Earnings season commenced last week, and this week is gearing up for a significant wave of major corporations set to release their financial reports. Among the notable companies scheduled to report this week are Tesla (NASDAQ:TSLA), Johnson & Johnson (NYSE:JNJ), Bank of America (NYSE:BAC), Netflix (NASDAQ:NFLX), Morgan Stanley (NYSE:MS), American Express (NYSE:AXP), Lockheed Martin (NYSE:LMT), and Goldman Sachs (NYSE:GS).
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Before a company announces its earnings, it’s common for implied volatility to be elevated, reflecting market uncertainty regarding the outcome of the report. This heightened uncertainty prompts speculators and hedgers to generate substantial demand for the company’s options, thereby driving up implied volatility and, consequently, the price of those options.
Following the earnings announcement, implied volatility typically reverts to more typical levels.
Now, let’s delve into the projected range for these stocks. To calculate the anticipated range, you can refer to the option chain and sum up the prices of the at-the-money put and call options with the nearest expiry date after the earnings release. While this method may not be as precise as a thorough calculation, it serves as a reasonably accurate estimate.
Monday
SCHW – 7.6%
Tuesday
JNJ – 2.9%
BAC – 5.2%
LMT – 3.8%
GS – 4.3%
IBKR – 4.9%
UAL – 7.2%
Wednesday
TSLA – 7.0%
PG – 3.9%
ABT – 5.1%
NFLX – 8.3%
MS – 4.9%
USB – 6.1%
LVS – 5.5%
Thursday
TSM – 5.0%
PM – 3.4%
UNP – 4.1%
T – 5.1%
ISRG – 8.5%
BX – 5.0%
FCX – 5.3%
Friday
AXP – 4.4%
SLB – 4.6%
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Option traders can utilize these projected price movements to structure their trades effectively. For bearish traders, a strategy involves selling bear call spreads beyond the anticipated range.
On the flip side, bullish traders can consider selling bull put spreads outside the projected range or opt for naked puts if they have a higher risk tolerance.
Neutral traders may find iron condors appealing. When employing iron condors during earnings periods, it’s advisable to position the short strikes outside the expected price range.
When engaging in options trading around earnings reports, it’s wise to adhere to risk-defined strategies and maintain modest position sizes. In the event that the stock experiences a more significant move than anticipated, resulting in a full loss, the impact on your portfolio should not exceed 1-3%.