By Justin Kuepper Updated Apr 3, The famous physicist Niels Bohr once said that "prediction is very difficult, especially about the future.
- Email Email When a company releases earnings, they provide the most recent financial performance and also give a guidance for the next quarter's performance.
- The Best Option Play For Earnings - The Option Prophet
- Remote work on the Internet without investment
- If you trade options, know the impact that earnings can have on your position.
- Options Earnings | What Are Earnings? | tastytrade | a real financial network
Oftentimes, these tools are derivative financial instruments that can help provide an aggregate picture of future market sentiment - tools like options. Such predictions can be particularly useful for active traders during earnings season when stock prices are most volatile. During these times, many traders and investors use options to either place bullish bets that lever their positions or hedge their existing positions against potential downside.
In this article, we'll look at a simple three-step process for making effective earnings predictions using options. Step 1: Analyze the Chain for Opportunities The first step in analyzing options to make earnings predictions is to identify unusual activity and validate it using open interest and average volume data.
The goal in this step is to find some specific options that may be telling for the future and create an initial list of targets for further analysis. Finding these target options is a two-step process: Look for the Unusual: Look for call or put options with current volume that is in excess of the average daily trading volumeparticularly in near-term months. Compare Open Interest: Make sure that the current volume exceeds the prior day's open interest, which indicates that today's activity represents new positions.
In Practice: Baidu If we visit the Yahoo! Source: Created with Yahoo! Finance Options Tool.
The Best Option Play For Earnings
We could also look at the current day's volume and compare it to the average daily volume to draw similar conclusions, but open interest is generally considered to be the most important to watch. Step 2: Determine the Magnitude with Straddles The second step in analyzing options to make earnings predictions is to determine the magnitude of the anticipated move. Since most options earnings by options in value when volatility increases, implied volatility can tell us when the market is anticipating a big move to the upside or downside.
Luckily, straddles are designed to take advantage of implied volatility, so we can use them to calculate an exact magnitude. Straddles represent an options strategy that involves purchasing call and put options with the same strike price and expiration date.
Mutual Funds and Mutual Fund Investing - Fidelity Investments
By purchasing an at-the-money straddle, options traders are positioning themselves to profit from earnings by options increase in implied volatility.
Therefore, looking at the price of the at-the-money straddle can tell us the magnitude of this implied volatility.
While we only really have access to trading volume, we can use the bid and ask prices and trading data to make fairly accurate assumptions. Simply put, trades hitting the bid price are likely selling transactions, while those hitting the ask price are likely buying transactions.
Make your stock forecast
Traders and investors can also look at the option chain for various types of options strategies that are most likely to occur around earnings season.
For example, similar volumes in put and call options in the same price and expiration dates may signal a straddle bet on volatility, while call options being sold could indicate long-term investors hedging their positions by selling calls — a bearish indicator.
Traders and investors can find this information earnings by options looking at real-time trades through their brokerage platforms or by using one of many websites that provide real-time trading information - or by simply using delayed data from websites like Investopedia or Yahoo! Bottom Line While using options data to predict earnings moves may be part art and part science, many financial experts find it invaluable when predicting not only earnings moves, but also mergers and acquisitions and other anticipated price movements.
Determine the magnitude of the move higher by calculating the cost of an at-the-money straddle, which provides an idea of anticipated volatility.
Discover the direction of the trade by looking at the bid and ask prices, as well as analyzing the overall option chain to look for the potential types of trades being placed. As you put this technique to use, you'll find that the future becomes much easier to predict. Compare Accounts.