Volatility report - week 06 - earnings, expected moves and trade setups Volatility report - week 06 - earnings, expected moves and trade setups Volatility report - week 06 - earnings, expected moves and trade setups

Volatility report - week 06 - earnings, expected moves and trade setups

Options 10 minutes to read
Koen Hoorelbeke

Options Strategist

Summary:  Our weekly Volatility Report includes a list of expected price movements, implied volatility rankings for upcoming earnings, key indices, and ETFs. In this edition we also have a look at some possible trade setups for a selection of those stocks, namely: Uber, Disney, Paypal and Pepsico


Volatility report - week06
(Feb 5 - 9, '24)

Welcome to this week's Volatility Report, a guide for traders and investors seeking to navigate the dynamic world of stock market fluctuations. In this report, we list the expected movements and implied volatility rankings* of stocks with upcoming earnings announcements, as well as key indices and ETFs. In this edition we'll also have a look at some possible trade setups for a selection of stocks in the list; Uber, Disney, Paypal and PepsiCo.

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

 

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Expected moves and volatility

Volatility and Expected Moves Analysis

Expected moves**, derived from at-the-money strike prices post-earnings**, indicate potential price volatility.

In the table above you'll find the following data:

  • Volatility Comparison: Implied volatility (IV) is currently contrasted against the 30-day historical figure to assess market expectations. A significant disparity often marks a prime scenario for premium selling.
  • IV Rank Insights: IV Rank situates the current IV within the past year's range. Values above 20% generally signal higher-than-average volatility, favoring premium selling, while lower values suggest caution for such strategies.
  • Sector Highlights: Financial firms, including Morgan Stanley and Goldman Sachs, are poised to report, with anticipated modest price movements. In contrast, larger expected moves for tech companies like Microsoft and Netflix indicate market anticipation of their earnings results.
  • Strategic Considerations: For traders, higher expected moves in the tech sector suggest the potential for volatility strategies, while lower moves in financials may align with range-bound positions.
  • Upcoming Economic Data: Key releases, particularly Retail Sales and Initial Jobless Claims, may introduce additional market volatility, reinforcing the value of expected move and IV in strategy development.
  • Highlighted Stocks:

    The list contains 4 highlighted stocks which each have 3 trade setup ideas (bullish, neutral, bearish). These ideas are listed below.


In this section of our volatility report, we're focusing on three credit/premium selling strategies that align with various market outlooks for our featured stocks. For each stock, we present a bullish, neutral, and bearish trade setup, designed to match your expectations for the stock’s future price action.

Think of these strategies as starting points to shape your trading plans. Each setup is flexible – you can adjust the strike prices and the widths of the spreads (set by default at $5) to suit your trading needs. The credit spreads we've chosen are bold, with strike prices set near the current price of the stock to seek higher rewards at increased risk. Feel empowered to place these strikes further away or closer based on your own market analysis and confidence.

Remember, these setups are foundational guides. It’s essential to refine them to fit your individual trading style and outlook, ensuring they support your trading objectives and risk management preferences.


Uber Technologies, Inc. (UBER)

  1. Bullish trade setup (Credit Put Spread):

    • This strategy involves selling a put with a higher strike price (67.5) and buying a put with a lower strike price (62.5), both expiring on 15-Mar-2024.
    • The trader receives a premium of $168.00, which would be the maximum profit if UBER stays above $67.5 by expiration.
    • The maximum risk is calculated as the difference between the strike prices ($500) minus the premium received, totaling $332.00.
    • The breakeven point is $65.82 (the higher strike put minus the premium received per share).

  2. Neutral trade setup (Iron Condor):

    • The neutral iron condor consists of selling a call spread (80/75) and selling a put spread (62.5/57.5).
    • The trader receives a total premium of $184.00, which is the maximum profit if UBER stays between the sold call strike of $75 and the sold put strike of $62.5 by expiration.
    • The maximum risk is $316.00, which is the difference between the strikes of the wider spread ($500) minus the premium received.
    • The breakeven points are $60.66 on the downside (62.5 - 1.84) and $76.84 on the upside (75 + 1.84).

