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Volatility report - week 12 - earnings, expected moves and trade setups (Nasdaq, Micron, Nike, FedEx)

Options 10 minutes to read
Koen Hoorelbeke

Investment and Options Strategist

Summary:  This week's volatility report outlines key trade setups for Nasdaq 100 Weekly's (NDXP), Micron (MU), Nike (NKE) and FedEx (FDX), targeting respective market movements. Amidst varying market conditions, we offer strategies ranging from bullish to bearish, emphasizing the critical nature of managing in-the-money options to avoid assignment risks as expiration nears.

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks.

Volatility report - week 12 (Mar 18 - Mar 22, '24)

Welcome to this week's Volatility Report, a guide for traders and investors seeking to navigate the dynamic world of stock market fluctuations. In this report, we list the expected movements and implied volatility rankings* of stocks with upcoming earnings announcements, as well as key indices and ETFs. In this edition we'll also have a look at some possible trade setups for a selection of ETF's and stocks in the list; Nasdaq 100 Weekly (NDXP), Micron (MU), Nike (NKE), FedEx (FDX).

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

Expected moves and volatility

Volatility and Expected Moves Analysis

Expected moves**, derived from at-the-money strike prices post-earnings**, indicate potential price volatility.

In the table above you'll find the following data:

  • Volatility Comparison: Implied volatility (IV) is currently contrasted against the 30-day historical figure to assess market expectations. A significant disparity often marks a prime scenario for premium selling.
  • IV Rank Insights: IV Rank situates the current IV within the past year's range. Values above 20% generally signal higher-than-average volatility, favoring premium selling, while lower values suggest caution for such strategies.
  • IV Rank 5D: IV Rank 5D situates the current IV within the past 5 day's range. Values of 100% indicate that the IV is at it's highest in the last 5 days. A higher value indicates the IV has been rising in the last few days, and might be worth considering to sell premium.
  • Highlighted Stocks:

    The list contains 4 highlighted stocks which each have 3 trade setup ideas (bullish, neutral, bearish). These ideas are listed below.

In this section of our volatility report, we're focusing on three credit and/or debit strategies that align with various market outlooks for our featured indices/etfs/stocks/.... For each underlying, we present a bullish, neutral, and bearish trade setup, designed to match your expectations for the underlying’s future price action.

Think of these strategies as starting points to shape your trading plans. Each setup is flexible – you can adjust the strike prices and the widths of the spreads (set by default at $5) to suit your trading needs. The credit spreads we've chosen are bold, with strike prices set near the current price of the stock to seek higher rewards at increased risk. Feel empowered to place these strikes further away or closer based on your own market analysis and confidence.

Remember, these setups are foundational guides. It’s essential to refine them to fit your individual trading style and outlook, ensuring they support your trading objectives and risk management preferences.

Nasdaq 100 Index Weekly's (NDXP)

Here are the trade setups for the Nasdaq 100 Index Weekly Options (NDXP) for the week of March 18 to March 22, 2024, based on the above screenshot:

Bullish Trade Setup (Put Credit Spread):

  • Selling a 17820 put and buying a 17810 put, both expiring on 22-Mar-2024.
  • Premium received: 330.00 USD.
  • Maximum profit: 330.00 USD, which is the premium received if NDXP stays above 17820 at expiration.
  • Maximum risk: 670.00 USD (the difference between the strike prices minus the premium received).
  • Breakeven: 17816.70 USD (sold put strike minus the premium received).

Neutral Trade Setup (Short Iron Condor):

  • Selling a 18400 call and a 17680 put, and buying a 18410 call and a 17670 put, all expiring on 22-Mar-2024.
  • Net premium received: 560.00 USD.
  • Maximum profit: 560.00 USD, achieved if NDXP closes between the short call and short put strikes at expiration.
  • Maximum risk: 440.00 USD (the difference between the strikes of the widest spread minus the net premium received).
  • Upper breakeven: 18405.60 USD (short call strike plus net premium received).
  • Lower breakeven: 17674.40 USD (short put strike minus net premium received).

Bearish Trade Setup (Call Credit Spread):

  • Selling a 18280 call and buying a 18290 call, expiring on 22-Mar-2024.
  • Premium received: 320.00 USD.
  • Maximum profit: 320.00 USD, realized if NDXP stays below 18280 at expiration.
  • Maximum risk: 680.00 USD (the difference between the strike prices minus the premium received).
  • Breakeven: 18283.20 USD (sold call strike plus premium received).

For NDXP:

  • The bullish Put Credit Spread is suited for those who are bullish on the index and believe it will stay above the sold put strike.
  • The Short Iron Condor is designed for a market view where the index is expected to stay within a defined range, profiting from time decay if the index remains between the short strikes at expiration.
  • The bearish Call Credit Spread is for a bearish outlook, with the expectation that the index will not surpass the higher strike price of the sold call.

As always with options, it's essential to manage these positions actively, especially as they approach expiration, to mitigate risks such as assignment and to adapt the strategy in response to any significant market moves.

