What Is The Options Market Saying About Microsoft And Alphabet Earnings?

The options market nailed Tesla (TSLA) almost perfectly. In yesterday’s piece, we analyzed the assumptions that were priced into the TSLA options ahead of its earnings release after the close. The delta assumption was nearly spot on. The highest probability was for a move to the 710-720 area, and we opened this morning at $717.96Remember that for options traders who actively hedge, the trading around the open is most relevant for success or failure. Active hedgers may be hedging their delta in the post or pre-market sessions, but they can’t easily hedge their volatility until the options market opens. The volatility assumption was a bit higher than the roughly 3% move that we saw, but the market was generally correct that the move would be relatively subdued. 

Considering that this week is the main event of earnings week, TSLA proved to be an important opening act. This afternoon we expect to hear from Microsoft (MSFT) and Alphabet (GOOG, GOOGL). Those two companies (three stocks, when we consider Alphabet’s dual share classes) alone make up over 9% of the S&P 500 Index (SPX) and about 17% of the Nasdaq 100 Index (NDX). Big moves in those stocks could have a significant impact on these major indices – especially if they move in the same direction. I believe it would be useful to analyze MSFT and GOOG using the same techniques that we did for TSLA. 

Let’s begin with MSFT, the larger of the two companies. This stock had a spectacular run over the past 6 months overall, and most notably over the past few weeks, as evidenced by the chart below:

MSFT 6 Month Chart, Daily Bars

(Click on image to enlarge)

Source: Interactive Brokers

One might expect that traders would be cautious after a move of over 12% in the month leading up to earnings, but that is not what we see in the options market. The Probability Lab[i] display for options expiring on April 30th, the options that are most directly influenced by today’s earnings report, show that the highest probability outcomes are in the 260-265 range, slightly above the current stock price:

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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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