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Volatility report - week 10 - earnings, expected moves and trade setups (NDX, CAC40, CRWD, MDB)

Volatility report - week 10 - earnings, expected moves and trade setups (NDX, CAC40, CRWD, MDB)

Options 10 minutes to read
Koen Hoorelbeke

Investment and Options Strategist

Résumé:  This week's volatility report outlines key trade setups for NDX, CAC40, CRWD, and MDB, 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 10 (Mar 04 - Mar 08, '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; NDX, CAC40, CRWD, MDB.

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.

Nasdaq 100 Index (NDX)

Based on the screenshot above, here are the trade setups for the Nasdaq 100 Index (NDX) for the week of March 4 to March 8, 2024:

  1. Bullish Trade Setup (Put Credit Spread):

    • Selling an 18140 put and buying an 18130 put, expiring on 08-Mar-2024.
    • Premium received: 780.00 USD.
    • Maximum profit: 780.00 USD, realized if NDX stays above 18140 at expiration.
    • Maximum risk: 220.00 USD (the difference between the strike prices minus the premium received).
    • Breakeven: 18131.20 (sold put strike minus premium received per share).
        

  2. Neutral Trade Setup (Short Iron Condor):

    • Selling an 18500 call and an 17920 put, and buying an 18510 call and a 17910 put, all expiring on 08-Mar-2024.
    • Net premium received: 200.00 USD.
    • Maximum profit: 200.00 USD, achieved if NDX closes between 18150 (call) and 17910 (put) at expiration.
    • Maximum risk: 800.00 USD (the difference between the strikes of the widest spread minus the net premium received).
    • Upper breakeven: 18502.00 (sold call strike plus net premium received per share).
    • Lower breakeven: 17918.00 (sold put strike minus net premium received per share).
         

  3. Bearish Trade Setup (Call Credit Spread):

    • Selling an 18400 call and buying an 18390 call, expiring on 08-Mar-2024.
    • Premium received: 250.00 USD.
    • Maximum profit: 250.00 USD, realized if NDX stays below 18400 at expiration.
    • Maximum risk: 750.00 USD (the difference between the strike prices minus the premium received).
    • Breakeven: 18402.50 (sold call strike plus premium received per share).

These trade setups provide a variety of strategies that align with different market outlooks on the NDX for the specified week. The bullish Put Credit Spread is for those expecting the market to remain stable or rise, the Short Iron Condor aims to profit from the index staying within a range, and the bearish Call Credit Spread is for those who anticipate a decline or wish to hedge against a potential downturn. Each strategy involves a different risk-reward profile and is designed to cater to specific market sentiments. It's important to manage these trades effectively, especially as expiration approaches, to mitigate risks and capture desired profits.

CAC 40 Index

Here are the trade setups for the CAC 40 index (CAC40) for the week of March 4 to March 8, 2024, based on the screenshot above:

  1. Bullish Trade Setup (Call Debit Spread):

    • Buying an 8000 call and selling an 8025 call, both expiring on 08-Mar-2024.
    • Debit paid: 77.00 EUR.
    • Maximum profit: 173.00 EUR, which is the difference between the strike prices minus the debit paid, realized if CAC40 exceeds the higher strike price at expiration.
    • Maximum risk: 77.00 EUR (the debit paid for the spread).
    • Breakeven: 8007.70 strike plus premium paid per share
         

  2. Neutral Trade Setup (Short Iron Condor):

    • Selling an 8000 call and an 7925 put, and buying an 8025 call and a 7900 put, all expiring on 08-Mar-2024.
    • Net premium received: 148.00 EUR.
    • Maximum profit: 148.00 EUR, achievable if CAC40 closes between the sold strikes of 8000 (call) and 7925 (put) at expiration.
    • Maximum risk: 102.00 EUR (the difference between the strikes of the bought options minus the net premium received).
    • Breakevens: upper: 8014.80 (8000+14.80), lower: 7910.20 (7925-14.80).
        

  3. Bearish Trade Setup (Put Debit Spread):

    • Buying a 7900 put and selling a 7875 put, expiring on 08-Mar-2024.
    • Debit paid: 51.00 EUR.
    • Maximum profit: 199.00 EUR, if CAC40 falls below the lower strike price by expiration.
    • Maximum risk: 51.00 EUR (the cost of the spread).
    • Breakeven: 7894.9 (7900 strike minus premium paid per share)

These trade setups for the CAC40 provide a range of strategies for different market outlooks for the specified week. The bullish Call Debit Spread is for an anticipated rise above a certain level, the Short Iron Condor for a range-bound scenario within specific strikes, and the bearish Put Debit Spread for a potential decline. The exact breakeven points would require more precise premium information. Each strategy offers a defined risk profile and should be managed according to the market's movement as expiration approaches.