Micron Technology Inc. (MU)

Here are the trade setups for Micron Technology Inc. (MU) for the week of March 18 to March 22, 2024, based on the screenshot above:

Bullish Trade Setup (Put Credit Spread):

  • Selling an 88 put and buying an 83 put, both expiring on 22-Mar-2024.
  • Premium received: 139.00 USD.
  • Maximum profit: 139.00 USD, which is the premium received if MU stays above 88 at expiration.
  • Maximum risk: 361.00 USD (the difference between the strike prices minus the premium received).
  • Breakeven: 86.61 USD (sold put strike minus the premium received).

Neutral Trade Setup (Short Iron Condor):

  • Selling a 107 call and an 86 put, and buying a 112 call and an 81 put, all expiring on 22-Mar-2024.
  • Net premium received: 160.00 USD.
  • Maximum profit: 160.00 USD, achieved if MU closes between the short call and short put strikes at expiration.
  • Maximum risk: 340.00 USD (the difference between the strikes of the widest spread minus the net premium received).
  • Upper breakeven: 108.60 USD (short call strike plus net premium received).
  • Lower breakeven: 84.40 USD (short put strike minus net premium received).

Bearish Trade Setup (Call Credit Spread):

  • Selling a 102 call and buying a 107 call, expiring on 22-Mar-2024.
  • Premium received: 95.00 USD.
  • Maximum profit: 95.00 USD, realized if MU stays below 104 at expiration.
  • Maximum risk: 405.00 USD (the difference between the strike prices minus the premium received).
  • Breakeven: 102.95 USD (sold call strike plus premium received).

For Micron Technology Inc:

  • The bullish Put Credit Spread is for traders who believe that MU will not fall below the sold put strike price by expiration.
  • The Neutral Short Iron Condor aims to capitalize on range-bound trading and time decay, with maximum profit occurring if MU finishes within the sold strikes.
  • The bearish Call Credit Spread is suitable for those expecting a downtrend, or to use as a hedge, with profits as long as MU remains below the sold call strike.

These strategies involve different risk profiles and should be entered with a clear understanding of potential outcomes, including the obligation to buy or sell if a short option is assigned. Close monitoring and management of these positions are crucial, especially as the expiration date approaches.

Nike Inc. (NKE)

Here are the trade setups for Nike Inc. (NKE) for the week of March 18 to March 22, 2024, based on the above screenshot:

Bullish Trade Setup (Put Credit Spread):

  • Selling a 95 put and buying a 91 put, both expiring on 22-Mar-2024.
  • Premium received: 102.00 USD.
  • Maximum profit: 102.00 USD, which is the premium received if NKE stays above 95 at expiration.
  • Maximum risk: 298.00 USD (the difference between the strike prices minus the premium received).
  • Breakeven: 93.98 USD (sold put strike minus the premium received).

Neutral Trade Setup (Short Iron Condor):

  • Selling a 107 call and a 93 put, and buying a 112 call and a 88 put, all expiring on 22-Mar-2024.
  • Net premium received: 150.00 USD.
  • Maximum profit: 150.00 USD, achieved if NKE closes between the short call and short put strikes at expiration.
  • Maximum risk: 350.00 USD (the difference between the strikes of the widest spread minus the net premium received).
  • Upper breakeven: 108.50 USD (short call strike plus net premium received).
  • Lower breakeven: 91.50 USD (short put strike minus net premium received).

Bearish Trade Setup (Call Credit Spread):

  • Selling a 103 call and buying a 108 call, expiring on 22-Mar-2024.
  • Premium received: 125.00 USD.
  • Maximum profit: 125.00 USD, realized if NKE stays below 108 at expiration.
  • Maximum risk: 375.00 USD (the difference between the strike prices minus the premium received).
  • Breakeven: 104.25 USD (sold call strike plus premium received).

For Nike Inc.:

  • The bullish Put Credit Spread is designed for those who are bullish on NKE, expecting the stock will remain above the sold put strike price.
  • The Neutral Short Iron Condor is suitable for a market outlook expecting NKE to trade within a certain range, benefiting from time decay and reduced volatility.
  • The bearish Call Credit Spread is for those with a bearish outlook on NKE, aiming for profits as long as the stock price stays below the sold call strike.

Each strategy aligns with a particular market view and carries its own risks and rewards. These option spreads involve multiple legs with differing strike prices and can be complex. They are designed to capitalize on specific market conditions and should be managed proactively, especially as the expiration date approaches, to mitigate risks such as assignment or significant losses due to adverse price movements in the underlying stock. It's crucial to closely monitor the market and adjust the positions if the anticipated scenario does not unfold as expected.

FedEx Corp. (FDX)

Here are the trade setups for FedEx Corp. (FDX) for the week of March 18 to March 22, 2024, based on the above screenshot:

Bullish Trade Setup (Put Credit Spread):

  • Selling a 245 put and buying a 240 put, both expiring on 22-Mar-2024.
  • Premium received: 144.00 USD.
  • Maximum profit: 144.00 USD, which is the premium received if FDX stays above 245 at expiration.
  • Maximum risk: 356.00 USD (the difference between the strike prices minus the premium received).
  • Breakeven: 243.56 USD (sold put strike minus the premium received).

