Posted in
Technical Analysis
By: Tom Gentile
on August 16th, 2022
Yesterday we showed an option Implied Volatility (IV) chart on Target Corporation, (NYSE: TGT) as an example of how IV tends to rush or increase going in to a stocks earnings announcement.
The education was to be careful buying an option on a stock just before they announce as not only is there a chance the stock doesn’t go the way one expects and for the direction they need for the option to make money, but IV which is a component of options pricing could decrease (volatility crush).
If a stock gaps much higher for example the price increase will help the option even if volatility crushes.
Walmart, Inc. (NYSE: WMT) announced earnings today before the market opened and they came in better than expected. The stock gapped up 6-points higher from its previous day close.
That pop in price helped the options on WMT increase, but they probably could have increased even more than they did if it weren’t for the IV crushing. Here are before and after shots of WMT stock prior to earnings and the IV chart on a call option for WMT.
Now take a look at the IV chart the same day before:
We primarily focus on the red line, which represents the 7-30-day ATM IV. This IV is another visual example of how IV tends to spike going in to an earnings announcement.
Volatility Crush
The next two images are going to show the stock gap higher in price the day the earnings came out (today) followed by the IV chart for the options the day the earnings came out (today).
We will reiterate the price of the stock gapped up.
This gap up in price will help the value/pricing of the option. If one picked a call option anticipating WMT to beat earnings and gap up that anticipation played out and one would have seen profits in the option.
There are times a stock can beat on eps but forecast lowered eps and or revenue in the next quarter (or more) and despite the good earnings the stock can gap down.
No matter the eps and revenue outcome and no matter the stock price move, IV tends to still crush, so you either need to risk being right or wait until after the earnings to see IV settle down so options pricing gets less expensive.
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.
Disclaimers
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.