The following is a guest column written by Scott Connor of the Trader Education group at TD Ameritrade. Scott manages Swim Lessons trader educational programming, which TD Ameritrade clients can access live beginning 10:30 a.m. CT each trading day from the Support/Chat function within the thinkorswim platform).
About 100 of the S&P 500 companies will be at bat this week as the earnings season gets into full swing. As we saw last week, the results from some companies can be disruptive to the markets when they surprise or disappoint Wall Street's expectations. Given October's reputation for volatility, is there more turbulence ahead?
About those NFLX Numbers
Let's start with NFLX, whose stock took a drubbing after Q2 results, apparently because its new-subscriber base fell well short of the numbers expected, with 1.68 million new members compared with the projected 2.5 million. Will this quarter be a rerun? The company guided Wall Street with 2.3 million new subscribers, the bulk of which would come from international sources.
Also, investors will want to know how other projects are coming along, such as the deal with Comcast announced in July 2016, which will incorporate Netflix into cable and direct set-top boxes. And what about that price hike, which was first initiated two years ago and is now being implemented full swing. Are members paying it?
At Thomson Reuters, analysts polled have an average forecast of $0.06 a share on revenues of $2.3 billion.
Short-term options traders have priced in a potential 10% share price move in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim platform from TD Ameritrade.
Ahead of earnings, call and put action was split evenly, with decent call volume at the 102-, 103- and 105-strike lines and put activity at the 100- and 101-strike lines. The implied volatility seemed to reflect that split, at the 56th percentile.
Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.
Figure 1: WHERE WILL IT GO? NFLX missed Wall Street's subscriber expectations last quarter, prompting a selloff of the stock, though it has mostly recovered since then. What's up for today's results? Chart source: thinkorswim by TD Ameritrade. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
The New IBM
IBM is a bird of a totally different feather, with sales and profits-and the stock-recovering amid Big Blue's efforts to reinvent itself. Its emerging businesses, which have the company turning to cloud solutions, analytics, security, and social and mobile technologies, appear to be slowly but surely becoming the drivers of bottom-line results. Analysts say that those business units, which only two years ago accounted for 20% of the company's operations, may double by 2018.
To that end, analysts reporting to Thomson Reuters are expecting a slight fall in revenue as the businesses pick up steam, with average expectations coming in at $19 billion compared with $19.3 billion a year ago. Profits are forecast to come in at $3.24 a share, $0.11 below the year-ago results.
Short-term options traders have priced in a potential share price move just under 5% in either direction around the earnings release, according to the Market Maker Move indicator. They are mostly looking at out-of-the-money call options at the 155- and the 157-strike lines, with volume running twice the norm. On the put side, the activity has stuck with historical trends at the 150- and 152.5-strike lines. The implied volatility looks to be at a relatively high 60th percentile.
Figure 2: MORE JUICE AHEAD? IBM shares have managed to outpace with a 12.5% gain on the year, nearly double that of the broader market. Chart source: thinkorswim by TD Ameritrade. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
Will GS Be Another Bank Beat?
If the results we saw out of last week's first round of bank earnings are any indication, then GS might be in for a good day. JPMorgan Chase, Citigroup and Wells Fargo outpaced expectations, with some thanks apparently to stronger trading volume. However, while a bank's beat on projections is generally welcome news to investors, we must remember that the earnings and profits of many big banks have been on a decline in recent years, partly because of the persistently low interest rate environment. For GS, analysts say they will be looking for a bump in revenues but will be interested in the composition of those revenues.
Analysts reporting to Thomson Reuters are pegging a per-share profit of $3.82 and sales that rang up to $7.4 billion.
Short-term options traders have priced in a small potential share price move of 2.3% in either direction around the earnings release, according to the Market Maker Move indicator.
Most of the action in the options market is directed at calls, where activity is strongest at the 172.5- and the 175-strike lines, while puts are calmer, mostly at the 170-strike line. But remember that there's a full day of potential options trading still ahead for GS before tomorrow's earnings results are announced. The implied volatility is at a relatively low 17th percentile.
Figure 3: WHICH WAY? At $170, GS shares are smack dab in the middle of the 52-week range. What's the next move? Chart source: thinkorswim by TD Ameritrade. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
How Well Did JNJ's Pharma Sales Do?
Like previous quarters, JNJ's pharmaceutical businesses are expected to prime the earnings pump in Q3 as robust market growth is expected to boost sales of Simponi and Stelara while Imbruvica sales may benefit from increased patient uptake. New cancer treatment Darzalex also may see strong sales, say analysts. Sales of these drugs are projected to help offset the pullback in sales of Olysio and Invega as competition ticks up. Familiar consumer products like Listerine and Neutrogena are also projected to ring up solid sales for that division.
Analysts at Thomson Reuters are looking for an average profit of $1.65 a share and top line sales of $17.71 billion.
Short-term options traders have priced in a 1.5% potential share price move in either direction around the earnings release, according to the Market Maker Move indicator.
The volume in the 120-strike calls has been double the volume of any other call strike. Puts are concentrated at the just-out-of-the-money 117 strike. There's a lot of open interest at the 117- and 115-strike lines. Like GS, there's still more time for the options activity to change before earnings are announced. The implied volatility is near the middle at the 47th percentile. Please remember that past performance is no guarantee of future results.
Figure 4: TIGHT TRADING RANGE. JNJ shares have dropped from mid-July highs and have been trading in a tight range for most of the past month. Chart source: thinkorswim by TD Ameritrade. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
Probability analysis results from the Market Maker Move indicator are theoretical in nature, not guaranteed, and do not reflect any degree of certainty of an event occurring.
TD Ameritrade commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.