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

MSFT Probability Distribution Using April 30th Options on April 27th

(Click on image to enlarge)

Source: Interactive Brokers

While the curve is not perfectly symmetrical, the area under the curve for below-market options is only slightly greater than that for above-market options. This shows some risk aversion, but not considerably so. The Time Lapse Skew[Ii] shows a modest downside skew, but not one that shows major fear ahead of earnings. The implied volatility of about 42 for at money options implies a move of just over 2.5%, below the average 3.5% that Bloomberg data shows.

MSFT Skew, April 30th Expiry, Values for April 27th (dark green) and April 26th (light green)

(Click on image to enlarge)

Source: Interactive Brokers

The 6-month chart of GOOG is quite similar to that of MSFT, with a sharp rise in April:

GOOG 6 Month Chart, Daily Bars

(Click on image to enlarge)

Source: Interactive Brokers

Yet the Probability Lab shows greater risk aversion, with the most likely outcomes in the 2265 area, or about 2.5% below the current price. That is more in line with what one would normally expect for a company of this type and size. 

GOOG Probability Distribution Using April 30th Options on April 27th

(Click on image to enlarge)

Source: Interactive Brokers

The Time Lapse Skew, however, shows a rather unexpected result. Skews are actually higher to the upside, an inverted condition from what is normally found:

GOOG Skew, April 30th Expiry, Values for April 27th (dark red) and April 26th (light red)

(Click on image to enlarge)

Source: Interactive Brokers

The conclusion I draw for both MSFT and GOOG ahead of earnings is that options traders seem quite sanguine ahead of today’s results, which is surprising for stocks that have risen so sharply in the month leading up to their earnings releases. This tells me that while the most likely outcomes are for relative stasis around earnings, with a slight uptick for MSFT and a slight downtick for GOOG, traders would be quite unprepared if results fail to impress investors. As a contrarian, that makes me a bit wary about the options market’s message ahead of these important earnings releases.

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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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