This week, the following major companies will be reporting earnings prior to January options expiration:
- Tuesday: Citigroup (NYSE:C), Apple (NASDAQ:AAPL)
- Wednesday: Goldman Sachs (NYSE:GS), eBay (NASDAQ:EBAY), F5 Networks (NASDAQ:FFIV), Wells Fargo (NYSE:WFC), US Bancorp (NYSE:USB)
- Thursday: Freeport McMoran (NYSE:FCX), Morgan Stanley (NYSE:MS), Google (NASDAQ:GOOG), Johnson Controls (NYSE:JCI)
- Friday: General Electric (NYSE:GE), Bank of America (NYSE:BAC), Schlumberger (NYSE:SLB)
To predict how these stocks will move post-earnings announcement, we look at the options market, and more specifically at the nearest expiration month calls and puts that are "at-the-money". In other words, we look at the price of the call and put of the front month expiring options with a strike price closest to the current stock price.
With January expiration after the close on Friday, there is very little time premium left in the January contracts so we have set that aside for this analysis. With earnings serving as the primary catalyst remaining prior to January expiration for these stocks, the premium for at-the-money options reflects the market's expectation for volatility as a result of the earnings announcement.
The thought process behind this analysis is that someone long the stock (say Goldman Sachs for example) that sells a call to hedge themselves against a potentially poor earnings result will be compensated for the expected reaction from a positive report, and that compensation would serve as protection in the event of a negative reaction to the earnings announcement. Alternatively, such an investor could purchase a put to protect themselves from a poor earnings report from Goldman Sachs but the cost of the put will mitigate the gains to the investor should the report come in better than expected.
If the earnings report is exceptionally good or awful these options forecasts can be very wrong, and if you believe that a report will be exceptional one way or the other to promote a greater than expected market reaction, then buying a call or put is a trade to consider depending upon how you anticipate the report occurring.
Where the put and the call premiums were forecasting different moves (example, the call is predicting a 2.2% move and the put is predicting a 2% move) we used the average. In some cases there was substantial skew between the expected up move versus the expected down move (All options prices are the ask quote).
Here are the expected moves the options market is forecasting for these fourteen companies reporting earnings this week based on our analysis of the January at-the-money options.
|Ticker||Stock Price ($)||January "At-the-Money" |
Option Strike Price
|January "At-the Money" |
|January "At-the-Money" |
|Forecast Post-Earnings Stock Move (+/-)|
|C||5.13||5||.18||.06||less than 2%|
Some of these options-based forecasts will be not be correct with respect to the actual market reaction to these companies' earnings releases. For example, we don't honestly believe for a second that Citigroup will only move 2% on their earnings report. But it gives us an idea of expectations, and that is a critical part of the market during earnings season.
Disclaimer: This article is for informational purpose and is not meant to reflect the views of The Strategist, its principals, associates, editors, or affiliate regarding any of the stocks mentioned. Nothing in this article is meant to reflect future trading intentions of the author. The facts in this newsletter are believed by the Strategist to be accurate, but the Strategist cannot guarantee that they are. Nothing in this newsletter should be taken as a solicitation to purchase or sell securities. These are Mr. Evensen’s opinions and he may be wrong. Principals, Editors, Writers, and Associates of The Strategist may have positions in securities mentioned in this newsletter. You should take this into consideration before acting on any advice given in this newsletter.