Can the Options Market Help Guide You During Earnings Season?

I personally like to look at the options market (particularly open interest) to help me find ranges for pinning on expiration days.  Just like technical analysis nothing is guaranteed, but I find it to be useful as a tool to use in conjunction with other tools (especially for trading options through different strategies). I also like to look at the options market during earnings season being fully aware that any impactful news will trump anything the options market might be suggesting. Below are four stocks that reported last week (4/15/13 – 4/19/13) and what the options market looked like with regard to them. I went with two stocks that could have potentially given you useful information (GOOG & CMG) and two that did not (BAC & IBM) thereby leaving it up to you to decide if there is any relevance or if it is all just random. Following that I will be provide images for the open interest of high momentum stocks that are scheduled to report next week (4/22/13 – 4/26/13).

BAC
Bank of America (BAC) reported Wednesday morning (4/17). Here is what the open interest looked like Wednesday morning including Tuesday’s closing price (click to enlarge). The options market was pricing in a plus or minus move of $0.34 during Tuesday’s session.

From the image above it would seem that the most painful close for option buyers would have been around 12. After they reported the stock dropped to a low of $11.23 during Thursday’s session.

Below is a look at open interest on Friday morning and where the stock had closed after Thursday’s session.

You can see there was still over 100,000 12 strike puts in the money. Using solely this information, you would likely surmise that the stock would move up somewhat during Friday’s session as traders close out their in the money 12 strike puts and also to get it closer to the 12 strike where their is heavier interest.

BAC did in fact move up to to a high of $11.69 and close at $11.66. In my opinion this is not a great example of using the options market to predict Friday’s closing price because I would have expected a larger move toward 12.

GOOG
Google (GOOG) reported earnings on Thursday after the bell (4/18).  Below is what open interest looked like Thursday morning and where the stock closed after Thursday’s session before the report.  The options market was pricing in a plus or minus move of $35.75.

The range with the highest open interests is fairly large and closing anywhere between 760 and 850 would seem to inflict damage on pretty much all option buyers (especially when you consider the premium involved in buying calls or puts). However the most pain would be between 785 and 800.

Below is a look at what open interest looked like Friday morning (which took all of Thursday’s trading into account) and where the stock opened and closed on Friday.

I think everyone knows what happened on Friday. In this case, I think the options market did in fact add some important information. I don’t think you could have predicted the kind of run GOOG had; however, by knowing what the open interest looked like on Friday morning you could have at least put the risk/reward more in your favor. You may have concluded that if the stock would move too much further below where it opened it would begin to face buying pressure from the 4000 open calls at 760. The stock never actually got that far and only dropped to a low of 766.26 before making a run for first the 780’s in the morning and then 800 later in the afternoon. Knowing that the stock wasn’t going to face much constraint (just in terms of the options market) from 760’s to 800 may have given you some type of edge whether you were looking to close a position, anticipating a large move or selling options to collect premium.

IBM
International Business Machines Corp (IBM) also reported Thursday (4/18) after the bell. Below is what open interest looked like Thursday morning and where the stock closed after Thursday’s session before the report.  The options market was pricing in a plus or minus move of $7.90.

The range with the highest open interest was very tight, between 205 and 210 and a closing price between those would have been the most painful trade for buyers of calls and puts.

Below is a look at what open interest looked like Friday morning (which took all of Thursday’s trading into account) and where the stock opened and closed on Friday.

This is one of those situations in which the impact of the earnings release was completely trumped by anything the options open interest was suggesting. By looking at the approximately 55,000 puts that were going to open in the money and considering where the highest open interest strikes were, you may have surmised that it would aid the stock from falling considerably more. However, that is the opposite of what happened in IBM’s case and the stock closed at the lows of the day.

CMG
Chipotle Mexican Grill also reported Thursday (4/18) after the bell. Below is what open interest looked like Thursday morning and where the stock closed after Thursday’s session before the report.  The options market was pricing in a plus or minus move of $24.45.

The highest open interest on the put side was 315 and the highest on the calls side was 335. Using this information I felt would be less significant because the number itself of open options was smaller in comparison to some of the other more highly traded stocks. However, I think that if the news was fairly in line it could have been used to determine a loose range of where the price might stay within. You could also look at the image and speculate that if earnings were good, there really wasn’t much stopping it from going much higher.

Below is a look at what open interest looked like Friday morning (which took all of Thursday’s trading into account) and where the stock opened and closed on Friday.

As you can see from above, CMG opened above its highest call open interest and really never looked back. Could you have known the run it was going to make based on open interest. No way. However, knowing that there wasn’t much in the way of options holding it back and in conjunction with other tools (TA levels, how the stock usually performs after a beat, the short interest etc.) you could have at least put the odds more in your favor (whether that may be by trying to buy calls, avoiding buying puts looking for a gap fill, or by managing the current options you had open).

Next week
Now for next week. Below are images for what open interest looks like including Friday’s session for AAPL, AMZN, BIDU, and NFLX.  I will also tweet out before they report their updated open interest. Again, please note that if you find them useful they should be used in conjunction with other tools. As you were able to witness above, they are not predictors of where the stock will go, but rather information to take in to help put the risk/reward in your favor.

NFLX reports earnings after the close on Monday (4/22). The highest open interest on the put side is currently at 150 and 200 on the call side. The options market is currently pricing in a move of plus or minus $26.26.

AAPL reports earnings after the close on Tuesday (4/23). The highest open interest on the put side is currently at 385 and 450 on the call side. The options market is currently pricing in a move of plus or minus $25.55.

BIDU also reports earnings after the close on Tuesday (4/23). The highest open interest on the put and call side is currently at 90. The options market is currently pricing in a plus or minus move of $5.06.

AMZN reports earnings after the close on Wednesday (4/24). The highest open interest on the put side is currently at 250 and 295 on the call side. The options market is currently pricing in a plus or minus move of $18.11.

Good Luck next week.