Option Volatility | Market Braces for Big Swings Following Walgreens and Bank of America Earnings

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: BAC is going to report earnings on October 15, 2024 BMO.

Over the last 12 quarters, the options market has consistently overestimated the movements of Bank of America stock around earnings announcements. Specifically, the options predicted an average move of ±4.2% post-earnings, while the actual observed movements averaged only ±2.8%. This overestimation occurred 67% of the time, highlighting a significant discrepancy between market expectations and actual stock performance.

Despite the general overestimation, BAC shares have shown a tendency to rise following earnings announcements, moving higher in 10 out of the last 12 reports. On average, the stock increased by 2.1% on the first trading day after earnings were released. During regular trading hours post-earnings, the stock experienced notable volatility, with the largest upward move reaching +8.2% and the most significant downward move hitting -7.7%. This pattern underscores the stock's resilience and the potential for considerable price swings, which might not always align with options market predictions.

The implied volatility skew shows the market's bias for pricing in volatility risk to the option premium of downside puts and upside calls. If the implied volatility for downside puts is increasing relative to upside calls, then that suggests the market is pricing in a larger fear to a downside move.

The average 1-day return for a long option straddle was -14.1%.

The largest option trades, with an expiration date of less than 30 days, over the past few trading sessions were mostly calls that expire Oct 18th. Yet, those calls were mostly mildly bullish or bearish.

NFLX is going to report earnings on October 17, 2024 AMC.

Over the last 12 quarters, the options market has underestimated the earnings-related movements of Netflix stocks half of the time. Although the predicted average move post-earnings was ±9.4%, the actual movements turned out to be more volatile, averaging ±11.4%. This indicates that NFLX often exhibited greater fluctuations in stock price following earnings announcements than the options market anticipated.

Interestingly, despite the higher than expected volatility, NFLX shares typically declined in the immediate aftermath of earnings reports. In 7 out of the last 12 quarters, the stock moved down by an average of -2.1% on the first trading day post-earnings. The stock's performance during regular trading hours post-earnings also highlighted significant swings, with the largest increase reaching +20.1% and the deepest plunge at -39.0%. For investors holding long option straddles, this volatility translated into a substantial average one-day return of +10.3%, underscoring the potential profitability of betting on larger price movements around earnings releases.

Netflix is positioning itself for continued growth and increased profitability as it embraces new monetization strategies, including advertising, and maintains its focus on expanding its subscriber base. The company's recent initiatives, such as cracking down on password sharing with a paid subscription-sharing offering, along with strategic price adjustments, are enhancing its revenue streams and contributing to margin expansion.

With a robust portfolio that includes hit series like "Bridgerton" and "Baby Reindeer," Netflix is already experiencing a successful 2024. The anticipation surrounding upcoming releases such as the second season of "Squid Game" and a new season of "Stranger Things" in 2025 further underscores its strong position in the streaming market. Additionally, Netflix is set to diversify its content offerings by including live sports, with plans to broadcast the National Football League's Christmas schedule and WWE Raw starting in 2025.

Netflix's strategic investments in the production and distribution of localized and foreign-language content have significantly broadened its appeal in international markets, reinforcing its dominance in the streaming industry. This diverse content strategy not only attracts a global audience but also helps in competing effectively against major players like Apple Inc. (AAPL), Amazon Prime Video of Amazon.com Inc. (AMZN), and Disney+ of The Walt Disney Co. (DIS).

Analysts are optimistic about the potential financial benefits of a price increase by Netflix, given its strong brand value and solid subscriber base. Such a price rise is expected to have incremental effects on the company’s financials, allowing it to compete more vigorously in the highly competitive streaming space. The combination of strategic content acquisition, innovative monetization strategies, and expansion into live sports broadcasting positions Netflix for sustained growth and market leadership.

WBA is going to report earnings on October 15, 2024 BMO.

The options market overestimated WBA stocks earnings move 42% of the time in the last 12 quarters. The predicted move after earnings announcement was ±6.1% on average vs an average of the actual earnings moves of 7.0% (in absolute terms). This shows that WBA tended to be more volatile than the options market predicted for the earnings stock price reaction.

WBA shares have moved lower in the immediate aftermath of earnings 7 out of 12 previous reports. On average the stock moved down -2.7% in the first day of trading after the company reported earnings. In addition, share price of the company has moved 10.5% lower on average 2 weeks after earnings.

During regular trading hours after the earnings was released, the biggest move to the high price was +9.6%, and the largest move to the low price was -25.4%.

The average 1-day return for an option straddle was +16.4%.

Source: Bloomberg, Market Chameleon