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Volatility report - week 09 - earnings, expected moves and trade setups (CAC40, CRM, SNOW, CELH)

Volatility report - week 09 - earnings, expected moves and trade setups (CAC40, CRM, SNOW, CELH)

Options 10 minutes to read
Koen Hoorelbeke

Investment and Options Strategist

Summary:  This week's volatility report outlines key trade setups for CAC40, CRM, SNOW, and CELH, 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 09 (Feb 26 - Mar 01, '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; CAC40, CRM, SNOW and CELH.

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.
  • 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.

CAC 40 Index

  1. Bullish Trade Setup (Debit Call Spread):

    • Strategy: Sell a 8150 call and buy a 7950 put, expiring on 1-Mar-2024.
    • Credit Paid: €343.00.
    • Maximum Profit: €1,657.-, achieved if the CAC40 expires above €8150.
    • Maximum Risk: €343.00, which is the premium paid to open the position.
    • Breakeven: €7,984.30 (7950 strike plus the price of 1 option).

  2. Neutral Trade Setup (Iron Condor):

    • Selling an 8000 call and a 7950 put, and buying an 8100 call and a 7850 put, all expiring on 01-Mar-2024.
    • Net Credit Received: 34.80 EUR (the amount collected from selling the spread).
    • Maximum Profit: 34.80 EUR (net credit received which is the profit if CAC 40 settles between the call and put sold strikes at expiration).
    • Maximum Risk: €652.00: Limited to the difference between the width of the wings (€100 * 10) minus the net credit received (€348.00).
    • Upper Breakeven: 8000 + 34.80 = 8034.80 EUR (sold call strike plus net credit received per option).
    • Lower Breakeven: 7950 - 34.80 = 7915.20 EUR (sold put strike minus net credit received per option).

  3. Bearish Trade Setup (Debit Put Spread):

    • Buying a 7950 put and selling a 7750 put, expiring on 01-Mar-2024.
    • Debit Paid: 27.40 EUR 
    • Maximum Profit: 1,726.00: Limited to the difference between the width of the wings (€200 * 10) minus the debit paid (€274) if CAC 40 falls below the lower strike price at expiration.
    • Maximum Risk: 274.00 EUR (the cost of the spread).
    • Breakeven: 7950 - 27.40 = 7922.60 EUR (higher strike minus debit paid per option).

Salesforce.com Inc. (CRM)

  1. Bullish Trade Setup (Credit Put Spread):

    • Selling a put with a strike price of 285 and buying a put with a strike price of 280, expiring on 01-Mar-2024.
    • Premium received: $155.00 USD.
    • Maximum profit: $155.00 USD, realized if CRM stays above $285 at expiration.
    • Maximum risk: $345.00 USD (difference between strikes minus premium received).
    • Breakeven: $283.45 (sold put strike minus premium received per share).

  2. Neutral Trade Setup (Iron Condor):

    • Buying a call with a strike price of 325 and selling a call with a strike price of 320, while selling a put at 280 and buying a put at 275, all expiring on 01-Mar-2024.
    • Net premium received: $222.00 USD.
    • Maximum profit: $222.00 USD, achievable if CRM closes between the sold strikes of $320 (call) and $280 (put) at expiration.
    • Maximum risk: $278.00 USD (the difference between the strikes of the widest spread minus the net premium received).
    • Upper breakeven: $322.22 (sold call strike plus net premium received per share).
    • Lower breakeven: $277.78 (sold put strike minus net premium received per share).

  3. Bearish Trade Setup (Credit Call Spread):

    • Buying a call with a strike price of 320 and selling a call with a strike price of 315, expiring on 01-Mar-2024.
    • Net premium received: $120.00 USD.
    • Maximum profit: $120.00 USD: Credit received.
    • Maximum risk: $380.00 USD (width of the largest spread, $500 minus the credit received, $120).
    • Breakeven: $316.20 (sold strike, $315, plus credit received per share, $1.20).

The provided trade setups offer options for traders based on their market view: bullish, neutral, and bearish. The credit spread generates immediate income with defined risk and profit, the iron condor looks to benefit from CRM trading within a specific range at expiration, and the bearish put spread positions for downside movement with limited risk. It's important for traders to actively manage these positions, particularly as expiration nears, to mitigate assignment risks and secure profits.

