MW What options trading is telling us now about Amazon, Apple, Meta and Microsoft earnings

By Lawrence G. McMillan

Volatile post-earnings moves offer the potential for quick gains

Several Big Tech companies are reporting earnings this week, including Amazon.com $(AMZN)$, Apple $(AAPL)$, Meta Platforms $(META)$ and Microsoft $(MSFT)$. Options traders attempt to predict the size of a stock's post-earnings movement by bidding up its puts and calls. Just before a company is to report earnings, one can observe the price of at-the-money options (i.e., options whose striking price is near the underlying stock price) to see how far options traders think the stock will move.

For example, Amazon is due to report earnings after the close on May 1. Suppose that Amazon shares are trading at $185 just before the close of trading that day. Then one would add the price of the Amazon (May 2) 185 call and the Amazon (May 2) 185 put to get what is called the "straddle" price. On Tuesday, an at-the-money straddle on Amazon cost about $13.

Will Amazon move more or less than 13 points once its earnings are reported? No one knows, of course, because not only are Amazon's earnings important, but the earnings forecast expected during its earnings call is also crucial.

Some stocks are typically more volatile than others when it comes to post-earnings movements. One relatively easy way to spot whether the options market has anticipated large moves in the past is to look at a chart of the implied volatility of the stock's options as the earnings date approaches.

Stocks that typically are capable of large moves will experience options traders bidding up the price of the straddle. That temporarily inflates the options, making them look expensive. Once the earnings are reported, that temporary inflation in option prices goes away. The result is that, if one were to look at a chart of the options-implied volatility, there would be a noticeable "sawtooth" pattern where options-implied volatility spikes up each quarter before earnings and then decreases afterward.

The chart below looks back two years for Amazon shares, and the spikes in implied volatility are obvious. The sawtooth pattern here warns that this stock is expected to be volatile post-earnings.

But just how volatile might it be? We can observe specifically how much Amazon stock has moved in the past. The following table shows the post-earnings moves by Amazon, in percentage terms, over the past 10 quarters.

In trading on Tuesday, for example, the at-the-money straddle in Amazon sold for $13 when the stock price was $185.30, so the straddle at that point cost 7% of the stock price (13 ÷ 185.30). Using absolute values, from the table above, one can see that the stock has moved 7% or more, up or down, four times. The other six times it did not. So with those odds, the straddle buy doesn't seem like a good idea.

But if the straddle gets a bit cheaper over the next two trading days (before earnings are reported), and if it could be bought for, say, 6.7% of the stock price, then it would probably be worth a speculative buy, considering the nervousness of the overall market and the fact that other large-cap stocks have seen some substantial post-earnings moves in the past two quarters.

Buying straddles on some of the other large-cap stocks, such as Apple, Microsoft and Meta, doesn't line up as well as for Amazon at this time. Those stocks display sawtooth implied-volatility graphs, indicating that options traders are still bidding up the options in hopes of a large post-earnings move.

Apple reports earnings on May 1, after the close of trading. On Tuesday, its at-the-money straddle sold at one point for about 5.3% of its stock price. Of the past 10 post-earnings moves, that's larger than only two of them. So Apple is not an attractive straddle buy right now.

Microsoft is similar. Its at-the-money straddle was priced on Tuesday at 5% of its stock price at one point. Microsoft reports earnings after the close on April 30. Four of the past 10 earnings moves have sent Microsoft shares up or down at least 5% post-earnings, but still, four out of 10 is not great. You'd have to buy the straddle for 3% of the stock price in order to reflect less than six of the last 10 post-earnings moves, and that is just not going to happen. The straddle will not drop that far in price.

Meta has potential

Meta might be a little more plausible. It reports earnings after the close on April 30. Its straddle price in trading on Tuesday was 8.3% of the stock price at one point. Of the last 10 post-earnings moves, that's greater than five of them. So, if you have some reason to expect a volatile move by Meta after its quarterly report, you wouldn't necessarily be overpaying for this straddle.

However, if we examine the data a little more closely, something stands out. Here are the last 10 post-earnings moves for Meta.

Notice that it's either feast or famine. Five of the moves are 10% or more (three of those five are 20% or more), but the other five are 4.8% or less. There's nothing in between. In fact, all three of the most recent moves have been of the small variety. So, paying 8.3% for the straddle means you're risking about half of your straddle price if the stock moves in line with the lower five moves - and risking even more if last quarter's tiny move is repeated.

So, of these four Big Tech stocks, a pre-earnings straddle purchase in Amazon gives you the best chance of making at least a small amount of money. Meta offers the chance for some bigger profit, but only if the stock moves in line with its larger historic moves and not its more recent ones.