Option Volatility And Earnings Report For Aug 17-21

This week's focus will be on retail earnings, with Walmart (WMT), Home Depot (HD), Target (TGT) and Alibaba (BABA) all scheduled to report. In the period leading up to a company's earnings report, implied volatility tends to be elevated as the market grapples with the uncertainty surrounding the outcome of the report. As speculators and hedgers become increasingly active, trading the company's options, the implied volatility rises, and consequently, the price of options increases as well.

Investors in Microsoft may find appeal in shorting out-of-the-money MSFT puts. Meanwhile, Micron's covered call has the potential to pay up to 63% to wait and observe. Alphabet's stock is deemed attractive for short-put yields, despite GOOGL stock remaining relatively stable.

Following the earnings announcement, implied volatility typically reverts to its normal levels. To estimate the expected range for these stocks, locate the option chain and sum the prices of the at-the-money put option and the at-the-money call option, using the first expiry date after the earnings date. Although this method is not as precise as a detailed calculation, it still provides a reasonably accurate estimate.

Option traders can leverage these expected moves to devise trades. Bears may consider selling bear call spreads outside the expected range, while bulls could sell bull put spreads outside the expected range or explore naked puts for those with a higher risk tolerance. Neutral traders can turn to iron condors. When engaging in iron condors over earnings, it's advisable to keep the short strikes outside the expected range.

When trading options over earnings, sticking to risk-defined strategies and maintaining a small position size is prudent. Should the stock undergo a larger-than-expected movement and the trade incurs a full loss, it should not significantly impact your portfolio, limiting the effect to between 1-3%.

Utilize Barchart's Stock Screener to identify other stocks exhibiting high implied volatility. The screener, when filtered accordingly, yields the following results sorted by IV Rank. For a comprehensive guide on identifying option trades during this earnings season, refer to the accompanying article.

Out of nine stocks, three remained within the expected range. Four stocks demonstrated an upward trend following their announcement, including TSLA, NU, NEM, NVDA, and MRNA. All of these stocks exhibited unusual options activity last week. Additional stocks with unusual options activity are listed below. It is crucial to remember that options trading entails significant risk, and investors may potentially lose 100% of their investment.

This article is intended for educational purposes only and does not constitute a trade recommendation. Readers are strongly advised to conduct their own due diligence and consult with a financial advisor before making any investment decisions. On the date of publication, Gavin McMaster held positions in TSLA and NVDA. All information and data presented in this article are provided solely for informational purposes and were originally published on Barchart.com.