TSLA And MSFT Ahead Of Earnings

This afternoon promises to be an important one for tech investors, with both Microsoft (MSFT) and Tesla (TSLA) scheduled to release quarterly results after the market’s close. While analysts’ estimates provide an important framework for decision making around an earnings release, options markets offer a subtle view into the market’s expectations about potential moves. Fortunately, your TWS allows you clarity into the options market’s views.

The immense size of MSFT gives it the second-highest weighting (only Apple is larger) in indices that are weighted by market capitalization. Those include the Nasdaq 100 (NDX) and S&P 500 (SPX) indices, where MSFT comprises about 11% and 6% of the index weight respectively. An outsize move in MSFT would necessarily spill into moves in those key indices.

While TSLA represents “only” about 2.5% of NDX, its mindshare among all types of investors as a bellwether for speculative behavior is enormous. Its lack of representation in SPX makes this a particularly critical release for TSLA. A positive result today could give the company the fourth consecutive quarter of profitability that is typically required for entry into the S&P 500 Index. Analyst consensus has steadily risen from a $2 loss to a 2 cent loss, fueling a doubling of the stock price throughout the past few months. Addition into SPX would likely bring a wave of buying from passive investors and ETF’s like SPY. 

The simplest way to see the option market’s anticipated move is to look at the nearest term, at-money straddle. Here is a recent snapshot for MSFT:

(Click on image to enlarge)

MSFT options straddle TWS

Although the strikes were cut off in this picture, I have displayed the weekly 210 strike calls and puts that expire on Friday. The midpoint of those options, less any intrinsic value, is a quick guide to the implied move of the stock.In this case, that is $9.48 (4.75 + 5.15 – (210 – 209.58)), or about 4.5% (9.48 / 209.58). Another way to do that is to take the average of the implied volatilities, which are displayed in annualized terms, and convert them to daily volatilities by dividing by 16. You will see that those numbers generally agree if the options are very short-lived. (For a more detailed explanation of the “Rule of 16”, please read this link).

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Disclosure: The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the ...

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