Neutral Trade Setup (Short Iron Condor):

  • Selling a 272.5 call and a 235 put, and buying a 277.5 call and a 232.5 put, all expiring on 22-Mar-2024.
  • Net premium received: 163.00 USD.
  • Maximum profit: 163.00 USD, achieved if FDX closes between the short call and short put strikes at expiration.
  • Maximum risk: 337.00 USD (the difference between the strikes of the widest spread minus the net premium received).
  • Upper breakeven: 274.13 USD (short call strike plus net premium received).
  • Lower breakeven: 235.87 USD (short put strike minus net premium received).

Bearish Trade Setup (Call Credit Spread):

  • Selling a 265 call and buying a 270 call, expiring on 22-Mar-2024.
  • Premium received: 123.00 USD.
  • Maximum profit: 123.00 USD, realized if FDX stays below 265 at expiration.
  • Maximum risk: 377.00 USD (the difference between the strike prices minus the premium received).
  • Breakeven: 266.23 USD (sold call strike plus premium received).

For FedEx:

  • The bullish Put Credit Spread is for those who are optimistic about FDX, expecting the stock will not fall below the strike of the sold put.
  • The Neutral Short Iron Condor is for traders predicting that FDX will trade within a specified price range, benefiting from theta decay.
  • The bearish Call Credit Spread assumes a more pessimistic outlook on FDX, aiming for profitability provided the stock does not rise above the sold call strike price.

As always with options trading, it's essential to monitor these positions closely due to the potential for assignment risk, particularly as the options approach expiration. It’s advisable to have a management plan in place for different market scenarios.

Note about spread management: as we present our trade setups, it's crucial to address the management of spreads that approach expiration in the money. Whether your position is fully or partially in the money, standard practice recommends closing the trade before expiration. This action is taken to prevent the risk of assignment, which can lead to unintended stock positions and additional capital requirements. Proactive closure of these positions, especially in the final day leading to expiry, allows for better control over the outcome and helps avoid the complexities and potential costs associated with exercise and assignment.
 

* Understanding these metrics is important for anyone involved in volatility-based trading strategies. The 'Expected Move' is an invaluable tool that provides a forecast of how much a stock's price might swing, positively or negatively, around its earnings announcement. This insight is essential for options traders, allowing them to gauge the potential risk and reward of their positions. Read more about it here: Understanding and calculating the expected move of a stock etf index

Moreover, the 'Implied Volatility Rank' (IVR) offers a snapshot of current volatility expectations in comparison to historical volatility over the last year. This ranking helps in identifying whether the market's current expectations are unusually high or low.

In addition to the Expected Move and Implied Volatility Rank, it’s also crucial to understand the concepts of ‘Implied Volatility’ and ‘Historical Volatility’. Implied Volatility (IV) is a measure of the market’s expectation of future volatility, derived from the prices of options on the stock. On the other hand, Historical Volatility (HV) measures the actual volatility of the stock in the past.

The relationship between these two types of volatility can serve as a valuable indicator for options traders. When IV is significantly higher than HV, it suggests that the market is expecting a larger price swing in the future, which could make options more expensive. Conversely, when IV is lower than HV, it could indicate that options are relatively cheap. Some traders use this IV-to-HV ratio as a signal for when to buy or sell options premium, adding another layer of sophistication to their trading strategies.

** A crucial application of the expected move in options trading is evident in strategies such as iron condors and strangles, particularly when these are implemented through short selling. In these strategies, the expected move serves as a pivotal benchmark for setting the boundaries of the trade. For instance, in the case of a short iron condor, traders typically position the short legs of the condor just outside the expected move range. This strategic placement enhances the probability of the stock price remaining within the range, thereby increasing the chances of the trade's success. Similarly, when setting up a short strangle, traders often choose strike prices that lie beyond the expected move. This ensures that the stock has to make a significantly larger move than the market anticipates to challenge the position, thus leveraging the expected move to mitigate risk and optimize the success rate. Utilizing the expected move in this manner allows traders to align their strategies with market expectations, fine-tuning their approach to volatility and price movements.

In this report, the calculation of the expected move for each stock and index is based on a refined approach, building upon the concepts outlined in our previous article. Traditionally, the expected move can be estimated by calculating the price of an at-the-money (ATM) straddle for the expiration date immediately following the event of interest. However, in this analysis, we've adopted a variation to enhance the accuracy of our predictions.

Our method involves a blend of 60% of the price of the ATM straddle and 40% of the price of a strangle that is one strike away from the ATM position. This hybrid approach allows us to closely mirror the expected move as indicated by the implied volatility (IV), offering a more nuanced and precise estimation. By utilizing this simplified yet effective method, we are able to provide an expected move calculation that not only resonates with the underlying market sentiments but also equips traders with a practical tool for their volatility-based strategies.

For continuous insights and updates on market/options strategies, interact with me/follow my social media account on Threads.

Previous "Volatility reports": 

Previous episodes of the "Saxo Options Talk" podcast

Previous "Investing with options" articles: 

Previous "What are your options" articles: 

Related articles:

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.

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