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Volatility report - week 08 - earnings, expected moves and trade setups (SMH, PANW, NVDA, SQ)

Volatility report - week 08 - earnings, expected moves and trade setups (SMH, PANW, NVDA, SQ)

Options 10 minutes to read
Koen Hoorelbeke

Investment and Options Strategist

Summary:  In our latest Volatility Report, we analyze the anticipated market fluctuations and assess implied volatilities for notable tech and semiconductor entities such as SMH, PANW, NVDA, and SQ. This edition highlights strategic trade setups tailored to various market sentiments. These setups serve as a blueprint for traders looking to navigate the week's market dynamics with calculated precision.

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 08 (Feb 19 - 23, '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; SMH, PANW, NVDA and SQ.

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.
  • Sector Highlights: Financial firms, including Morgan Stanley and Goldman Sachs, are poised to report, with anticipated modest price movements. In contrast, larger expected moves for tech companies like Microsoft and Netflix indicate market anticipation of their earnings results.
  • Strategic Considerations: For traders, higher expected moves in the tech sector suggest the potential for volatility strategies, while lower moves in financials may align with range-bound positions.
  • Upcoming Economic Data: Key releases (CPI, PPI, Initial Jobless Claims, ...) may introduce additional market volatility, reinforcing the value of expected move and IV in strategy development.
  • 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.

Market Vectors Semiconductor ETF (SMH)

  1. Bullish Trade Setup (Credit Put Spread):

    • Strategy: Sell a 195 put and buy a 190 put, expiring on 19-Apr-2024.
    • Credit Received: $157.00 USD.
    • Maximum Profit: $157.00 USD, achieved if SMH stays above $195 at expiration.
    • Maximum Risk: $343.00 USD, which is the difference between the strikes minus the credit received.
    • Breakeven: $193.43 (195 strike minus the credit received).

  2. Neutral Trade Setup (Iron Fly):

    • Strategy: Sell a 200 call and a 200 put, buy a 215 call and an 185 put, all expiring on 19-Apr-2024.
    • Premium Received: $1,115.00 USD.
    • Maximum Profit: $1,115.00 USD, achieved if SMH is exactly at $200 at expiration. However, the primary goal is to capture part of the theta decay over time rather than holding for maximum profit at expiration. A potential exit strategy could be to close the position for a 25% profit, which would be about $278.75 USD (one-fourth of the premium received).
    • Maximum Risk: $385.00 USD.
    • Upper Breakeven: $211.15 (200 strike plus premium received).
    • Lower Breakeven: $188.85 (200 strike minus premium received).

  3. Bearish Trade Setup (Credit Call Spread):

    • Strategy: Sell a 215 call and buy a 220 call, expiring on 19-Apr-2024.
    • Credit Received: $133.00 USD.
    • Maximum Profit: $133.00 USD, achieved if SMH stays below $215 at expiration.
    • Maximum Risk: $367.00 USD.
    • Breakeven: $216.33 (215 strike plus credit received).

Palo Alto Networks Inc. (PANW)

    1. Bullish Trade Setup (Credit Put Spread):

      • Selling a put option with a strike price of 340 and buying a put option with a strike price of 330, expiring on 15-Mar-2024.
      • Credit received: $285.00 USD.
      • Maximum profit: $285.00 USD, realized if PANW stays above $340 at expiration.
      • Maximum risk: $715.00 USD (difference between strikes minus credit received).
      • Breakeven: $337.15 (340 strike minus credit received).

    2. Neutral Trade Setup (Iron Condor):

      • Selling a call option with a strike price of 400 and selling a put option with a strike price of 340, while buying a call at 410 and a put at 330, all expiring on 15-Mar-2024.
      • Premium received: $520.00 USD.
      • Maximum profit: $520.00 USD, achievable if PANW trades between $400 and $340 at expiration.
      • Maximum risk: $480.00 USD (difference between the strikes of one of the spreads minus premium received).
      • Upper breakeven: $405.20 (400 strike plus credit received).
      • Lower breakeven: $334.80 (340 strike minus credit received).

    3. Bearish Trade Setup (Credit Call Spread):

      • Selling a call option with a strike price of 390 and buying a call option with a strike price of 400, both expiring on 15-Mar-2024.
      • Credit received: $285.00 USD.
      • Maximum profit: $285.00 USD, achieved if PANW remains below $390 at expiration.
      • Maximum risk: $715.00 USD (difference between strikes minus credit received).
      • Breakeven: $402.85 (400 strike plus credit received).

