Earnings Volatility: Options Traders Are Betting on a Big Move in Microsoft and Meta

Stock prices may see larger-than-normal moves during earnings season, making it a potentially attractive time for options traders. For investors looking to trade against these moves, you should always keep track of how the options might shift after their earnings. Here are the top earnings and volatility for this week:

-Earnings Date: July 25th After Market

-Implied Move: 5.5%

-Absolute Average Actual Move for the past 4 Quarters: 5.6%

-Absolute Average Actual Move for the past 12 Quarters: 3.9%

-EPS Normalized Estimate: $2.55

-Revenue Estimate: 55.48B

According to recent data from Market Chameleon, options for Microsoft may be currently slightly undervalued, with the implied move of 5.5% merely lower than the average actual move for the past 4 quarters (5.6%), yet higher than the past 12 quarters (3.9%). The options market overestimated MSFT stocks earnings move 58% of the time in the last 12 quarters. The predicted move after earnings announcement was ±4.7% on average vs an average of the actual earnings moves of 3.9% (in absolute terms).

Microsoft's revenue growth likely slowed last quarter amid sluggish corporate demand though analysts will be watching the software company's results for indicators of how the jump in excitement around artificial intelligence is bolstering its business, according to Wall Street Journal's Tom Dontan.

The market's response to the company's fiscal fourth-quarter results also will depend in no small measure on the growth—and outlook—for the company's Azure cloud computing unit. Growth in the unit has been gradually decelerating, from 51% in the June 2021 quarter, to 27% in the March quarter (or 31% adjusted for currency exchange rates.) For the June quarter, consensus estimates call for 25% growth, or 26.5% adjusted for currency.

Microsoft last week announced plans to charge businesses $30 a month per person for access to an AI-powered assistant for Microsoft 365, its popular workplace software that includes Word and Excel. The fee is more than double what Microsoft charges for the least expensive version of the software.

Raymond James analyst Andrew Marok on Monday repeated his Outperform rating on Microsoft shares, lifting his target price to $400, from $320. "Sentiment has been definitively positive on Microsoft with AI dominating conversations around tech and MSFT enjoying an enviable position at the vanguard of the new technology," he writes in a research note. Marok thinks investors want to see no more than a modest deceleration in Azure growth, with encouraging commentary on the cloud outlook for fiscal 2024, and some quantification of the AI outlook.

Marok asserts that the company is "best-positioned to capitalize on the long-term tailwinds that AI should bring to the tech space."

Wedbush analyst Dan Ives likewise remains bullish on the stock headed into earnings, with an Outperform rating and $375 target price. And he thinks the report has implications well beyond Microsoft’s own shares. "The entire Street will be laser-focused on one print this week: Microsoft,” he writes “While this is a massive week for Big Tech earnings season, there is no better barometer of the overall cloud and enterprise spending environment then Redmond and all eyes will be glued to the screens Tuesday after the bell.”

Ives is upbeat about the quarter. "We expect a cloud beat for the June quarter along with generally optimistic commentary out of Microsoft towards cloud and AI spend and some cookie-cutter caution on the choppy and unpredictable macro," he writes. Ives thinks growth at Azure could be 2 or 3 percentage points better than Street consensus.

Before significant corporate events such as earnings announcements, product launches, or clinical trial results, implied volatility tends to increase. However, after the news has been released, the implied volatility can drop significantly due to the sudden clarity in the market and the stock price reaction to the news. This phenomenon is referred to as IV crush.

IV crush can lead to a decrease in option prices because the Implied volatility is lowered dramatically. This decrease in option prices due to IV crush can be a risk for options traders who have purchased options at a higher price with the expectation of making a profit from a significant move in the underlying stock price. Conversely, IV crush may not be as prevalent if the option is undervalued and the stock price moves drastically, which can pose a risk for option sellers. It's important for traders to be aware of IV crush and factor it into their trading strategy when considering options trades around significant corporate events.

Not all options are affected equally by an IV crush. IV crush affects short-term option prices more than long-term option prices.

Nonetheless, it's important to note that trading options always involve risks, and investors should consult with a financial advisor before making any trades.