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
Toms Option Tools scan the markets for bullish and bearish trade opportunities using our proprietary scans and strategy algorithms. TTR Darknet finds bullish entries based on triple stack channel collisions. Money Calendar identifies seasonal patterns with at least 90% accuracy looking back 10 years. Weekly Cash Clock finds short term opportunities that last a week on average. Microcurrency Trader applies Darknet technology and moving averages to cryptocurrencies. Velocity Trader utilizes volume spike and Velocity indicators on custom stock lists. Quantum Scripts scans the markets for momentum acceleration signals and employs Quantum noise filters. Optimal Trader finds directional pre-earnings opportunities that are optimized for entry date, stock movement, and volatility surge. My Trades tracks the profit/loss of your trades, displays stock charts and risk graphs, creates new trades, and edits existing trades. Morning Report provides top 10 option rankings in 6 categories each day.
Stock and options trading has large potential rewards, but also large potential risk.
You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.
This is neither an offer to buy/sell/ or recommend a particular stock or option.
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.
No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
Disclaimer of Warranties and Liabilities Tom Gentile and TomsTradingRoom, LLC including employees, consultants, and editors (“Publisher”) cannot and do not warrant the completeness or accuracy of the content found in our areas, or its usefulness for any particular purpose.
Tom Gentile and TomsTradingRoom, LLC also make no promises that our content or the service itself will be delivered to you uninterrupted, timely, secure, or error-free. Under no circumstances will Tom Gentile and TomsTradingRoom, LLC be liable for direct, indirect, incidental, or any other type of damages resulting from your use or downloading of any content on our site.
This includes, but is in no way limited to, loss or injury caused in whole or in part by our negligence or by anything beyond our control in creating or delivering any portion of Tom Gentile and TomsTradingRoom, LLC.
You are agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that Tom Gentile and TomsTradingRoom, LLC will not be liable for any I, investment decision made, or action taken by you, or others based upon reliance on news, information, or any other material published by Tom Gentile and TomsTradingRoom, LLC.
Tom Gentile and TomsTradingRoom, LLC relies on various sources of information that we believe to be accurate and reliable. However, we make no claims or representations as to the accuracy, completeness, or truth of any material contained on our site.
Tom Gentile and TomsTradingRoom, LLC are educational portals, providing content for educational and informational purposes only. Neither Tom Gentile nor TomsTradingRoom, LLC are a broker/dealer. Investors need a broker to trade stocks and options and must meet certain requirements. All securities, futures, and investments data and ideas are offered to self-directed investors. All prices in USD unless noted otherwise.
A full disclaimer can be found here: http://www.tomgentile.com/legal_disclaimers.html.