Earnings Volatility | Micron and Costco Options Signal 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: MU is going to report earnings on September 25, 2024 AMC.

In the past 12 quarters, the options market has consistently overestimated the earnings-related movements of Micron Technology, doing so 67% of the time. On average, traders predicted an earnings swing of ±7.3%, while the actual movements averaged only ±5.7%. This pattern of overestimation extends to the pre-earnings expectations as well, where the anticipated move was ±7.4% compared to an actual average move of ±6.1%. The opening market gaps typically measured ±5.3%, with subsequent drifts adding an average movement of ±2.7%.

During regular trading hours following the earnings release, MU stock exhibited significant volatility. The largest increase reached +17.9%, and the most considerable drop was -19.1%. Despite these substantial intra-day movements, the average 1-day return for an options straddle strategy was markedly negative at -12.9%. This indicates that the straddle buyers often faced losses, likely a result of the persistent overestimation of stock volatility by the options market.

Citi Research analyst Christopher Danely anticipates that Micron Technology Inc. (MU) will provide November-quarter guidance of $8.0 billion in revenue when it announces its results on Wednesday. This forecast falls short of the $8.3 billion consensus target. Danely notes that most buy-side investors he's consulted with share his more conservative outlook, with some even projecting lower figures.

"Based on many conversations with investors this week, it appeared roughly 80% were bearish on Micron, with every hedge fund we spoke with being bearish but a few mutual funds being bullish," Danely stated in a client note.

The sentiment surrounding Micron has been increasingly negative this month, with several analysts issuing more cautious commentary. BNP Paribas analyst Karl Ackerman notably downgraded Micron's shares to Underperform from Outperform, and sharply reduced his price target to $67 from $140. Ackerman expects Micron to lag behind other makers of artificial-intelligence semiconductors through 2025 due to an oversupply of high bandwidth memory (HBM), which he believes will depress the average selling prices of Micron's memory chips.

Following suit, Morgan Stanley analysts lowered their price target on Micron to $100 from $140 while maintaining an Equal Weight rating. They expressed skepticism about the growth of Micron's average selling price in the fourth and first quarters, suggesting that the stock is likely to "continue trading poorly unless that shows signs of reversing."

-Earnings Release Date: COST is going to report earnings on September 26, 2024 AMC.

Over the last 13 quarters, the options market has frequently overestimated the post-earnings movement of Costco Wholesale Corporation, doing so 46% of the time. Specifically, while options prices forecasted a ±4.5% move following earnings releases, the actual movement averaged only -0.7%. Historically, the predicted moves have been ±3.9% versus the actual moves of ±3.1% in absolute terms, indicating a consistent trend of overestimation.

In detail, before Costco's earnings announcements, options traders expected a move of ±3.3%, but the actual average move recorded was ±2.7%, a difference of 0.6%. Opening gaps post-earnings averaged ±2.0%, with the stock typically drifting an additional ±1.5% afterward. In terms of extreme volatility, the most significant upward swing during regular trading hours after earnings was +7.0%, while the sharpest decline was -9.3%. For option traders using the straddle strategy, which involves betting on volatility, the average one-day return was notably negative at -12.4%, reflecting the gap between expected and actual stock movements.

Costco saw a slight decline in its stock price last Tuesday following a downgrade from Redburn Atlantic. The investment firm adjusted its rating on the retailer from Buy to Neutral.

Analyst Daniela Nedialkova acknowledged Costco's strong fundamentals, highlighting its differentiated business model and expanding membership base. However, she expressed concerns that many of the potential growth drivers for the near future are already reflected in the stock's current valuation.

Costco's price-to-earnings (P/E) ratio for 2025 stands at 50 times, a level that Nedialkova suggests may not offer a favorable risk-reward balance. "While ongoing comp/market share gains should continue to drive decent earnings growth (approximately 10% per annum), the current risk-reward profile is skewing less favorably given the even higher than normal expectations priced into a starting point of 50x P/E on FY25," Nedialkova explained.

Redburn Atlantic has assigned a price target of $890 for Costco's stock.

On the other hand, Costco maintains a distinctive edge in the retail sector through its membership-based model, where customers pay an annual fee for access to its warehouse stores. This structure not only ensures a steady revenue stream but also provides a degree of predictability that many other retailers lack, particularly in uncertain economic conditions. The company derives substantial recurring revenues from membership fees, with renewal rates exceeding 90% in key markets such as the United States and Canada.

Recently, Costco raised its membership fees for U.S. and Canadian customers, effective September 1. Gold Star, Business, and Business add-on memberships now cost $65 annually, reflecting a $5 increase. Executive Memberships have risen from $120 to $130. Additionally, the maximum annual 2% Reward for Executive Members has been boosted from $1,000 to $1,250.

-Earnings Release Date: BB is going to report earnings on September 26, 2024 AMC.

In the last 13 quarters, the options market has frequently overestimated the post-earnings movements of BlackBerry Limited, doing so 77% of the time. Although the options predicted an average post-earnings move of ±11.1%, the actual movements averaged only ±7.2%. This pattern of overestimation is evident even when comparing specific instances, such as when a predicted ±11.0% movement closely aligned with an actual move of +10.9%.

Before BlackBerry's earnings releases, the expected move was generally around ±9.8%, yet the actual average move turned out to be ±8.1%, marking a 1.7% discrepancy between expectations and reality. The opening gaps post-earnings typically averaged ±5.3%, with the stock continuing to drift approximately ±5.2% thereafter. During regular trading hours following the earnings release, the stock experienced significant volatility, with the highest surge reaching +17.8% and the deepest drop at -23.7%. Despite these substantial price swings, the average one-day return for an options straddle was negatively substantial at -12.6%, underscoring the impact of the consistent overestimation of volatility by options traders.