Earnings Volatility: Options Traders Await the 'Magnificent 7' Earnings Results

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 the week:

-Earnings Date: 10/26 after market close

-Implied Move: 6.8%

-Absolute Average Actual Move for the past 4 Quarters: 6.9%

-Absolute Average Actual Move for the past 12 Quarters: 6.9%

-Earnings Normalized Estimate: $0.578 per share

-Revenue Estimate: $141.588 billion

According to recent data from Market Chameleon, options for Amazon are mostly in-line with with its average actual move for the past 4 quarters and 12 quarters. The options market overestimated AMZN stocks earnings move 50% of the time in the last 12 quarters.

Earnings season typically is the time when investors can look past macroeconomic forces and focus on company-specific news moving stocks. This quarter, however, stock markets are largely driven by conflict in the Middle East and surging Treasury yields.

Companies with the highest options volume this week are receiving fewer bets on larger-than-average earnings moves, as the earnings implied moves are more often in-line or even lower than the historical average move.

S&P 500 companies that have exceeded earnings per share and sales estimates have underperformed the benchmark within a day of reporting by an average of 0.1%, which is much less than the typical of the previous six years. Those who didn't make it behind by 6.2%, the most negative response in a year, were left behind, according to data compiled by Bloomberg Intelligence.

This might suggest that the direction of US equities is being dictated more by macro-driven factors of late, given the relatively muted upside reaction to earnings beats, according to Bloomberg's Elena Popina.

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.