Option Volatility | Market Braces For Big Swings After Apple Earnings Report
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.
As we reach the middle of the second quarter earnings season, the $S&P 500 Index(.SPX.US$ companies are showing mixed results. More companies than usual are reporting better-than-expected earnings, but the size of these earnings surprises is smaller than average. Earnings for the S&P 500 are higher now compared to the end of the quarter and are growing at the fastest rate since the fourth quarter of 2021. However, the market is not reacting as positively to good earnings as it normally does, and it's reacting more negatively to bad earnings.
According to research by Julian Emanuel of Evercore ISI, stocks that fail Wall Street projections for earnings, revenue, or both are showing much worse market reactions in the next trading day than have been observed over the previous five years. In a note to clients, Emanuel stated that for the time being, "earnings remain a catalyst for volatility, not higher S&P 500 prices."
So far, 41% of S&P 500 companies have reported their Q2 2024 results. Of these, 78% have beaten earnings estimates, which is slightly better than the 5-year average of 77% and the 10-year average of 74%. On average, companies are reporting earnings 4.4% above estimates, which is below the 5-year average of 8.6% and the 10-year average of 6.8%. These historical averages include results from all 500 companies, not just the ones that have reported so far.
Here are the top earnings and volatility for the week:
-Earnings Release Date: Post-market on Aug 1
-Earnings Forecast: FY2024 Q3 revenue of $84.37 billion, up 3.15% year-over-year; EPS of $1.34, up 6.42% year-over-year
Leading up to Apple Inc.'s earnings announcements, the options market forecast a post-earnings stock price movement of plus or minus 3.8%. However, the actual earnings release prompted a more significant price change of plus 6.0%. Over the past 13 quarters, options traders have had a tendency to overpredict the volatility of Apple's stock in response to earnings, doing so 62% of the time. On average, the options market anticipated a post-earnings move of plus or minus 4.0%, while the actual average move observed was slightly less volatile at plus or minus 3.4% in absolute terms.
Historically, the expected earnings move for Apple's stock has been around plus or minus 4.6%, but the reality has painted a slightly different picture with an average actual move of plus or minus 4.2%, just 0.3% lower than predicted. Upon the release of earnings, Apple shares typically experience an opening gap averaging plus or minus 3.9%, followed by a more modest average drift of plus or minus 1.7% during the remainder of the trading session. The stock's most pronounced movements during regular trading hours after earnings releases have been a peak climb of up to 10.6% and a maximum drop of -8.8%, underscoring the potential for significant price fluctuations in reaction to the company's financial reports.
Apple has experienced a notable surge in options activity last Friday, with a substantial increase in open interest for the $220.00 call option due to expire on August 2, 2024. An additional 6,019 contracts were added, bringing the total open interest for this strike price to 23,811 contracts. This marked a significant uptick in trader attention but was not the largest observed. The most considerable increase in open interest was seen in the $265.00 call option with an expiration date of January 17, 2025, which attracted an impressive 9,994 new contracts. This robust activity indicates strong investor interest in Apple's future stock performance at these price levels.
-Earnings Release Date: Post-market on July 30th
-Earnings Forecast: 2024 Q2 revenue of $5.72 billion, up 6.76% year-over-year; EPS of $0.19, up 826.5% year-over-year
Over the past 12 quarters, the options market has had a tendency to overpredict the volatility of Advanced Micro Devices stock in response to earnings reports. Specifically, the predicted post-earnings price movement was plus or minus 7.6%, while the actual average movement was slightly less, at plus or minus 6.8% in absolute terms. This overestimation occurred in 58% of the instances during the observed period.
In the lead-up to AMD's earnings announcements, options traders anticipated, on average, a plus or minus 9.9% move in the stock price. However, the actual average earnings move turned out to be marginally lower, at plus or minus 9.6%, just 0.4% shy of expectations. Typically, AMD shares showed an initial reaction with opening gaps averaging plus or minus 6.7%, followed by further price drifts during the day averaging plus or minus 4.8%. The most extreme fluctuations within regular trading hours post-earnings release saw AMD's stock price soaring as high as +52.3% and plunging to a low of -24.4%, highlighting the potential for dramatic swings following the company's financial updates.
$NVIDIA(NVDA.US$ and $Broadcom(AVGO.US$ are two of the semiconductor industry's most popular stocks among investors, while AMD was deemed to be among the "most unpopular," according to Citi analysts who recently conducted investor meetings to learn more about their opinions of chipmaker stocks.
Analysts at Goldman Sachs predict AMD will release third-quarter guidance that is consistent with consensus projections. The chipmaker is expected to raise its prediction for data center GPU revenue to $4.5 billion from $4 billion, according to the analysts, which could help boost investor confidence.
- Earnings Release Date: Post-market on Aug 1st
- Earnings Forecast: 2024 Q2 revenue of $148.59 billion, up 10.58% year-over-year; EPS of $1.02, up 57.62% year-over-year
For the most recent quarter, the options market forecasted a post-earnings price swing of plus or minus 8.9% for Amazon.com stock, but the actual move was a more modest plus 2.3%. Looking at the past 13 quarters, the options market overestimated the earnings-related volatility of AMZN stock 54% of the time, predicting an average move of plus or minus 6.7%. However, the actual movements averaged slightly higher at plus or minus 7.1%, indicating that AMZN's stock was generally more volatile than anticipated in response to earnings.
In the periods leading up to AMZN's earnings announcements, the options market expected an average move of plus or minus 6.2%, yet the actual average move was plus or minus 6.4%, exceeding predictions by 0.2%. On average, the stock experienced opening gaps of plus or minus 6.8%, followed by intraday drifts of plus or minus 2.2%. The most significant intraday movements recorded after earnings releases saw the stock reach a high of plus 20.4% and a low of minus 15.9%, showcasing the potential for substantial price fluctuations around these corporate financial events.
- Earnings Release Date: Post-market on July 31th
- Earnings Forecast: 2024 Q2 revenue of $38.29 billion, up 19.65% year-over-year; EPS of $4.75, up 59.34% year-over-year
In the last 12 quarters, the options market has underestimated the reaction of Meta Platforms stock to earnings announcements 42% of the time. While the options market predicted an average earnings-related move of plus or minus 8.7%, the actual average move turned out to be significantly larger at plus or minus 13.2% in absolute terms, indicating that META's stock exhibited more volatility post-earnings than expected.
In anticipation of META's earnings releases, the consensus in the options market was an expected move of plus or minus 7.0%. However, the actual movements averaged slightly higher at plus or minus 7.7%, exceeding the predicted move by 0.7%. META stocks showed an average opening gap of plus or minus 7.7%, with subsequent intraday drifts averaging plus or minus 1.9%. The most dramatic movements during regular trading hours after earnings reports were recorded at a high of plus 28.8% and a low of minus 27.0%, underscoring the considerable volatility that can follow the company's earnings announcements.
Source: Bloomberg, Market Chameleon, FactSet, Dow Jones
Disclaimer: Options trading entails significant risk and is not appropriate for all customers. It is important that investors read Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Opening new options positions close to or on their expiration date comes with substantial risk of losses for reasons that include potential volatility of the underlying security and limited time to expiration. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including i potential for losses that may exceed the original investment amount. Supporting documentation for any claims, if applicable, will be furnished upon request.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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