The options market does a great job of predicting the expected move of a stock ahead of a company’s earnings report—and that information can be a tremendous resource to help traders profit. Because I’m aware that many of my subscribers have stock and/or options positions in a handful of stocks such as Tesla Motors (TSLA), Facebook (FB) and Apple (AAPL), I dig deep into what the options market is projecting for these stocks on their earnings announcements, and report my findings to my subscribers.
Here is a sample of some of the research I sent to my subscribers on February 22 ahead of Tesla’s earnings, based on what I was seeing in the options market:
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Tesla (TSLA) will report earnings this evening after the closing bell. The stock is trading slightly higher today at 280, as the market is down marginally. TSLA is up 30% year-to-date.
Expected Move/Volatility
The options market is pricing in a move of $18 this week for TSLA, 262 to the downside and 298 to the upside. (Note: The stock actually moved $17.5, virtually in line with the options market prediction)
Compared to the expected 6.4% move this week, in the past four quarters of earnings, TSLA stock has moved:
October 2016 earnings: Higher by 1%
August 2016 earnings: Higher by 2.1%
May 2016 earnings: Lower by 5%
February 2016 earnings: Higher by 4.75%
In each of the last four quarters, TSLA closed the day following its earnings release in a tighter range than the expected 6.4% move. The largest upside move was 4.75% and the largest downward move was 5%.
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Order Flow
Option order flow in a popular stock like TSLA is very hard to read because, on average, over 100,000 option contracts trade a day. Here’s the open interest data, and the largest option trades made recently:
Open interest is skewed bearish on a 1.6:1 ratio put over call.
Bullish Trades:
February 17: Buyer of 3,000 June 300 Calls for an average price of $11
Bearish Trades:
February 14: Buyer of 4,000 March 280 Puts for an average price of $12.25
February 9: Buyer of 6,500 March 270 Puts for an average price of 13.90
Conclusion
TSLA shares have been on a meteoric rise since the middle of December, rallying from a low of 182 to a high of 280 this morning. As the stock has rallied, option order flow has been mostly mixed, which in some ways is surprising to me because I would have expected options traders to have chased calls higher. But the mixed order flow also shows how many traders continue to bet against the company.
A 6.4% move ($18) seems reasonable to me (perhaps even cheap), given TSLA’s big run and the short interest in the stock. However, the last several earnings reports have produced relatively muted moves on earnings.
If you are looking for bullish/bearish/low volatility exposure for TSLA earnings, here are some ideas:
Bullish:
If long TSLA stock, you could sell March 300 Calls for $5. Or longer term, you could sell January 360 Calls for $12.
If you’re willing to own the stock at 250, you could sell April 250 Puts for $7 (you MUST be willing to buy stock at 250).
If want to take a high-risk short-term trade, you could buy February 285 Calls (exp. 2/24) for $6.50 (these calls will go to zero if the stock does not get above 285 by Friday afternoon).
If you’re longer-term bullish, you could buy June 300 Calls for $15.
If you’re longer term bullish, you could buy June 300/330 Bull Call Spreads for $8.
Bearish:
If you’re long stock and need a hedge, you could buy February 275 Puts (exp. 2/24) for $7. (These puts will lose a great deal of value if the stock goes higher, but that’s the price of earnings insurance)
If you’re longer-term bearish, you could buy April 270 Puts for $13.50.
If you’re longer-term bearish, you could buy April 270/240 Bear Put Spreads for $9.
Low Volatility:
Sell April 250/245 Bull Put Spreads and April 330/335 Bear Call Spreads (Iron Condor) for a total of $1.60.
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I also break down (though not in as great detail) other commonly held stocks ahead of earnings. Here is my write-up ahead of Walt Disney (DIS) earnings on February 7.
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Walt Disney (DIS) will report earnings on February 7 after the close.
With the stock trading at 109, the options market is pricing in a move of $3.35, or 105.65 to the downside and 112.35 to the upside.
Last earnings cycle, DIS rose from 95 to 97.5 on earnings.
Open interest is skewed bullish on a ratio of 1.3:1 call over put.
DIS has performed well to start 2017, trading higher by 5% year-to-date.
The 3% expected move is in line with the average four quarter earnings move of 2.9%.
Options activity has been overwhelmingly bullish in DIS for the past month, including the following options in open interest:
38,000 February 110 Calls
30,000 April 110 Calls
17,000 April 115 Calls
40,000 June 115 Calls
90,000 June 120 Calls
32,000 June 125 Calls
Note the 162,000 June calls. These options trades are not likely earnings plays, but targeting a move higher in the first half of the year.
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While the options market does not always get the expected move and direction correct, this information does a great job of highlighting the risk the big market players see heading into earnings, and how they are positioning themselves.
Valuable information indeed.
My subscribers also have email access to me at all times, and often ask me to break down what I am seeing ahead of any company’s earnings release. If you’re interested in becoming a Cabot Options Trader subscriber, click here.
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