There has been a lot of noise made over the possibility that earnings will decline rapidly this quarter. I reviewed 16 different large-cap company earnings coming up by using the tools in Volland (https://www.vol.land) and ORATS (https://orats.com/).
For the most part, earnings expectations are making a slight comeback this month. Most companies are not bouncing back to levels they were at before the Fed hawkish pivot, but are exceeding the earnings per share (EPS) they had in Q1.
Many companies, particularly tech, had many upside revisions to earnings expectations as the quarter advanced. Also, the volatility expected by earnings, bullish or bearish, is down across the board.
One odd thing is that selling calls has been the strategy taken to hedge almost all these earnings reports. Calls are being sold across the board, giving clear earnings price targets. Very few of these stocks have many puts being bought to hedge, which again leaves the door open for downside.
However, in the case where implied volatility (IV) will decline as event vol moves away, the more likely scenario is an advance to the target presented by the sold calls and then a retreat from that price (sometimes even before the market opens the next day). This happened last week with Tesla, Inc. TSLA and Netflix, Inc. NFLX, and today with General Motors Company GM. In all three of these cases, earnings have been remarkably positive, yet the price plummets after the initial surge. This reflects the customer "sold call" method of hedging as dealers need to sell deltas off their increasing long deltas.
If the earnings were encouraging and showed true growth for these companies, I would expect the earnings peaks to be revisited eventually. That is the typical pattern of dealer long OTM calls after positive events when there was no put buying as a hedge.
Disclaimer: This article is written by Ad Deum Funds, LLC, doing business as Wizard of Ops (“Wizard of Ops”). It is not intended as a source of specific investment advice. The information contained in this article has been carefully selected from sources believed to be reliable as of the time that it was published, but its completeness, accuracy, and usefulness is not guaranteed. Some of the advice and information in this article may be inconsistent or contrary to advice and information published at a prior or subsequent date. Investment contains substantial risks and past performance is not indicative of future performance. Nothing contained herein should be construed as an offer or the solicitation of an offer to buy or sell any stock, security, or other item mentioned in the article. Wizard of Ops bears no responsibility for any loss of principal, failure to obtain desired objectives, or any other outcome related to the advice contained herein. The article is provided “as is”, “where is”, “with all faults”, and “as available”. At any time, Wizard of Ops’ members, officers, directors, employees, contractors, and other representatives may own any stock, securities, or other items mentioned in the article. Wizard of Ops makes no warranty, representation, or guarantee regarding the information or material contained in the article. Under no circumstances shall Wizard of Ops be liable for any direct, indirect, incidental or any other type of damages resulting from any use of or downloading of the article.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.
