So earlier this morning, they had a feature on what options may be telling you about earnings reports.
The guests (Dennis Davitt, and someone named Rebecca) did something radical. They each pointed out the magnitude move predicted on the options board. Intel “expects” about 5%, EBAY the same, Google 7%, and so on. They were very good imho.
Mark found this info rather useless. He just wants direction. It’s a pretty typical exchange when options get mentioned; option bets are more complex than simple up and down opinions. Even if it is merely a directional play, you are gaming time frames and stock volatility.
The magnitude of an expected move can be infered from the options board. You see the volatility on the screen now and make an educated guess as to where volatility will go after the number (not as difficult as it sounds). And then you infer how far the stock would have to move to essentially break even on non-directional option *bets*. In other words, delta-neutral straddles and strangles. And voila, you have an expected range for the stock after the number.
Guessing the direction of a move based on options flow is pretty tricky. There are pay sites that do a great job tracking option money flow, but divining the meaning is in the eyes of the beholder. What if you see a jillion near money or OTM puts trading at spiked volatility. Is that bullish (contrarian view….nervous stock holders) or bearish (smart money buying the puts)? Could be either one, and that’s the point.
Bottom line is the magnitude of the move is pretty objective, direction is pretty subjective. I realize for CNBC’s purpose, they would rather guests just go on and guess; no worries if you get it wrong, they literally never remember it anyway. But as far as usefulness goes, magnitude expectations are more valuable.
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individual stocks no point in guessing direction preearnings. if you’re Buffet or if you’re Daniel Zanger it’s okay to trade on one side but earnings time probably when the straddles make all the money and the speculators just trade back and forh.
Post earnings is different. low float small cap stocks that smash earnings, and continue to rally cuz they dont have enough shares for big buyers to add a position so price continue to drift.
Tends to be more buying momentum and over reaction after someone smashes last years earnings and estimates and stuff. over reaction on the downside for someone that misses. all cuz of the tendancy stocks have to continue to beat earnings if just did, or to continue to miss if they missed.
it called “Post earnings drift”- anomaly in the market that has been well documented.
I’m just learning about options so I havnt done it, but Pre earnings, why not straddle before, and sell shortly after regardless of results?
Won’t you almost always get a move in price as people guess one way, and then after the results?
How can the option “formula” account for this?
Seems to me like if you bought a straddle like if you buy a straddle the day before announcement that it would always move big enough… but even if it didn’t you’d only lose a day of time decay.
Is this just somethin where everyone dont do this cuz of people not knowing bout it?
Or is there something about “implied volitility” that changes right before and right after and i don’t know about it?
yeah, implied volatility spikes pre-earnings and implodes afterwards. The variable is how far the stock moves. The bidup tends to be too much more often than not, but the magnitude of the loss if you sell options in something that gets plowed tends to be bigger than the gains when the stock does not move much.
I prefer shorting options ahead of the number, and then defending it if i have to with bad stock trades in the after-hours. But net/net the Expected gain of either selling everything or buying everything ahead of earnings is pretty close to zero.