    These setups are created with different market sentiments in mind: bullish, neutral, and bearish. The breakeven points show where PANW's stock price needs to be at expiration for the trades to neither gain nor lose money, and the maximum risk represents the most that can be lost on the trade. The Iron Condor's profit is maximized if the underlying closes within the range of the sold strikes, while the credit spreads profit if the underlying stays on one side of the sold strike at expiration.

NVIDIA Corporation (NVDA)

  1. Bullish Trade Setup (Credit Put Spread):

    • Selling a put with a strike price of 695 and buying a put with a strike price of 690, expiring on 23-Feb-2024.
    • Credit received: $207.00 USD.
    • Maximum profit: $207.00 USD, achieved if NVDA is above $695 at expiration.
    • Maximum risk: $293.00 USD (difference between strikes minus credit received).
    • Breakeven: $692.93 (sold put strike minus credit received).

  2. Neutral Trade Setup (Iron Condor):

    • Selling a call with a strike price of 795 and selling a put with a strike price of 675, while buying a call at 800 and a put at 670, all expiring on 23-Feb-2024.
    • Premium received: $278.00 USD.
    • Maximum profit: $278.00 USD, achievable if NVDA remains between $795 (call) and $670 (put) at expiration.
    • Maximum risk: $222.00 USD (difference between the strikes of one of the spreads minus premium received).
    • Upper breakeven: $797.78 (795 strike plus credit received).
    • Lower breakeven: $673.22 (675 strike minus credit received).

  3. Bearish Trade Setup (Credit Call Spread):

    • Selling a call with a strike price of 770 and buying a call with a higher strike price of 775, expiring on 23-Feb-2024.
    • Credit received: $152.00 USD.
    • Maximum profit: $152.00 USD, realized if NVDA stays below $775 at expiration.
    • Maximum risk: $348.00 USD (difference between strikes minus credit received).
    • Breakeven: $771.52 (sold call strike plus credit received).

These trade setups represent strategies for different market views on NVDA: the bullish credit put spread assumes NVDA's price will not fall significantly, the neutral iron condor benefits from NVDA trading within a range, and the bearish credit call spread anticipates a cap on NVDA's upside potential. The maximum profit for the credit spreads is the premium received, while the maximum loss is the difference between the strike prices minus the premium. The breakeven points provide the price levels at which the options will not gain or lose money at expiration.


Block Inc. (SQ)

  1. Bullish Trade Setup (Credit Put Spread):

    • Selling a put with a strike price of 60 and buying a put with a strike price of 55, expiring on 15-Mar-2024.
    • Credit received: $141.00 USD.
    • Maximum profit: $141.00 USD, achievable if SQ stays above $60 by expiration.
    • Maximum risk: $359.00 USD (difference between strikes minus credit received).
    • Breakeven: $58.59 (sold put strike minus credit received).

  2. Neutral Trade Setup (Iron Condor):

    • Selling a call with a strike price of 75 and selling a put with a strike price of 60, while buying a call at 80 and a put at 55, all expiring on 15-Mar-2024.
    • Premium received: $229.00 USD.
    • Maximum profit: $229.00 USD, possible if SQ trades between the sold strikes of $80 (call) and $55 (put) at expiration.
    • Maximum risk: $271.00 USD (difference between the strikes of one of the spreads minus premium received).
    • Upper breakeven: $77.29 (75 strike plus credit received).
    • Lower breakeven: $57.71 (60 strike minus credit received).

  3. Bearish Trade Setup (Credit Call Spread):

    • Selling a call with a strike price of 70 and buying a call with a strike price of 75, expiring on 15-Mar-2024.
    • Credit received: $144.00 USD.
    • Maximum profit: $144.00 USD, realized if SQ remains below $70 at expiration.
    • Maximum risk: $356.00 USD (difference between strikes minus credit received).
    • Breakeven: $71.44 (sold call strike plus credit received).

These strategies are designed to cater to different market sentiments regarding SQ's future price action. The bullish credit put spread assumes the stock will not drop significantly, the neutral iron condor is suitable for a range-bound market, and the bearish credit call spread anticipates the stock's price capping. The breakeven points indicate the price at which the options will neither gain nor lose value at expiration, and the maximum risk represents the maximum potential loss for each setup.

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": 

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