Earnings Volatility | Options Market Sees Big Move in Apple, AMD and Amazon Shares After Earnings

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.

- Earnings Date: 5/2 After the bell

- Earnings Consensus: FY2024 Q2 revenue of $90.614 billion, down 4.45% YoY; EPS of $1.49, down 1.72% YoY

Apple's post-earnings implied movement stands at ±4.2%, slightly above its historical average, suggesting the market anticipates a modestly more significant move after the earnings release. A look back at the stock's performance on the last 12 earnings days shows a balanced mix of gains and losses, with the most notable rise being +7.6%. Recently, the stock's post-earnings movements have been relatively tame, with the past four quarters logging changes of +4.7%, -4.8%, +0.6%, and -0.5%.

Options activity highlights a bullish sentiment for Apple, with calls at strike prices of $170, $175, and $180 for this Friday showing a rush of interest, with open interest standing at 28,000, 23,000, and 31,000 contracts, respectively.

Bank of America stands out with a bullish pre-earnings call on Apple, naming it a top pick for 2024. They maintain optimism for Apple's Q2 report next week, citing strong service revenue growth and profit margins. However, they caution that a weak demand environment and potential guidance downgrades could prompt a price pullback. Nonetheless, with "a rich path of catalysts and defensive cash flows," the bank maintains a "Buy" rating with a target price of $225.

- Earnings Date: 4/30

- Earnings Consensus: Q1 revenue of $5.452 billion, up 1.85% YoY; EPS of $0.17, turning profitable from a loss YoY

AMD's implied move is ±8.6%, indicating a higher degree of expected volatility compared to the historical average. Historical performance on the last 12 earnings days shows a 58% probability of post-earnings price declines, the largest gain being +12.6%, and the largest drop at -13.9%. Over the last four quarters, only one reported a post-earnings shares jump, with changes of -9.2%, -7.0%, +9.7%, and -2.5%.

Option volatility skew suggests a bullish market sentiment for AMD. Calls at strike prices of $170 and $160 for this Friday are the most traded among all contracts, with trading volumes of 18,000 and 11,000 contracts, respectively.

While sectors like artificial intelligence and the PC market are seeing some resilience, research company Susquehanna anticipates "broad-based headwinds" for the semiconductor industry as earnings season gets underway this week.

Analyst Christopher Rolland stated in an investor note, "We offer our 1Q semis earnings preview, and in short, we expect continued broad-based headwinds, although uneven as different markets/companies remain at different sections of the downcycle."

- Earnings Date: 4/30

- Earnings Consensus: Q1 revenue of $142.541 billion, up 11.92% YoY; EPS of $0.83, an increase of 166.97% YoY

Amazon's volatility implied move is ±7.6%, a notch above the historical norm, suggesting investors are bracing for movement. A review of the past 12 earnings reports shows a tendency toward post-earnings declines, though recent quarters have fared much better, with three notable post-earnings surges of +8.3%, +6.8%, and +7.9%.

Despite a volatility skew hinting at bearish sentiment, the options landscape tells another story, with calls expiring this Friday at strike prices ranging from $180 to $200 trading briskly, as many bet on a post-earnings uptick.

UBS predicts investors will shift focus beyond Amazon's cloud business AWS, considering the overall franchise revenue and operating income, especially since the company has emerged from the growth lull experienced in Q2 and Q3 of the previous year. The market expects Amazon's quarterly revenue to hit the high-end forecast of $142.5 billion, with operating income projected between $13 billion and $13.5 billion and cloud business growth anticipated at 15% to 16%.

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.