Sling Shot Earnings

Fifty Ways to Trade an Option

It’s once again the season. Four times a year we get a concentrated dollop of variance in single name equities. Earnings time brings all the volume to the screens, and has traders guessing about first, second, and third order implications.

If the price of a company’s stock is the current discounted value of its future cash flows, there is no more significant planned update of those future values than the quarterly earnings calls. Reporting by listed companies is their regular and mandated duty, where not only are the figures released, but the c-suite gives various shades of color on a public conference call with industry analysts. 

There may be something to glean in pouring through the updated balance sheet or listening to the inflection of the CFO - maybe. For options traders what this represents is a predictable and consistent source of activity, and larger than expected moves. 

Day to day we might get minor updates about the business environment or a company specific nugget. That contributes to the overall background expectation of volatility. The difference with earnings is that everyone knows exactly when it’s going to happen. Because the calendar is released far in advance, you can’t just buy options in an earnings month expecting it to move - everyone else has already bid that up.

Trading options around earnings requires taking a position not on whether the stock will move or not, but whether it will move more or less than the market’s expectation of movement. 

Fundamental analysts will be buying or selling based on how they think sales have done this quarter, while volatility traders are looking at historical implied moves, the current vol environment, and where the straddle is pricing all of this. 

Different stocks have different profiles around earnings, and over time tend to fall into patterns. It’s unlikely that AAPL has something that causes it to move 10%, but NVDA certainly could pull an ace out of its sleeve to drive this AI zeitgeist wild. 

As we head into this fall earnings season, we must also contextualize the overall volatility environment. The market is at all time highs, and while we have a curious election bump for volatility, implieds are relatively soft. 

Interestingly for this earnings season, we’re seeing less of a dispersion expectation. The implied dispersion is a measure of how much index components are likely to vary compared to their index. Typically this rises into earnings (see July), but the bump has been muted. Macro (i.e. the election) is a heavy blanket.

Earnings trades present several different types of opportunities, both defensive and opportunistic.

Today in 50 Ways to Trade an Option, we’ll explore how to use a sling shot setup to protect an underlying position heading into earnings, while still retaining some of that upside potential.