options, volatility and earnings - fidelity investments...technical data in this presentation is...

June 11, 2019

Fidelity Webinar Series

Options, Volatility and EarningsJermal Chandler, Instructor

Cboe Global Markets

Options Institute

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Disclaimer

Options involve risks and are not suitable for all investors. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker or from The Options Clearing Corporation at www.theocc.com. Futures trading is not suitable for all investors and involves risk of loss. The information in this presentation is provided solely for general education and information purposes. No statement within this presentation should be construed as a recommendation to buy or sell a security or future or to provide investment advice. Any strategies discussed, including examples using actual securities or futures price data, are strictly for illustrative and educational purposes only. In order to simplify the computations, commissions, fees, margin interest and taxes have not been included in the examples used in this presentation. These costs will impact the outcome of all transactions and must be considered prior to entering into any transactions. Multiple leg strategies involve multiple commission charges. Investors should consult with their tax advisors to determine how the profit and loss on any particular option strategy will be taxed. Past performance does not guarantee future results. Supporting documentation for any claims, comparisons, statistics or other technical data in this presentation is available from Cboe upon request. Cboe Exchange, Cboe Volatility Index, CFE and VIX are registered trademarks and Cboe Futures Exchange, Cboe Short-Term Volatility Index, Cboe 3-Month Volatility Index, Cboe Mid-Term Volatility Index, Execute Success, SPX, The Options Institute VXST, VXV and VXMT are service marks of Cboe Global Markets, Incorporated (Cboe). S&P 500® is a registered trademark of Standard & Poor's Financial Services, LLC and has been licensed for use by Cboe and Cboe Futures Exchange, LLC (CFE). Cboe's and CFE’s financial products based on S&P indices are not sponsored, endorsed, sold or promoted by S&P and S&P makes no representation regarding the advisability of investing in such products. This presentation should not be construed as an endorsement or an indication by Cboe of the value of any non-Cboe product or service described in this presentation.

Copyright © 2019 Cboe Global Markets. All rights reserved

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Disclaimer

The information provided in this communication is solely for educational purposes and should not be construed as advise or an investment recommendation. Fidelity Investments is a separate company, unaffiliated with CBOE. There is no form of partnership, agency affiliation, or similar relationship between CBOE and Fidelity Investments, nor is such a relationship created or implied by the information herein. Fidelity Investments has not been involved with the preparation of the content supplied by the CBOE and does not guarantee or assume any responsibility for its accuracy or completeness.

Copyright © 2019 Cboe Global Markets. All rights reserved

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Earnings Reports

Options Pricing Refresher

Earnings Volatility Bid

Expected Move Straddle

Underlying Stock Move

Earnings Volatility Crush

Trading Strategies

Recap

Today’s Webinar Topics

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Public companies in the U.S. are required to report financial results on a quarterly (annual) basis

In 2000, Regulation FD was established to address selective disclosure of information by publicly traded companies

Press release issued outside of market hours

Financial news outlets report highlights as quickly as possible

• Net income and earnings per shares (EPS)

• Revenues

• Segment or specific product sales

• Profit margins

• Potential outlook or forward looking statements

Results are weighed against analysts estimates

Serve as a measure of how company is doing from profitability standpoint

Earnings Reports

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Management will host Conference Call to discuss results and answer questions

Majority of companies announce in January, April, July and October each year

Earnings season usually begins the first full week of each of these months

After earnings announcement – Stock will typically trade outside of market hours – prior to open or after close

Reg FD implementation changed impact of earnings announcements; Much more dramatic with respect to stock price changes

Stock price potentially volatile for many companies based on content of results

For option traders, earnings are tradeable binary events

Stock trading could be halted during earnings announcements for some companies.

Earnings Reports

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Option Price Components

Six Option Pricing Factors

Footnotes applied here


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Intrinsic Value and Extrinsic Value

XYZ stock at $55.00 XYZ June 50 strike Call at $8.00

Footnotes applied here


Intrinsic Value $5.00

Extrinsic Value $3.00

Intrinsic Value $5.00

Extrinsic Value $3.00+

Option Value $8.00

Composition ofPrice for 50 Call

$8.00

Extrinsic Value = Time Value

Option Value $8.00

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Implied volatility (IV) represents current market price for volatility

IV is theoretically the measure of how much stock might change within a given time period of measure

EPS? Revenues? Profit? Large amount of uncertainty around corporate earnings

Therefore, IV typically will rise into earnings event causing options prices to go higher

When earnings month introduced, options are generally already priced for earnings; Still may increase in days leading up to event

Example: AMC on May 29, 2019. Stock has earnings BMO on May 30, 2019


Exp. Friday Days ATM IV

May31 2 112.11%

Jun7 9 56.55%

Jun21 23 40.52%

Jul19 51 33.30%

Aug16 79 29.96%

Nov15 170 29.72%

Pictures and examples are for illustrative purposes only.

