Earnings Volatility: Broadcom and Nio Options Signal Traders Expect Unprecedented Post-Earnings Moves

Implied volatility often spikes before a company releases its earnings, as market uncertainty drives up demand for options from speculators and hedgers. This heightened demand inflates both the implied volatility and the price of the options. Following the earnings announcement, implied volatility generally returns to normal levels.

Here are the top earnings and volatility for the week:

-Earnings Release Date: AVGO is going to report earnings on September 5, 2024 AMC.

The options market has frequently overestimated the earnings-related price movements of Broadcom stock, doing so 58% of the time over the last 12 quarters. Traders predicted a move of approximately ±7.5% around earnings announcements, whereas the actual average move recorded was slightly lower at ±4.6%.

Prior to AVGO's earnings releases, the anticipated average earnings move by the options market was ±5.6%. However, the actual average movement turned out to be ±4.6%, indicating a consistent overestimation by 1.0%. The opening price gaps averaged ±3.9%, with subsequent stock drifts during the trading day averaging about ±2.1%.

Within regular trading hours following the earnings release, AVGO experienced its largest upward movement at +16.1%, while the most significant downward move was -8.6%. Notably, AVGO shares have typically reacted positively post-earnings, with the stock climbing in the immediate aftermath of 9 out of the 12 previous reports. On average, the stock appreciated by 2.1% on the first trading day following the earnings release. This trend suggests a generally favorable investor response to Broadcom's quarterly financial results.

On September 5, following market close, Broadcom will report its third-quarter financial results for fiscal 2024. On $12.96 billion in revenue, analysts are predicting earnings per share of $1.20.

Based on the revenue forecast, the company's top line is expected to grow by 46% annually, primarily due to the November 2023 completion of the VMware acquisition.

Ahead of the earnings, the company saw the largest open interest increase for the option expiring this Friday after the company's earnings at the strike price of 162, 180 calls, and 160 puts last Friday.

For the options expiring this Friday, following its earnings release, Broadcom has seen considerable activity around the 170 and 180 call options, as well as the 160 puts. With the current stock price at $161.29, this options activity suggests some optimism regarding the earnings results.

The concentration of calls at the 170 and 180 levels indicates that a number of investors are betting on the stock price rising post-earnings, reflecting a bullish sentiment. Conversely, the presence of significant activity at the 160 puts suggests that there is also a cautionary outlook, with some investors hedging against a potential drop. This mixed sentiment in the options market highlights the uncertainty and speculative nature surrounding AVGO's earnings impact on its stock price.

-Earnings Release Date: NIO is going to report earnings on September 5, 2024 BMO.

The options market has consistently overestimated the movement in NIO stock following earnings announcements over the last 12 quarters. Specifically, traders predicted an average post-earnings movement of ±10.9%, while the actual average movement recorded was significantly lower at ±4.7%.

Before the earnings releases, the expected average movement in NIO stock was even higher at ±13.4%. However, the actual movements averaged ±9.0%, falling short of expectations by 4.5%. The typical pattern observed included opening gaps averaging ±6.9%, followed by a stock drift after the open, averaging ±5.2%.

During the regular trading hours post-earnings, NIO exhibited extreme volatility with the largest surge up to +101.2% and the sharpest drop at -27.6%. Despite the dramatic price movements, the average one-day return for an options straddle strategy was notably poor at -19.5%.

Further emphasizing the challenges in options trading with NIO, data from Market Chameleon highlighted that both long straddle and long strangle strategies have had a 0% win rate over the past 12 quarters. This stark statistic underscores the difficulty of predicting NIO's stock movements around earnings releases and suggests that the market's expectations have been significantly out of sync with actual outcomes.

The 0% success rate of purchasing long straddle and long strangle strategies in NIO's stock might seem to incentivize investors to consider the opposite approach—selling these strategies. However, the relatively low stock price of NIO, approximately $4, complicates this strategy. The low per-share price reduces the total value of each options contract, which is particularly stark when compared to stocks with higher per-share prices.

For instance, each standard options contract represents 100 shares, so a contract for NIO at $4 per share holds a total value of $400. In contrast, a similar contract for a stock priced at $100 per share would represent a value of $10,000. This vast difference means that while the potential revenue from selling options on higher-priced stocks can justify the brokerage commissions, the fees associated with trading $400 contracts might not be economically viable due to the disproportionate impact of these costs relative to the investment value. This makes selling straddles and strangles less attractive for stocks like NIO with lower per-share prices.