Have a look at the downloadable calendar provided here, showcasing stocks with liquidity levels of 3 and 4 stars. You may question the rationale behind trading during earnings season, given the notable volatility in stock prices at this time. The answer resides in the market mechanics related to options pricing. During earnings reports, options pricing typically peaks due to expected market movements. Interestingly, the projected changes are often less dramatic than the actual market swings that happen.
Let's use Tesla (TSLA) as a case in point -- its earnings report is scheduled for July 19th, after the market closes. The predicted price fluctuation up until the closing bell this Friday is approximately $21.18, either upwards or downwards.
The implied volatility is notably high at 106% for this upcoming week, far exceeding the 79% implied volatility just 1 week later. This means the market is pricing in the largest movement, right before this Friday's expiration.
How Should you Navigate Earnings?
First and foremost, you should strive to maintain reasonable position sizes. Keep in mind that price fluctuations are generally not as sizable as predicted; this is the very reason why insurance firms provide risk alleviation mechanisms at a cost, or premium. This concept holds true for stock options as well. Investors are often willing to pay to transfer their risk to others. As you assume this risk, your role can be likened to that of the insurer. However, given that you don't have endless financial resources, keeping your positions modest is key. Another suggestion is to purchase “wings”, or outer options, to avoid massive losses on either side of the trade.
Take TSLA as an example. Consider a strategy that includes writing (or selling) a short 265 put and a short 315 call (also known as a strangle). Simultaneously, consider buying a 260 put and a 320 call. This effectively turns the trade into an iron condor strategy, which should ideally be applied using this Friday's expiration.
Big Earning Releases for Each Day
As can be seen on the calendar below, we can see some of the big names below and the sectors in each. Financial services are the biggest sector at the beginning of earning season. Healthcare stocks begin at the beginning of August.
An Update to the Nasdaq Rebalance
The Nasdaq is set to undergo a rebalancing as of July 24th, with the “big 7” experiencing reductions in their index weighting. This unique rebalance will not involve any additions or removals from the index. Rather, it is designed to decrease the size of the top-performing stocks that have attributed to the considerable surge in the index throughout the year. Please refer to the article, linked here, for details of all adjustments being made in the Nasdaq!
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