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What the Options Market is Expecting for Apple and Amazon

What the Options Market is Expecting for Apple and Amazon

Posted October 27, 2022 at 12:20 pm
Steve Sosnick
Interactive Brokers

The pressure is on Apple (AAPL) and Amazon (AMZN) ahead of their earnings reports after today’s close.  They are the largest and fourth-largest companies in the US by market capitalization and have much to prove after the second and third-largest companies fell sharply yesterday after their own earnings releases.  Microsoft (MSFT), the current #2, fell by 7.7%, while Alphabet’s two share classes (GOOG, GOOGL) that combine to be #3, fell by over 9% each.  Add in the fact that Meta Platforms (META), which was once firmly in the top 10, is down over 20% – again! – after its latest earnings debacle, and it becomes clear how much is riding on these two market stalwarts.

Earlier this year we asserted that the distinction between growth and value shares was shrinking, and that we now all need to think like value investors.  META has taught us more than once about what happens when growth stocks shrink, and now MSFT and GOOG have taught us how painful it can be when investors retrench their expectations about the premia that they pay for growth that they hope is reliable. 

The earnings woes of MSFT and GOOG have certainly made traders warier about AAPL and AMZN.  They fell 2% and 4% respectively yesterday, and both are down over 2% as I write this.  We saw consumer facing businesses disappoint at both MSFT and GOOG, and the cloud computing business, which is key for AMZN, appears to be an expensive battle for market share among a group of well-capitalized, unyielding tech titans.  Furthermore, the options markets were relatively optimistic about MSFT and GOOG earnings, which of course proved to be incorrect.  Let’s see if the options market has changed its opinion ahead of tonight’s megacap releases.

Interestingly, the IBKR Probability Lab shows a peak in the $148-$150 range, about 2.5% above current levels.  Traders are taking a contrarian view, thinking that we might have already priced in whatever bad news is to come:

IBKR Probability Lab for AAPL Options Expiring October 28th, 2022

IBKR Probability Lab for AAPL Options Expiring October 28th, 2022

Source: Interactive Brokers

The high likelihood that the market puts on a post-earnings bounce for AAPL are reflected in the implied volatilities of above-market, near-term options.  That said, the at-money implied volatility of at-money options is a steep 110, implying a move of over 6%.  That compares to a long-term average of 4.46%, with the last four moves being 3.28%, -3.66%, 6.98% and -1.82%.  That isn’t much of a pattern.  The near-term skew is also quite steep.

Multi-Expiry Skew for AAPL, October 28th (top), November 4th (mid), November 18th (bottom)

Multi-Expiry Skew for AAPL, October 28th (top), November 4th (mid), November 18th (bottom)

Source: Interactive Brokers

What we wrote for the Probability Lab view of AAPL largely applies to AMZN.  The peak probability is about 2.5% above the current price, though there is a higher cumulative probability being placed upon a downward move.

IBKR Probability Lab for AMZN Options Expiring October 28th, 2022

IBKR Probability Lab for AMZN Options Expiring October 28th, 2022

Source: Interactive Brokers

The at-money volatility for AMZN options is an eye-watering 182.  That implies a reasonable potential for a move of over 10%.  This is not at all surprising when we recall that the last four post-earnings moves for AMZN have been 10,36%, -14.05%, 13.54% and -2.15%

Multi-Expiry Skew for AMZN, October 28th (top), November 4th (mid), November 18th (bottom)

Multi-Expiry Skew for AMZN, October 28th (top), November 4th (mid), November 18th (bottom)

Source: Interactive Brokers

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.

Disclosure: Probability Lab

The projections or other information generated by the Probability Lab tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Please note that results may vary with use of the tool over time.

Disclosure: Options Trading

Options involve risk and are not suitable for all investors. Multiple leg strategies, including spreads, will incur multiple commission charges. For more information read the "Characteristics and Risks of Standardized Options" also known as the options disclosure document (ODD) or visit ibkr.com/occ

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