Earnings Volatility: Options Traders Rush Big Tech Stocks Before 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. Here are the top earnings and volatility for:

-Earnings Date: 10/18 After market close

-Implied Move: 6.1%

-Absolute Average Actual Move for the past 4 Quarters: 9.3%

-Absolute Average Actual Move for the past 12 Quarters: 6.3%

-Earnings Normalized Estimate: $0.631 per share

-Revenue Estimate: $24.27 billion

According to recent data from Market Chameleon, options for Tesla are slightly undervalued compared to its average actual move for the past 4 quarters (9.3%), yet just in-line with the average actual move for the past 12 quarters (6.3%). The options market overestimated TSLA stocks earnings move 58% of the time in the last 12 quarters.

The largest US technology and internet corporations are generating profits comparable to those made two years ago when the epidemic sent sales of digital services and smart gadgets skyrocketing, despite having eliminated thousands of employees to reduce costs. Currently, it is anticipated that they will assist take up the slack from sectors like energy and health care that are currently seeing a decline in earnings.

The third-quarter profits of tech firms that are announced over the coming weeks will be "an eye-opener" for Wall Street and will drive the sector up another 12% to 15% over the final months of the year, says Wedbush analyst Dan Ives.

In particular, he believes the impact of the AI cycle on the consumer internet sector "will be massive" and will begin with the cloud service divisions, such as Amazon's AWS and Alphabet's GCP.

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.