Snowflake Inc. (SNOW)

  1. Bullish Trade Setup (Credit Put Spread):

    • Selling a put with a strike price of 220 and buying a put with a strike price of 215, expiring on 01-Mar-2024.
    • Premium received: 180.00 USD.
    • Maximum profit: 180.00 USD, which is the credit received and realized if SNOW stays above $220 at expiration.
    • Maximum risk: 320.00 USD (difference between strikes minus credit received).
    • Breakeven: $218.20 (sold put strike minus premium received per share).

  2. Neutral Trade Setup (Iron Condor):

    • Selling a call with a strike price of 260 and selling a put with a strike price of 210, while buying a call at 265 and buying a put at 205, all expiring on 01-Mar-2024.
    • Net premium received: 190.00 USD.
    • Maximum profit: 190.00 USD, achieved if SNOW trades between $260 (call) and $210 (put) at expiration.
    • Maximum risk: 310.00 USD (the difference between the strikes of the widest spread minus the net premium received).
    • Upper breakeven: $261.90 (260 strike plus net premium received per share).
    • Lower breakeven: $208.10 (210 strike minus net premium received per share).

  3. Bearish Trade Setup (Debit Put Spread):

    • Buying a put with a strike price of 220 and selling a put with a strike price of 215, expiring on 01-Mar-2024.
    • Debit paid: 175.00 USD.
    • Maximum profit: Limited and realized if SNOW drops below $215 by expiration.
    • Maximum risk: 175.00 USD (the cost of the spread).
    • Breakeven: $218.25 (higher put strike minus debit paid per share).

In these trade setups for SNOW:

  • The bullish Credit Put Spread offers a strategy for those who believe the stock will not fall below a certain price.
  • The Iron Condor is suitable for a market view where the stock price is expected to remain within a specific range, profiting from the premium decay while the stock stays between the short strikes.
  • The bearish Debit Put Spread aligns with an outlook that expects a decline in the stock's price, offering a defined risk and potential reward.

These setups provide options for traders with different market sentiments, giving them strategies to capitalize on Snowflake Inc.'s stock movement leading up to the expiration date. As always, it's essential for traders to manage their positions actively, especially when dealing with spreads that may end in the money, to avoid the risks associated with assignment and ensure control over the trade's outcome.

Celsius Holdings Inc. (CELH)

  1. Bullish Trade Setup (Long Call Spread):

    • Buying a call with a strike price of 69 and selling a call with a strike price of 74, both expiring on 01-Mar-2024.
    • Debit paid: 150.00 USD.
    • Maximum profit: 350.00 USD, achieved if CELH is at or above $74 at expiration.
    • Maximum risk: 150.00 USD (the debit paid for the spread).
    • Breakeven: $70.50 (lower strike plus premium paid per share).

  2. Neutral Trade Setup (Iron Condor):

    • Selling a call with a strike price of 74 and selling a put with a strike price of 60, while buying a call at 79 and buying a put at 55, all expiring on 01-Mar-2024.
    • Net premium received: 180.00 USD.
    • Maximum profit: 180.00 USD, realized if CELH trades between the call and put sold strikes ($74 and $60) at expiration.
    • Maximum risk: 320.00 USD (difference between the strikes of the widest spread minus the net premium received).
    • Upper breakeven: $75.80 (sold call strike plus net premium received per share).
    • Lower breakeven: $58.20 (sold put strike minus net premium received per share).

  3. Bearish Trade Setup (Long Put Spread):

    • Buying a put with a strike price of 65 and selling a put with a strike price of 60, expiring on 01-Mar-2024.
    • Debit paid: 195.00 USD.
    • Maximum profit: 305.00 USD, if CELH drops below $60 by expiration.
    • Maximum risk: 195.00 USD (the cost of the spread).
    • Breakeven: $63.05 (higher put strike minus debit paid per share).

For these setups:

  • The Long Call and Put Spreads are directional trades banking on CELH's price movement.
  • The Iron Condor is a volatility play, profiting if CELH remains within a specific range at expiration.
  • The breakevens for the debit spreads are calculated by adjusting the long strike price by the cost of the spread, while for the Iron Condor, they are adjusted by the net credit received.
  • Managing these trades is crucial, especially for spreads nearing expiration in the money, to avoid potential assignment risks.
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 "What are your options" articles: 

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Previous "Investing with options" articles: 

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