By: Tom Gentile
on August 15th, 2022
Earnings season for this quarter isn’t quite over just yet.
In fact, this week is going to see some of the largest cap and most popular retail stocks announcing earnings this week.
Stocks the likes of Walmart, Inc. (NYSE: WMT). They announce Tuesday, August 16 BMO (Before Market Open). The Home Depot, Inc. (NYSE: HD) also announces Tuesday, the 16th BMO. Another Do-it-Yourself retailer Lowe’s Companies. Inc. (NYSE: LOW) comes out Wednesday, August 17 BMO.
Then there is Target Corporation (NYSE: TGT) who is due to report this Wednesday as well, also BMO.
One more? Kohl’s Corporation (NYSE: KSS) reports Thursday, August 18 BMO.
Implied Volatility Prior to an Earnings Announcement
One thing to be mindful of if one is thinking about buying call options going into an earnings announcement is the Implied Volatility increase that typically happens.
If you look at the image below of the Implied Volatility chart on an option for TGT you will see it has already spiked really high and that to us, says it is too late to try and buy.
The option shown is the August 26, 2022, #170 Call for TGT.
If one spends $948 (9.48 times 1 contract or 100 shares = $948 per contract.
That money is at risk and no matter what the earnings are unless the stock gaps up a hefty amount the IV tends to drop significantly post-earnings. When it does that is called Volatility Crush.
When the volatility crushes out of an option that option price is likely to go down and even if the stock moves up a bit the IV crush could be bigger than the stock price move and the option is at risk of losing money.
The Approach to Learn
One can see in Figure 1 it would have been better to go long the call about a week before the IV popped higher.
One may not know the ideal best time to enter a long call on a stock due to report earnings, but rest assured my tools (www.tomsoptiontools.com) has and can run back tests on these stocks to see when the ideal time to enter an options trade prior to the earnings announcement so one can anticipate a similar spike in IV and that spike in IV increases the price of the option.
Knowing the past history and results of these type moves one can consider positioning themselves in an option trade at an ideal time prior to earnings to look to profit off that move versus be stuck buying an option that is too expensive. Like TGT and other retailers shown below.
App: Toms Option Tools
Market Insight articles may show images of lists of stocks meeting a variety of options parameters like Unusual Call and or Put activity or Expensive IV found on my app Toms Option Tools.
Other times I will have other charts may work to amplify my educational points.
Those options data lists, however, can be found on my app Tom’s Option Tools. Use your device to search up and download this app and get free access to the Morning Reports section of the app.
Other parts of the app are available at a premium subscription rate, but the Morning Reports Lists are yours free.