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Using Straddles to Determine Potential Stock Move

IV can tell us when underlying market is anticipating a big move to upside or downside

Straddles are designed to take advantage of IV; Therefore can be used to calculate anticipated magnitude of move


Underlying trading $17.50; Mid-market straddle is $1.85. That represents 10.6% move in stock until expiration

Earnings move largely factored into pricing of those affected options

Implied volatility a reflection of expected move


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Relationship between a company’s stock price and its corporate earnings report can be complicated

Stocks have their own trading characteristics and react differently to earnings reports

There is a potential for a stock to have a large move in either direction on the first trading day after earnings reports

High profits don’t necessarily mean high stock price; Big losses don’t necessarily lead to low stock prices

Earnings surprises can either positive or negative

• Positive occurs when reported earnings significantly above EPS

• Negative occurs when reported earnings significantly below EPS

In a nutshell, two influential factors: current earnings and promise of future earnings


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Plenty of data to dissect over given time periods

Average implied and average actual move often compared

What did earnings reveal?

What quarter has biggest moves? What quarter has smallest moves?

What was the market conditions during a particular quarter/year?


Ticker Max Gain Max Loss

Avg. Imp

Stk Move

Avg. Act

Stk Move Last Q

AMZN 13.20% -7.80% 4.93% 4.80% 2.50%

AXP 7.60% -2.70% 3.18% 2.44% 1.70%

BAC 7.20% -1.90% 2.37% 2.01% 0.10%

C 4.00% -3.40% 2.47% 1.78% -0.10%

EBAY 13.80% -5.60% 5.76% 4.55% 5.00%

INTC 10.60% -9.00% 4.25% 5.73% -9.00%

NFLX 13.50% -5.20% 7.76% 6.26% -1.30%

URI 8.10% -15.00% 5.51% 5.28% 8.10%

WDC 7.50% -18.20% 6.03% 6.81% 1.30%

XOM 3.60% -5.10% 1.77% 2.60% -2.10%

TwoYearsOfData…


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The Uncertainty in Corporate Earnings Cannot be Overlooked!!

Obviously uncertainly is even greater when companies has less data i.e. newer to the market

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After the announcement, the uncertainty is removed and traders will experience a post-earnings volatility crush

Traders who were clamoring for those options prior to announcement looking to take profit and sell

Prior to earnings, there was a known event that could move the stock price. Afterwards those options lost their appeal

Post earnings volatility crush even more pronounced in OTM options

Important: Any trading strategy employed must take into account post-earnings volatility crush


Post Earnings

Exp. Friday Days May 29 IV ATM IV

May31 1 112.11% 34.31%

Jun7 8 56.55% 23.29%

Jun21 22 40.52% 23.18%

Jul19 50 33.30% 24.06%

Aug16 78 29.96% 24.20%

Nov15 169 29.72% 26.36%


OTM – Out of the money - a call option with a strike price that is higher than the market price of the underlying asset, or a put option with a strike price that is lower than the market price of the underlying asset.ATM – At the money - strike price is identical to the price of the underlying security

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Long Vol; Direction Specific

• Looking for large standard deviation directional stock moves

• Bull Call/Bull Call spread

• Bear Put/Bear Put spread

• Ratio Spreads

Long Vol; Direction Agnostic (Just Move!)

• Looking for large standard deviation stock move in ANY direction

• Long Straddle

• Long Strangle

Short Vol; Direction Adverse

• Would benefit from volatility crush and low standard deviation stock move

• Bear Call spread/Bull Put spread

• Naked Bear Call

• Naked Bear Put

• Short Strangle

• Short Straddle

• Iron Condor

Strategies are same as always; One-day stock and volatility earnings event change the game

Trading Strategies

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Recap – Options, Volatility and Earnings

Pre-EarningsPost-Earnings


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Earnings Reports

Options Pricing Refresh





Trading Strategies

Recap – Options, Volatility and Earnings

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Options Institute provides write-ups on Options Trades: News & Research < Options < Trading Ideas < Expert Option Analysis

Expert Options Analysis


19Pictures and examples are for illustrative purposes only.

Next Webinar – July 17

options, volatility and earnings - fidelity investments...technical data in this presentation is...

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