Apple, AMD stock option traders aren’t expecting fireworks after earnings reports
Options oddsmakers aren’t expecting fireworks after Apple Inc. or Advanced Micro Devices Inc. report their much-anticipated quarterly results after Tuesday’s closing bell.
That’s not to say options traders aren’t prepared for some volatility, just less than the average moves seen after previous earnings reports.
Apple is scheduled to report fiscal third-quarter results and AMD is slated to reveal second-quarter results after Tuesday’s closing bell. Apple’s stockAAPL, +0.93% climbed 0.9% on Monday, while AMD sharesAMD, -1.59% shed 1.6%.
An option strategy known as a “straddle,” which involves both bullish options (calls) and bearish options (puts) with strike prices around current stock prices (at the money) expiring after Friday’s close, is a pure volatility play that makes money for buyers of the strategy if a stock moves in either direction more than the pricing implies, in either direction. Read more about options straddles.
Currently, straddles are implying a 4.2% move in Apple’s stock after earnings and a 9.5% move in AMD shares, according to Garrett DeSimone, head quant at OptionMetrics.
That might sound like a lot when compared with the stocks’ respective daily average moves on an average day, but it’s not when compared with what the stocks have done the day after previous earnings reports.
“Generally, what we’re seeing is pretty low implied volatility coming into these earnings,” DeSimone said, in an interview with MarketWatch. That indicates it is relatively cheaper to take a “long” volatility position.
Apple’s stock has gained an average of 4.7% (median of 4.7%) on the day after the past 21 earnings reports, and have advanced an average of 5.1% (median of 4.8%) after the past 10 results, according to an analysis of FactSet data.
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The average post-earnings gain – the stock rose after 12 of the past 21 earnings reports -– was 4.8% (median up 4.8%) while the average decline when the stock fell after earnings was 4.7% (median down 4.3%).
Also read: AMD earnings: With stock at highest prices in more than a decade, outlook must be strong.
For AMD, the average move has been 12.2% (median of 10.3%) after the past 21 earnings reports and 13.2% after the past 10 (median of 14.0%). The average post earnings gain – the stock rose after 10 of the past 21 reports – was 15.2% (median of 12.8%) while the average decline was 9.5% (median of 7.7%).
Meanwhile, the average move on any day over the period going back 10 quarterly reports was 1.2% for Apple shares and 2.6% for AMD’s stock.
“If you look at the broader market, you’re seeing lower numbers for the VIX,” DeSimone said. “It’s a pretty common phenomenon during the summer.”
The CBOE Volatility IndexVIX, +13.08% , known as the VIX, closed at 12.83 on Monday, down about 50% from a year-end price of 25.42.
Investors should keep in mind that cheaper options prices don’t make a straddle more likely to make buyers money. While the buyer’s potential loss from a straddle is capped and the potential profit is unlimited, the opposite is true for the seller. So like a Las Vegas oddsmaker, the option market has gotten very good at pricing strategies low enough to entice buyers, but not quite low enough for the seller to lose money.
“These straddles are generally losing trades,” DeSimone said. “That’s not to say the market is always correct, but that’s just the expectations that are being priced in.”
Apple’s stock has gained 4.9% the past three months while AMD shares have rallied 21.2%. In comparison, the Nasdaq CompositeCOMP, -0.44% has tacked on 1.5% and the Dow Jones Industrial AverageDJIA, +0.11% has advanced 2.5%.
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