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Volatility Hobbles Options Market Bets on Earnings fueled Us Stocks Swings

Volatility Hobbles Options Market Bets on Earnings-Fueled US Stocks Swings

NEW YORK – An options strategy that bets on individual stocks making larger-than-expected moves after corporate results were winning big this earnings season but is now among many derailed by this week’s volatility spike.

The strategy involves buying options straddles – which combine a put and a call options purchase – on company shares ahead of its earnings report. Data from ORATS showed the strategy worked especially well in the two weeks before this one when post-earnings stock moves tended to be larger than what was priced in the options.

But a burst of dizzying stock turbulence earlier this week caused the prices of the options to rise, making it more difficult for traders to realize a profit. It was one of several strategies – including short volatility and dispersion trading strategies – that thrived in calm markets but were thrown off-kilter when U.S. economic worries and the unwinding of a global yen-funded carry trades shook stocks this week.

“The rule of thumb is that earnings straddles are more profitable when the volatility is low,” ORATS founder Matt Amberson said. “When there are more macro events … then the earnings move tends to be less than is expected by the market straddles. A good example is this earnings season.”

For the first week of earnings, shares of companies that reported results, on average, swung 21% more than that implied by options, making buying options straddle a winner 56% of the time, the data showed.

For the subsequent two weeks, the stocks of reporting companies moved 62% and 33% more than what options straddles had priced, delivering win rates of 62% and 58%, respectively.

This week, however, stock swings for reporting companies came in at only 86% of the move priced in options straddles, dragging down the win rate for the strategy to 50%, the lowest for any week this earnings season, ORATS data as of Wednesday showed.

(Source: Reuters)

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Maria Reed
Maria Reed is a financial journalist with a passion for covering US equities. She joined the ABBO News team in June 2023. Maria holds an M.S. degree in International Economics and Finance from Otto-von-Guericke University in Magdeburg and is a CFA Level 2 candidate.