity to manage their risk capital in an effective manner. These are all essential concepts to focus on when learning about trading options. If you are trading already, a focus on these elements of trading should improve your results.

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results. 

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