Last week was the wildest earnings week of any in the ORATS 3-year study, as measured by the average actual moves divided by the estimated moves. Earnings season starts a couple of weeks after quarter-end, at either mid-January, April, July or October, and runs for about 6 weeks. Each week during earnings season, ORATS publishes earnings statistics. ORATS also tracks earnings seasons weekly average results for a rolling three year period to establish comparable results for each week of earnings.
For the firms that have announced, the big number that options traders watch is the move in the stock after earnings announcement compared to what was expected as measured by the options straddle.
Last week was week number 3 of 6. Straddle buyers saw the actual moves divided by the implied moves hit 114% for the 338 firms reporting that ORATS tracks.
The big movers we led by 2U Inc with its stock price down -64.9% posted a 641% move vs expected and Pluralsight, Concho Resources, and Owens-Illinois each had over 500% moves vs expected.
Historically the actual move to implied move ratio has hovered around 85% for all weeks and 87% for week 3. This low ratio shows that the straddle is usually priced richly coming into the earnings announcement. One theory for the richness is that investors are protecting their stock positions buy buying options straddles around earnings, driving up the price of the straddle vs how much stocks actually move.
An options straddle is the simultaneous buying of a call and put option at the same strike in hopes that the stock will move farther away from the strike by expiration than the price of the straddle.
To find the expectation of the earnings move from a straddle, you need the price of the straddle before earnings (this is known), and the estimated residual value of the straddle after earnings (this needs to be calculated). To find that residual value, an estimate of the implied volatility after earnings is made along with a probability distribution for the earnings move. ORATS has been estimating this value and checking the value against actual moves for years now.
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