It might be hard to predict how a stock reacts to earnings, but investors can look to the options market for clues to what Wall Street expects.
It can also help identify opportunities for short-term trading gains. Options prices are determined by a few things, with volatility being one of the biggest factors.
The more a stock fluctuates, the higher the odds an options contract will be worth something. If a stock price never changed, the value of an option—the right to buy or sell that stock at a different price in the future—would be zero. The volatility embedded in options prices holds a wealth of information.
Importantly, it can signal how violently a stock will react when earnings are reported. In the strategy, traders buy a call option—the right to buy a stock—and a put option—the right to sell a stock—at the same price and at the same time in the future.
Measuring the cost of a straddle tells investors, very roughly, what to expect after earnings. The options market got it right.
3 Earnings Option Strategies
Qualcomm makes and sells product in Asia, while Royal is a travel stock. It can help take the edge off wild markets like this one.
Write to Al Root at allen.