HomeMost PopularUnveiling the Realm of Option Volatility in the Financial Landscape

Unveiling the Realm of Option Volatility in the Financial Landscape

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As we approach the tail end of earnings season, the horizon may seem less crowded with prominent names this week. However, amidst the dwindling fanfare, notable companies like Crowdstrike (CRWD), Target (TGT), Broadcom (AVGO), and Costco (COST) are set to make their mark.

Before a company unveils its earnings report, the stage is set with heightened suspense reflected in the surge of implied volatility. Speculators and hedgers fervently engage in the options market, driving up the implied volatility and consequently, the option prices.

Subsequent to the earnings revelation, the curtain falls, and implied volatility starts to recede to more subdued levels.

Now, let’s delve into the anticipated spectrum for these stocks. Estimating the expected range involves a simple yet enlightening calculation: a fusion of the at-the-money put option price and the at-the-money call option price fetched from the option chain. Remember to focus on the first expiry date after the earnings bonanza for the most precise approximation.

Turning our gaze to the week ahead, here is the breakdown:

Monday

SE – 17.6%

GTLB – 18.4%

Tuesday

CRWD – 11.9%

TGT – 7.2%

Wednesday

CPB – 4.6%

JD – 9.4%

Thursday

AVGO – 8.3%

COST – 4.2%

MRVL – 11.6%

Friday

Nothing of note

These expected moves are a compass for option traders, guiding their strategic maneuvers. Whether bearish, bullish, or neutral, there are tailored plays available within the anticipated range.

It’s a delicate dance where risk-defined strategies reign supreme, and prudence dictates keeping position sizes modest. A prudent investor ensures that any unexpected surge resulting in a total loss has a controlled impact, capped at 1-3% of their portfolio.

Seeking High Implied Volatility

Leveraging Barchart’s Stock Screener, we can scout for stocks exhibiting elevated implied volatility. A meticulous filter application including total call volume, market cap, and IV Percentile unveils a trove of prospects, ranked by IV Percentile.

Referencing such tools can be instrumental in carving out lucrative option trades during this earnings season.

The Prelude: Last Week’s Earnings Tale

Reflecting on the recent past, a lone company captivated market watchers with its earnings revelation:

LI +18.8% vs 10.5% anticipated

ZM +8.0% vs 8.2% anticipated

U -6.1% vs 15.0% anticipated

… and the saga continued, with each stock’s performance echoing a unique narrative.

Of the 20 contenders, 14 adhered to the prescient realm of expectations, underscoring the volatile undercurrents of the market.

The Ebb and Flow of Open Interest

Unusual tides rippled through the options market last week, with stocks like AMD, SQ, PLUG, C, F, MSFT, and RIVN capturing attention with their intriguing options activity.

A glimpse at other stocks with notable changes in open interest illuminates the evolving landscape, hinting at potential opportunities awaiting discerning investors.

It’s imperative to remember the inherent risks that options involve, with the possibility of a complete capital loss. As always, prudent decision-making, informed by diligent research and expert advice, should steer investment choices.

On the date of publication, Gavin McMaster had no direct or indirect positions in any securities mentioned. The information herein serves educational purposes only, offering insights into the dynamic world of finance.

The views expressed in this article are solely those of the author and may not align with those of Nasdaq, Inc.

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