“Investors are pricing in outsize swings for Facebook Inc., Apple Inc. and Alibaba Group Holding Ltd., when the companies release their quarterly results this week,” Gunjan Banerji reports for The Wall Street Journal.
Investors are “projecting a 6.5% one-day move after Apple’s earnings report on Thursday, which compares with the iPhone maker’s average swing of 3.8% in the last eight quarters,” Banerji reports. “The estimates don’t indicate which direction shares might sway, just the magnitude of the move. The percentages are derived from an options trade known as a straddle, which entails buying both bullish and bearish contracts that can be exercised at the same price for the stock.”
“Some companies have posted big gains rather than losses. Twitter Inc. shares jumped 15.5% on Thursday — its biggest single-day increase in a year — after reporting earnings,” Banerji reports. “Electric carmaker Tesla Inc. rallied 9.1% on Thursday after its quarterly results, while Netflix Inc. shares jumped 5% the day after its Oct. 16 report.”
Read more in the full article here.
MacDailyNews Take: Which way will it go?
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All eyes on Apple’s earning this Thursday – October 29, 2018
If speculators are betting both on bullish and bearish trends, then it seems unlikely that the shares will move substantially in either direction. If a big trend were expected in either direction, speculators would be betting accordingly.
Whatever happens to the stock in the immediate aftermath of any Apple financial announcement is usually a superficial knee jerk reaction. The meaningful trend is what happens over the following week or two.
I second this. I’ve rarely lost money by buying Apple right before earnings are announced and holding for a least a few weeks.
The options market prices uncertainty. With higher uncertainty (known as volatility) comes higher options prices. That’s how you can tell the the stock price is expected to move a lot or a little. Nothing can be inferred about direction, and expectations don’t always become reality. But when volatility is high, prices are expected to move and speculators are betting accordingly.
Your first paragraph is incorrect, alanaudio. A straddle is a great move if you are convinced the market will react strongly either way but aren’t sure which way. For AAPL, that’s the classic case of blowing out projections, but having conservative guidance. Its like sports, where you are not really betting on the outcome, but the point spread.
Let’s say you buy equal value of calls and puts that a stock will move 5 points. If the stock moves not at all, you lose some money on both bets because the “options premium” is immediately lost. How much you ultimately make or lose depends on when you sell your options, how the stock moves, and their expiration date. You can lose both bets if the stock doesn’t change. If the stock moves exactly 5 points, you basically break even on one bet (minus some options premium) and your bet the other way basically becomes worthless. But if the stock moves 8 or 9 or 12 points you make a pile of cash even though one of your 2 bets didn’t work.
So, rather than taking a 50:50 chance coin flip in which you would either win big or lose all, you place 2 bets and, as long as the stock moves enough, you win something based on your hunch about volatility. And if you have an inkling that the move is more likely to be in a particular direction you can do a “strangle” which is like a straddle, but you bet more for the move in the favorite direction. I used those all the tie on AAPL plays.
I did a straddle on Portal Player years ago. They made the original iPod click wheel. Earnings came out and I made a mint on my call options. The puts became worthless but I still made a huge net profit. The puts were so worthless, you don’t even bother to sell them because the commission is more than you’d get back. Imagine my happiness when a few weeks before their expiration, it was announced that Apple was dropping Portal Player as a supplier. Their stock plunged 40% in one day an I made a mint off the worthless options as well.
“If speculators are betting both on bullish and bearish trends, then it seems unlikely that the shares will move substantially in either direction.”
This is an invalid assumption. Consider a different situation…a football game between Team A and Team B. Some people are willing to bet that Team A wins. Others are willing to bet that Team B wins. Just because there is heavy betting on both sides, you cannot assume that the score will be close.
When somebody performs a straddle options trade, that one person is betting on both outcomes at once. It’s entirely different to some people betting one way being balanced out by a comparable number of others betting the other way.
To go with your analogy, the straddle traders are betting on either Team A or Team B winning, but by a large goal difference.
Yes. That’s right. I was responding to alanaudio who thought that the options activity implied little expected movement.
We are talking about options prices here, not options strategy. Price-wise it makes no difference who buys and sells the puts and calls. The option prices are the same either way, and reflect the market’s opinion of likely future price movement.
AAPL’s trading range today was $206.09 to $219.69! I dumped my profits from my last round of AAPL options trades into a spread of pure calls as the stock was plunging in the last 45 minutes of the trading day. I bought up weekly 210 (expires Friday), Jan 230 (expires before earnings, I believe), and Feb 230 (post-earnings). As I was grabbing at a falling knife, my bet was down $1K within minutes, and yet at close I was up $620. This sort of stuff used to give me an ulcer, but meh…options are not for the weak of heart.
A clever hedge would have been to purchase some reasonably out of the money puts in case the underlying market collapses. We’ve probably got another leg up this week and then another leg down farther before things rebound…the question is if that rebound will be before or after Jan AAPL earnings…heh.