  3. Bearish trade setup (Credit Call Spread):

    • This bearish setup is a credit call spread, where the trader sells a call with a lower strike price (80) and buys a call with a higher strike price (85).
    • The trader receives a premium of $102.00, which is the maximum profit if UBER stays below $80 by expiration.
    • The maximum risk is the spread between the strikes ($500) minus the credit received, totaling $398.00.
    • The breakeven point is $80.98 (the sold call strike plus the premium received per share).

The Walt Disney Company (DIS)

  1. Bullish trade setup (Credit Put Spread):

    • This setup involves selling a put option with a strike price of $95 and buying a put option with a strike price of $90, both expiring on 15-Mar-2024.
    • The trader receives a credit of $162.00 USD, which will be the maximum profit if DIS stays above $95 by the expiration date.
    • The maximum risk is the difference between the strikes ($500) minus the credit received, totaling $338.00 USD.
    • The breakeven point for this trade is $93.38 (the sold put strike minus the credit received).

  2. Neutral trade setup (Iron Condor):

    • The iron condor is created by selling a call spread (110/105) and a put spread (90/85).
    • The total credit received is $149.00 USD, which represents the maximum profit if DIS trades between the sold strikes of $105 and $90 at expiration.
    • The maximum risk is $351.00 USD, which is the difference between the strikes of the wider spread ($500) minus the credit received.
    • The breakeven points are $88.51 on the downside (90 - 1.49) and $106.49 on the upside (105 + 1.49).

  3. Bearish trade setup (Credit Call Spread):

    • This strategy consists of selling a call option with a strike price of $105 and buying a call option with a strike price of $110, indicating a bearish outlook.
    • The trader receives a credit of $134.00 USD, which is the maximum profit if DIS remains below $105 by the expiration.
    • The maximum risk for this trade is $366.00 USD, the difference between the strike prices ($500) minus the credit received.
    • The breakeven price is $106.34 (the sold call strike plus the credit received per share).

PayPal Holdings, Inc. (PYPL)

  1. Bullish trade setup (Credit Put Spread):

    • The strategy involves selling a put with a higher strike price (60) and buying a put with a lower strike price (55), both expiring on 15-Mar-2024.
    • The trader receives a credit of $158.00 USD, which would be the maximum profit if PYPL stays above $60 by expiration.
    • The maximum risk is calculated as the difference between the strike prices ($500) minus the premium received, totaling $342.00 USD.
    • The breakeven point for this trade is $58.42 (the higher strike put minus the credit received per share).

  2. Neutral trade setup (Iron Condor):

    • The iron condor is created by selling a call spread (75/70) and a put spread (55/50).
    • The total credit received is $134.00 USD, which represents the maximum profit if PYPL trades between the sold call strike of $70 and the sold put strike of $55 by expiration.
    • The maximum risk is $366.00 USD, which is the difference between the strikes of the wider spread ($500) minus the premium received.
    • The breakeven points are $53.66 on the downside (55 - 1.34) and $71.34 on the upside (70 + 1.34).
  1. Bearish trade setup (Credit Call Spread):

    • This setup is a credit call spread, which involves selling a call with a lower strike price (67.5) and buying a call with a higher strike price (72.5).
    • The trader receives a credit of $169.00 USD, which is the maximum profit if PYPL stays below $67.5 by expiration.
    • The maximum risk is the spread between the strikes ($500) minus the credit received, totaling $331.00 USD.
    • The breakeven price is $68.69 (the sold call strike plus the credit received per share).

Pepsico, Inc. (PEP)

  1. Bullish trade setup (Credit Put Spread):

    • This strategy involves selling a put with a strike price of 170 and buying a put with a lower strike price of 165, both expiring on 15-Mar-2024.
    • The trader receives a credit of $180.00 USD, representing the maximum profit if PEP stays above $170 by expiration.
    • The maximum risk is the difference between the strikes ($500) minus the premium received, which is $320.00 USD.
    • The breakeven point for this trade is $168.20 (the sold put strike minus the credit received).