CrowdStrike Holdings Inc. (CRWD)

Here are the trade setups for CrowdStrike Holdings Inc. (CRWD) based on the screenshot above, for the week of March 4 to March 8, 2024:

  1. Bullish Trade Setup (Put Credit Spread):

    • Selling a 290 put and buying a 285 put, both expiring on 08-Mar-2024.
    • Premium received: 180.00 USD.
    • Maximum profit: 180.00 USD, which is the premium received if CRWD stays above 290 at expiration.
    • Maximum risk: 320.00 USD (the difference between the strike prices minus the premium received).
    • Breakeven: 288.20 USD (sold put strike minus premium received).
         

  2. Neutral Trade Setup (Short Iron Condor):

    • Selling a 340 call and a 290 put, and buying a 345 call and a 285 put, all expiring on 08-Mar-2024.
    • Net premium received: 305.00 USD.
    • Maximum profit: 305.00 USD, achieved if CRWD closes between the short call and short put strikes at expiration.
    • Maximum risk: 195.00 USD (the difference between the strikes of the widest spread minus the net premium received).
    • Upper breakeven: 348.05 USD (short call strike plus net premium received).
    • Lower breakeven: 286.95 USD (short put strike minus net premium received).
          

  3. Bearish Trade Setup (Call Credit Spread):

    • Selling a 340 call and buying a 345 call, expiring on 08-Mar-2024.
    • Premium received: 125.00 USD.
    • Maximum profit: 125.00 USD, realized if CRWD stays below 340 at expiration.
    • Maximum risk: 375.00 USD (the difference between the strike prices minus the premium received).
    • Breakeven: 341.25 USD (sold call strike plus premium received).

   
  • The bullish Put Credit Spread is a play for those who believe the stock won't drop below a certain price.
  • The Short Iron Condor suits a prediction of CRWD trading within a specific range, capitalizing on premium decay.
  • The bearish Call Credit Spread is for traders expecting a downtrend or wanting to hedge against a potential drop.

MongoDB Inc. (MDB)

Here are the trade setups for MongoDB, Inc. (MDB) for the week of March 4 to March 8, 2024, according to the screenshot above:

  1. Bullish Trade Setup (Put Credit Spread):

    • Selling a 400 put and buying a 395 put, both expiring on 08-Mar-2024.
    • Premium received: 210.00 USD.
    • Maximum profit: 210.00 USD, which is the premium received if MDB stays above 400 at expiration.
    • Maximum risk: 290.00 USD (the difference between the strike prices minus the premium received).
    • Breakeven: 397.90 USD (sold put strike minus the premium received).
         

  2. Neutral Trade Setup (Short Iron Condor):

    • Selling a 485 call and a 400 put, and buying a 490 call and a 395 put, all expiring on 08-Mar-2024.
    • Net premium received: 380.00 USD.
    • Maximum profit: 380.00 USD, achieved if MDB closes between the short call and short put strikes at expiration.
    • Maximum risk: 120.00 USD (the difference between the strikes of the widest spread minus the net premium received).
    • Upper breakeven: 488.80 USD (short call strike plus net premium received).
    • Lower breakeven: 396.20 USD (short put strike minus net premium received).
         

  3. Bearish Trade Setup (Call Credit Spread):

    • Selling a 485 call and buying a 490 call, expiring on 08-Mar-2024.
    • Premium received: 170.00 USD.
    • Maximum profit: 170.00 USD, realized if MDB stays below 485 at expiration.
    • Maximum risk: 330.00 USD (the difference between the strike prices minus the premium received).
    • Breakeven: 486.70 USD (sold call strike plus premium received).
  • The bullish Put Credit Spread is designed for those anticipating the stock will not dip below a certain price level.
  • The Short Iron Condor is ideal if expecting MDB to trade within a specific price range, profiting from premium decay.
  • The bearish Call Credit Spread is suited for traders expecting a decline or for those implementing a hedge.
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 "What are your options" articles: 

Related articles:

Previous "Investing with options" articles: 

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