Implied versus actual moves during earning announcements

Transcription

1 Implied versus actual moves during earning announcements Questions to answer with this study: 1. How have some of the most liquid stocks moved in price after their earning announcements? 2. By what avg. amount does the pre-announcement implied move over- or under-state the actual postannouncement move? 3. Should we buy or sell premium before earnings? 1 of 17

2 Upcoming earning announcements We took 50 highly liquid stocks (14 whose earnings are this week) and observed their pre-earnings implied move versus their actual post-earning move. This was done over 917 earnings announcements (going back to 2004). First, a definition of how we measure an actual move: 2 of 17

3 First, a defini7on of actual percentage change We measured the move as a percentage of stock price change preearnings closing price to the post-earnings closing price. 3 of 17

4 Implied versus actual moves during earning announcements In 768 out of 917 days, the actual postannouncement move is less than the implied expected move 83.7% of the time. The pre-announcement, implied expected stock movements averaged 8.1% (std. dev. 3%). The actual stock movements averaged an absolute 4.4% (std. dev. 2.4%), based on the pre- and post-announcement closing prices. 4 of 17

5 For example, implied versus actual moves for TSLA (Note: Earnings is July 31) In TSLA, for 10 of the past 14 earnings dates, the stock s actual postannouncement move was less than the pre-announcement implied price. 5 of 17

6 An updated clear interpreta.on to the table From the set of 917 observed earnings trades, 768 observations had an implied (i.e. expected) move greater than the actual move. From this set (of 768), the avg. actual move was much less at 3.2%; the avg. implied move was 8.2%. This was less than half the avg. implied move. Avg. pre-earnings implied move Avg. abs. post-earnings actual move When implied>actual 8.2% 3.2% When implied<actual 7.0% 10.2% 6 of 17

7 An updated clear interpreta.on to the table From the set of 917 observed earnings trades, 149 observations had an implied (i.e. expected) move less the eventual actual move. From this set (of 149), the avg. actual move was 10.2%; while the avg. implied move was 7%. This is much less of a error. Avg. pre-earnings implied move Avg. abs. post-earnings actual move When implied>actual 8.2% 3.2% When implied<actual 7.0% 10.2% 7 of 17

8 Implied or expected move is greater than actual move It is true that options may still have remaining days left until expiration, which results in implied greater than actual moves (i.e. the stock may eventually reach the implied price). However, the largest impact to the stock s price in the short-term is most likely eliminated after earnings announcements. 8 of 17

9 Note: 14 of the 50 stocks from our study have earnings this week Symbol Name Earning Date Pre- earnings implied IV Rank COH Coach 7/29/14 7% 75% YNDX Yandex N.V. 7/29/14 10% 67% INVN InvenSense 7/29/14 13% 64% NCR NCR Corp 7/29/14 9% 43% CBG CBRE Group 7/29/14 5% 42% GNC GNC Holdings 7/29/14 11% 39% IGT Interna7onal Gaming Tech. 7/29/14 3% 10% WFM Whole Foods 7/30/14 9% 94% CTRP Ctrip.com 7/30/14 11% 57% YELP Yelp 7/30/14 15% 46% HOLX Hologic 7/30/14 7% 11% DDD 3d Systems 7/31/14 12% 61% AVP Avon Products 7/31/14 11% 58% TSLA Telsa Motors 7/31/14 10% 30% 9 of 17

10 Addi.onal Slides Calculating implied or expected movements 10 of 17

11 Method #1 Use Dough! This new feature will be implemented tonight, July 29, See the next two pages for screenshots: 11 of 17

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14 Method #2 - - Calcula7ons of implied es7mated pre- earnings price movements We can get an estimated pre-earnings market move using the weekly options data. Steps: 1. Find the at the money straddle cost 2. Multiple the straddle cost times To find the percentage move, divide this by the stock price and then multiple times of 17

15 Method #2 Example Example: TWTR s stock is currently $ The 38.5/38.5 straddle is $ ( ) = 10.05% The expected % move is therefore 10.05% 15 of 17

16 Method #3 - - Calcula7ons of implied es7mated pre- earnings price movements We can get an estimated pre-earnings market move using the Market Maker Measure (MMM) in TOS Steps: 1. Find the MMM number. This is the expected stock move (either up or down). 2. Divide by the stock price 16 of 17

17 Method #3 Example Example: TWTR s stock is currently $ The MMM number is =10.61% The expected % move is therefore 10.6% 17 of 17

18 Method #3 Example DISCLAIMER: The purpose of this material is to demonstrate market trading techniques and strategies designed to give you the skills and confidence to manage your own investments. The risk of loss in trading securi7es, op7ons, futures and forex can be substan7al. You must consider all relevant risk factors, including your own personal financial situa7on, before trading. Op7ons involve risk and are not suitable for all investors. You are assuming the en7re risk of any and all trades placed in the stock market. Due to the 7me- cri7cal nature of trading, the varying fees charged by brokerages, and the ac7vity of other market par7cipants, tastytrade cannot guarantee that similar trades you place will mirror the exact performance of the tastytrade porgolio. tastytrade is not a licensed financial advisor, registered investment advisor, registered broker- dealer or FINRA SIPC NFA- member firm. tastytrade does not provide investment or financial advice or make investment recommenda7ons. tastytrade is not in the business of transac7ng trades, nor does tastytrade agree to direct your commodity accounts or give trading advice tailored to your par7cular situa7on. Nothing contained in tastytrade s porgolio demonstra7on cons7tutes a solicita7on, recommenda7on, promo7on, or endorsement of any par7cular security, other investment product, transac7on or investment. BY USING THE TASTYTRADE WEB SITE AND ACCESSING THE TASTYTRADE MATERIALS, YOU AGREE, AT ALL TIMES, TO INDEMNIFY, DEFEND, AND HOLD TASTYTRADE (INCLUDING ANY OF ITS AFFILIATES, OR ITS RESPECTIVE SUCCESSORS AND ASSIGNS, OR ANY OF ITS RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, REPRESENTATIVES, LICENSORS, OPERATIONAL SERVICE PROVIDERS, ADVERTISERS, OR SUPPLIERS) HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, ACTIONS, DEMANDS, SUITS, LOSSES AND COSTS (INCLUDING ATTORNEYS FEES) RESULTING FROM TRADES YOU PLACE IN THE MARKET. TASTYTRADE SHALL NOT BE LIABLE FOR ANY LOSS OR DAMAGE, OF ANY KIND, DIRECT OR INDIRECT, IN CONNECTION WITH OR ARISING FROM USE OF EDUCATIONAL SERVICES PROVIDED AS PART OF THIS PORTFOLIO DEMONSTRATION.