Earnings Volatility: Can Roaring Kitty-Driven Popularity Impact GameStop's Financial Performance?

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: GME is going to report earnings on September 10, 2024 AMC.

The options market has consistently overestimated the earnings-related price movements of GameStop (GME) stock over the past 12 quarters, suggesting traders may be pricing in too much volatility surrounding these events. Analysis shows that the average expected move around earnings announcements was ±16.6%, in contrast to the actual average move of just 13.5%.

Historical data indicates that prior to earnings releases, the market anticipated an average move of ±13.8%. However, the actual price movement averaged only ±10.8%, indicating a discrepancy of 3.0% between expected and actual volatility. This suggests a systematic overestimation of GME's earnings impact by the options market.

Further dissecting the price behavior, the opening gaps on earnings days averaged ±10.1%, and the stock typically drifted around ±7.2% after the market opened. During regular trading hours post-earnings, GME experienced its largest upward move at +53.0% and the most significant downward move at -43.9%.

Despite the high volatility, the average 1-day return for an options straddle was notably negative at -15.1%. This highlights the challenges in achieving profitable trades based on earnings predictions, as the actual movements often fell short of what options prices suggested.

Interestingly, GameStop shares showed a tendency to increase by an average of 12.2% in the two weeks leading up to the earnings announcement over the observed quarters. This pre-earnings appreciation could reflect speculative trading or investor optimism preceding the official earnings disclosure.

This pattern of overestimation by the options market could be valuable for strategic traders, suggesting potential opportunities for those betting against the implied moves, especially in selling options or constructing spreads that benefit from lower-than-expected volatility.

Based on the previous 12 earnings releases, GME is more likely to trade lower 1 day after earnings for an average loss of -1.9%

GameStop Corp. is bracing for a challenging quarter with analysts predicting a significant year-on-year revenue decline. The video game retailer is expected to report revenues of $895.7 million, marking a 23% drop from the previous year's figures, which saw a modest increase of 2.4%. The adjusted loss is anticipated to be -$0.09 per share, reflecting the ongoing struggles in the hardware and accessories segment.

In a bid to rejuvenate its retail strategy, GameStop announced plans to transform several of its locations into stores specializing in retro gaming. This new initiative aims to capitalize on the growing nostalgia among gamers for classic video game consoles, games, and accessories. The company has embraced this direction with enthusiasm, recently tweeting, "The classics are back. New retro GameStops are now spawning near you." This shift underscores GameStop's effort to tap into a niche market as it navigates through its broader corporate challenges.

The stock market reacted unexpectedly to an online activity by Keith Gill, a notable internet personality and previous supporter of GameStop, known as Roaring Kitty. Gill's cryptic social media post led to an 8.2% surge in GameStop's stock price within minutes, despite no direct mention of the company. Additionally, GameStop's associated cryptocurrency token experienced a significant price increase, highlighting the volatile nature of digital assets linked to the company's brand.

US video game retailer GameStop says it has raised more than $2 bilion in its second share sale in a month after a rally in June.

While the overall sentiment from analysts remains cautious, some like Michael Pachter from Wedbush Securities see potential for slight outperformance. Citing recent software releases by major publishers like Electronic Arts and Nintendo, Pachter predicts a smaller per-share loss and slightly higher net sales than the consensus. However, he maintains an Underperform rating on the stock with a 12-month price target of $11, suggesting a potential decline in the company's stock price.

GameStop has not held an earnings conference call since March 2023 and remains opaque about its future plans, having ceased providing formal sales or earnings guidance in 2019. This lack of communication adds to the uncertainty surrounding the company's strategic direction and operational efficiency.

-Earnings Release Date: ADBE last reported earnings on June 13, 2024 AMC.

Despite common overestimations in the options market, Adobe actually exhibited greater volatility than predicted in regards to its earnings-related stock price movements. Over the last 13 quarters, while the options market overestimated the earnings move 46% of the time, ADBE's average actual earnings move was 7.0%, surpassing the predicted average of 6.1%.

In a recent example, the options market expected an earnings-related stock price move of ±8.9%, but ADBE's shares actually surged by +14.5% post-earnings. This discrepancy highlights the stock's tendency to outperform volatility expectations during earnings announcements.

Looking at the period prior to earnings releases, the predicted average move was ±5.3%, closely aligning with the actual average move of ±5.1%, which is just 0.2% below the forecast. The average opening gaps were ±4.7%, followed by a post-open stock drift of ±2.1%.

During the regular trading hours following the earnings release, the stock's volatility was pronounced, with the biggest upward and downward moves both reaching ±17.9%.

However, despite the significant price movements, the average 1-day return for an option straddle was negative at -2.3%. This indicates that while the actual stock movements were larger than anticipated, the cost of options often did not align profitably with these outcomes. This suggests that while ADBE might offer opportunities for traders looking to capitalize on higher-than-expected volatility, the pricing of options could present challenges in achieving favorable returns. Traders might need to adjust their strategies, considering the historical performance and the actual volatility observed in ADBE stock post-earnings.

-Earnings Release Date: KR last reported earnings on June 20, 2024 BMO.

Options pricing has frequently overestimated the post-earnings movement of Kroger Co. (KR) stock, with a tendency to expect larger swings than actually materialize, according to an analysis of the past 13 quarters. The options market predicted an average move of ±5.9% surrounding earnings announcements, slightly higher than the actual average move of 5.5%.

More specifically, for the most recent earnings, options prices suggested a potential post-earnings move of ±5.6%, yet the actual move was only -3.3%. This pattern of overestimation occurred in 54% of the analyzed quarters.

Historically, prior to earnings releases, the expected average move was also ±5.9%, compared to an actual average move of ±5.2%, indicating a consistent overestimation by 0.7%. This discrepancy between expected and actual movements is further broken down into an average opening gap of ±4.1% and a subsequent drift of ±3.0% after the market opens.

During regular trading hours following the release of earnings, KR stock experienced significant volatility. The largest upward movement recorded was +13.6%, while the most substantial downward movement was -19.5%.

Interestingly, despite the general overestimation of movement by the market, the average 1-day return for an options straddle was marginally positive at +0.1%. This suggests that while the overall expectations for large moves were not fully realized, option traders managed to eke out slight gains on average from these positions.