  2. Neutral trade setup (Iron Condor):

    • The iron condor involves selling a call spread (185/180) and a put spread (160/155).
    • The total credit received is $160.00 USD, which is the maximum profit if PEP stays between the sold call strike of $180 and the sold put strike of $160 at expiration.
    • The maximum risk is $340.00 USD, which is the difference between the strikes of the wider spread ($500) minus the premium received.
    • The breakeven points are $158.40 on the downside (160 - 1.60) and $181.60 on the upside (180 + 1.60).

  3. Bearish trade setup (Credit Call Spread):

    • This setup is a credit call spread, selling a call with a strike price of 180 and buying a call with a higher strike price of 185.
    • The trader receives a credit of $135.00 USD, which is the maximum profit if PEP remains below $180 by expiration.
    • The maximum risk is the spread between the strikes ($500) minus the credit received, which is $365.00 USD.
    • The breakeven price is $181.35 (the sold call strike plus the credit received per share).

* Understanding these metrics is important for anyone involved in volatility-based trading strategies. The 'Expected Move' is an invaluable tool that provides a forecast of how much a stock's price might swing, positively or negatively, around its earnings announcement. This insight is essential for options traders, allowing them to gauge the potential risk and reward of their positions. Read more about it here: Understanding and calculating the expected move of a stock etf index

Moreover, the 'Implied Volatility Rank' (IVR) offers a snapshot of current volatility expectations in comparison to historical volatility over the last year. This ranking helps in identifying whether the market's current expectations are unusually high or low.

In addition to the Expected Move and Implied Volatility Rank, it’s also crucial to understand the concepts of ‘Implied Volatility’ and ‘Historical Volatility’. Implied Volatility (IV) is a measure of the market’s expectation of future volatility, derived from the prices of options on the stock. On the other hand, Historical Volatility (HV) measures the actual volatility of the stock in the past.

The relationship between these two types of volatility can serve as a valuable indicator for options traders. When IV is significantly higher than HV, it suggests that the market is expecting a larger price swing in the future, which could make options more expensive. Conversely, when IV is lower than HV, it could indicate that options are relatively cheap. Some traders use this IV-to-HV ratio as a signal for when to buy or sell options premium, adding another layer of sophistication to their trading strategies.


** A crucial application of the expected move in options trading is evident in strategies such as iron condors and strangles, particularly when these are implemented through short selling. In these strategies, the expected move serves as a pivotal benchmark for setting the boundaries of the trade. For instance, in the case of a short iron condor, traders typically position the short legs of the condor just outside the expected move range. This strategic placement enhances the probability of the stock price remaining within the range, thereby increasing the chances of the trade's success. Similarly, when setting up a short strangle, traders often choose strike prices that lie beyond the expected move. This ensures that the stock has to make a significantly larger move than the market anticipates to challenge the position, thus leveraging the expected move to mitigate risk and optimize the success rate. Utilizing the expected move in this manner allows traders to align their strategies with market expectations, fine-tuning their approach to volatility and price movements.

In this report, the calculation of the expected move for each stock and index is based on a refined approach, building upon the concepts outlined in our previous article. Traditionally, the expected move can be estimated by calculating the price of an at-the-money (ATM) straddle for the expiration date immediately following the event of interest. However, in this analysis, we've adopted a variation to enhance the accuracy of our predictions.

Our method involves a blend of 60% of the price of the ATM straddle and 40% of the price of a strangle that is one strike away from the ATM position. This hybrid approach allows us to closely mirror the expected move as indicated by the implied volatility (IV), offering a more nuanced and precise estimation. By utilizing this simplified yet effective method, we are able to provide an expected move calculation that not only resonates with the underlying market sentiments but also equips traders with a practical tool for their volatility-based strategies.


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