Stocks finished the week with the S&P 500 closing at a new all-time high. Is the market prepared for next week’s gargantuan earnings revelation? Amazon, Apple, Facebook and Google are all strong market leaders and an earnings surprise can influence the overall market. Apple reports on Tuesday after the close. Facebook discloses it numbers after Wednesday’s close and Amazon and Google bring in their key earnings numbers on Thursday after the close.
Earnings reports from industry leaders (all with significant market caps), which defines all of the stocks above, can have a definite impact on the overall stock market. All four of these stocks represent a significant portion of the value of the S&P 500 and are in the top eight of stock market capitalization of U. S. Stocks. If they should all produce either good, or bad results, the overall market will certainly respond accordingly.
With the S&P 500 trading at all-time highs, excellent earnings could be the impetus for trading at higher levels. If, on the other hand, the earnings reports of all four were disappointing, then the market would certainly be in for a bit of a correction. Unfortunately, earnings season provides a significant gamble and Amazon, Apple, Facebook and Google are volatile enough to cause the overall market to respond.
The Options Table shown below provides a look at the at-the-money straddle prices for the stocks we are discussing. For Options Settling next Friday, the price of the at-the-money straddle is indicative of the volatility that is expected in the next week. A comparison is also given to the options which expire in two weeks. In the lower right hand corner of the Table we provide the 20-Day Historical Volatility of the stock. If you compare that to the Implied Volatility of the options, you get a clear idea of the differential between past volatility and expected future volatility. The pricing discrepancy is enormous.
The Table which was a snapshot of options prices at 3:55 PM ET on Friday provides a fascinating look at options pricing. Interestingly, the one week straddle prices are very similar to the closing ranges for each stock since a month ago. Trading options going into earnings is definitely a risky proposition, but if one could execute the straddles with the differences indicated with the one and two weeks until expiration and the individual stock didn’t move substantially after the announcement, they would own the second week’s straddle for a very good price level. Like most options strategies that you might trade going into expiration, there is substantial risk, but if you are buying one straddle and selling another, you have defined risk.
While the Table gives you insight into just one set of options comparisons, there are a multitude of strategies which may be interesting during earnings season. Our Webinar Preview PDF provides valuable information pertaining to Options Trading Strategies. Whether you consider one by two put spreads, fences, or just selling put spreads, there are numerous ways to get long going into earnings. Be sure that no matter what trade you are considering that the liquidity is good and the risk/reward of the strategy meets your requirements. If you are interested in learning more, Contact Us.
No one knows what next week’s earnings will bring, but it is safe to say that an abundance of good or bad earnings reports will significantly influence the stock market’s movement in the short-term. Earnings provide volatility, but also a fresh look at overall market valuation.
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.