Tech Giants Face Volatility as Earnings Season Approaches

As the earnings season approaches, several tech giants, including amazon, apple, meta, and microsoft, are set to release their quarterly earnings reports. The market's focus is not only on the financial performance of these companies but also on the potential volatility in their stock prices, particularly in the options market.

Options traders typically increase the trading prices of both call and put options related to these companies in the lead-up to the release of financial reports. This reflects their expectations of significant stock price volatility. A commonly used reference indicator is the "straddle" price, which involves buying both a call and a put option with the same strike price and expiration date. This combined price represents the market's prediction of potential volatility.

Amazon, in particular, is expected to release its financial report on May 1st after the market closes. If the stock price is around $185 before the report, and the combined price of a call and put option with a strike price of $185 and an expiration date of May 2nd is $13, it suggests that the market expects the stock price to fluctuate by approximately 7% after the report. Historically, Amazon's stock price has fluctuated by more than 7% after the earnings report in four out of the past ten quarters, indicating that buying a straddle at the current price may not be a guaranteed profitable trade.

However, if the straddle price decreases in the next two days, for example, to 6.7% of the stock price, it could present a more attractive speculative opportunity. Given the current cautious market sentiment and the significant post-earnings volatility experienced by other large tech stocks in recent quarters, Amazon's options could offer a favorable risk-reward ratio.

In contrast, Apple and Microsoft's options prices appear less attractive. Apple is scheduled to release its earnings report on May 1st after the market closes, with its straddle price around 5.3% of the stock price. Historically, Apple's stock price has only exceeded this volatility level twice in the past ten quarters. Microsoft, releasing its report on April 30th after the market closes, has a straddle price of around 5% of its stock price, with only four out of the past ten quarters showing volatility at or above this level. Buying a straddle at the current prices for these companies may not offer a significant advantage in most scenarios.

Ask Aime: "Should I buy Amazon's straddle options before earnings?"

Meta's situation is somewhat unique. Its earnings report is also scheduled for April 30th after the market closes, with a straddle price of around 8.3% of its stock price. Historically, Meta's stock price has shown significant volatility after earnings reports, with five out of the past ten quarters experiencing fluctuations exceeding 8.3%, including three instances where the volatility was over 20%. Conversely, in the other five quarters, the volatility was less than 4.4%. This suggests that Meta's stock price tends to either experience dramatic movements or remain relatively stable, with few instances of moderate volatility.

Therefore, if investors anticipate significant volatility for Meta, the current straddle price may not be overly expensive. However, if Meta's stock price continues its recent trend of low volatility, there could be a substantial risk of loss. The upcoming earnings reports will be crucial for these tech giants as they navigate the balance between growth investments and profit margin control. The market will closely watch how these companies perform and whether their stock prices reflect the expected volatility.