Market Direction Dependent on Earnings

Originally published via our newsletter previously. Subscribe for early access!

We as investors and options traders are now dealing with two wars, continued recession fears and bond yields not seen since 2007 to name a few of the challenges making it hard for Bulls to push this market higher.

 There aren’t a lot of major economic reports out this week, so we don’t have to concern ourselves too much with those.

The primary thing taking center stage as what to focus on are Earnings.

Earnings season has already begun. Many banks and financials reported last week and were seeing many major financial stock beating estimates.

Tech is front and center this week with Microsoft (MSFT), Alphabet, Inc. (GOOGL) already reporting and Intel, (INTC) still to come this week.

Much of the sentiment and conviction of traders are likely to hinge on the earnings reports and more importantly their forward-looking guidance.

One thing to count on is price volatility will be prevalent and that will make trading challenging for short-term options traders.

Market in Focus: SPY SPDR S&P 500 ETF Trust

The seasonal patterns over the past 10 years show the library of securities in that library of securities have had a majority of those securities having bullish patterns in October.

The two wars, concerns over whether we are still going to go into a recession and yield levels in bonds not seen since 2007 have caused a challenge to market bulls.

The price point of $420 was a support price and it has traded back to it, but did not test it as support today,  Instead it  broke and closed below it as of today. If there is a false breakdown and the SPY snaps back up this may end up being a support.

If not, we are looking at the next level support being $410.

Tool and Observations

My software has multiple earnings scans. Some are available depending on the subscription level you have.

Some are found in my tools, but come with one of my instructors, Mike Wade’s Earnings Mastery Course.

If you have those congrats and I wish the bet of success with those.

If one does not have certain scans I am going to educate you on a basic way one can form an anticipated price move for the stock on their earnings announcement.

Look to the options chain for the security you have in mind to trade options on based on their earnings announcement.

*** Note – I am not advocating all trade options on stocks announcing earnings. It is a highly speculative style of trading and without more education and some rules to follow it is best if one does not pursue this style of options trading until that education and rules have been acquired. ***

What I am going to show you below is a way to assess what appears the market makers of the stock see as a prospective point move to come for the security on their announcement of their earnings.

Example (NOT Recommendation). In fact, I am going to use a stock that already announced and show what the option numbers were the night prior to the announcement and the subsequent move after their reported numbers.

The closing numbers are from the tools as of 2023-10-24, so they will likely not be the same when you are reading this.

The stock I will use for the education is Alphabet, Inc. (NASDAQ: GOOGL).

They reported earnings after the close on October 24.

The closing prices for the At the Money options for this Friday’s expiration date are as shown below.

Calls are on the left and Puts are on the right of the image below:

What one can do is take the At the Money Options and add the premium of the Call to the premium of the Put and that combined number can be looked at as the anticipated rice move on the stock.

This is to be done on the At the Money options for the current week or month, not for say LEAPS options.

The price of the October 27, 2023, $138 Call at the natural (highest shown price) is 4.40.

The price of the October 27, 2023, $138 Put at the natural (highest shown) price is 3.50.

Added together the total is $7.90. That can be looked at as the anticipated price move on the earnings.

Not just on the gap, but within a day or so even.

Take a look at the chart below from the tools.

Recognize the charts from the tools are not intraday charts, but they update roughly every half hour or so after the first update of the day which takes place a half hour after the market open.

Then the delay is about 15+ minutes.

The closing price on 10-24 was we’ll say 139.

It opened at 128 the next morning. That is an 11-point differential. I didn’t say that price calculation will be the exact price move, but one can still anticipate a move in that amount. It sometimes falls a bit shy or exceeds the number.

The thing is one does not know if the stock move will be higher or lower so an option strategy to consider is a Straddle or Strangle.