Investors are bracing for a pivotal week of corporate earnings, with a heavy focus on the technology sector as major companies including Advanced Micro Devices (AMD), Uber, and Palantir are set to report their latest quarterly results. The options market is signaling expectations for significant stock price volatility, providing a glimpse into market sentiment ahead of the announcements.
This week's reports follow a period of mixed results where several high-profile companies saw their shares move dramatically, sometimes far exceeding what options traders had priced in. The upcoming data will offer fresh insights into corporate health, consumer spending, and the broader economic landscape.
Key Takeaways
- Major technology and growth companies like AMD, Uber, Palantir, and Shopify are scheduled to release earnings reports this week.
- The options market is predicting potential double-digit percentage swings for several stocks, including Applovin (14.0%), Shopify (11.2%), and Arm Holdings (10.7%).
- These expected moves are derived from options pricing, which reflects market uncertainty ahead of earnings announcements.
- A review of last week's earnings shows that while many stocks stay within their predicted range, significant surprises can and do occur.
Market Braces for Volatility
The week is packed with highly anticipated financial disclosures from industry leaders. The action begins Monday with data analytics firm Palantir (PLTR), for which the options market is implying a potential stock move of 10.4% in either direction following its report.
Tuesday will be particularly busy. Semiconductor giant Advanced Micro Devices (AMD) is on the docket, with an expected move of 9.0%. Ride-hailing and delivery firm Uber (UBER) has a priced-in move of 7.4%, while e-commerce platform Shopify (SHOP) faces a higher implied volatility of 11.2%.
How Expected Moves Are Calculated
The "expected move" is a market-derived forecast of how much a stock's price might swing after an earnings report. It is calculated by analyzing the prices of at-the-money call and put options that expire shortly after the announcement. High demand for these options, driven by uncertainty, inflates their price and signals a wider potential range for the stock.
As the week progresses, other notable reports will capture investor attention. On Wednesday, chip designer Arm Holdings (ARM) is expected to see a 10.7% move, while mobile technology company Applovin (APP) has the highest implied volatility of the group at 14.0%. On Thursday, data platform DataDog (DDOG) is facing a potential swing of 9.6%.
Lessons from Last Week's Earnings
While implied volatility provides a useful gauge of market expectations, it is not a guarantee of future performance. An analysis of last week's earnings reports reveals a mixed bag of outcomes. Out of 29 major companies that reported, 19 of them, or approximately 65%, saw their stock prices stay within the range predicted by the options market.
However, the remaining 10 companies experienced moves that exceeded expectations, highlighting the inherent risks of earnings season.
Notable Earnings Surprises Last Week
- STX: Jumped 19.1%, far exceeding its expected move of 10.9%.
- CMG: Dropped 18.2%, more than double its predicted 8.8% swing.
- EBAY: Fell 15.9%, significantly outside its expected range of 6.7%.
- META: Declined 11.3%, surpassing the anticipated 7.1% move.
These examples serve as a reminder that while options data reflects collective market wisdom, unexpected information in an earnings report or forward guidance can lead to dramatic and unpredictable price action. Conversely, some stocks like PayPal (PYPL) and Alphabet (GOOGL) moved much less than anticipated, demonstrating that sometimes the buildup of uncertainty is greater than the actual event.
How Traders Approach Earnings Season
The period surrounding an earnings announcement is characterized by what traders call elevated "implied volatility." This is because the outcome of the report is unknown, and both speculators and hedgers drive up demand for options contracts to either bet on a direction or protect their existing positions.
Once the earnings information is released and the uncertainty dissipates, this implied volatility typically collapses rapidly.
Sophisticated traders use this dynamic to structure their positions. Common strategies include:
- Bull Put Spreads: A bullish strategy where a trader sells a put option and buys another at a lower strike price, betting the stock will stay above a certain level.
- Bear Call Spreads: A bearish strategy involving the sale of a call option and the purchase of another at a higher strike price, anticipating the stock will stay below a specific price.
- Iron Condors: A neutral, range-bound strategy that profits if a stock stays between two price points, effectively betting against a large move in either direction.
Financial professionals often advise using risk-defined strategies and maintaining small position sizes when trading around earnings events, as a larger-than-expected move can lead to significant losses. The goal is often to capitalize on the decay of volatility rather than guessing the stock's direction.
With another significant week of corporate news ahead, market participants will be watching closely to see if these tech giants can meet, beat, or miss Wall Street's expectations, and whether their stock movements will align with the volatility priced in by the options market.
