What to Expect When You’re Expecting Tonight’s Megacap Earnings

This afternoon promises to be an exciting one.  Over 1/3 of the NASDAQ 100 Index (NDX) is expected to report earnings nearly simultaneously after today’s close.  The combination of Apple (AAPL), Amazon (AMZN), Alphabet (GOOG/GOOGL) and Facebook (FB) not only represent a significant minority of NDX, the also comprise over 15% of the index weight of the S&P 500 Index (SPX).  Because of their market heft, tonight’s earnings are not simply events that concern holders of those specific companies.  By necessity they concern markets as a whole.

The market environment makes these earnings releases particularly concerning.  Even before the broad selloffs that we saw on Monday and yesterday, large tech stocks have tended to fare poorly – even after releasing earnings that beat expectations.  Yes, there have been exceptions like Snap (SNAP) and Pinterest (PINS) which rallied sharply after positive surprises, but more typically we have seen reactions like that of Shopify (SHOP).  That stock, which is the largest component of Canada’s TSX 60 Index, beat its earnings expectations substantially this morning but is trading lower nonetheless.  Tesla (TSLA) traded only marginally higher after beating it’s number, while Netflix (NFLX) and Intel (INTC) were harshly punished.  Microsoft (MSFT) fell sharply yesterday as well after a positive surprise, but that may have been more about the broad selloff than anything company specific.

This morning we are seeing the “buy the dip” crowd active in this afternoon’s focus names.  That strategy has generally worked for aggressive traders in large tech companies, so it is not unreasonable to expect traders to try it once more.  As we did in prior articles, we will look beyond the current stock price moves to see what options markets are predicting for these companies.

All these stocks have weekly options that expire after the close tomorrow.  As a result, we have a very pure way of seeing what the market anticipates for tomorrow’s post-earnings move.  We will use the TWS’ Time Lapse Skew and Probability Lab functions to see the market’s predictions.  In all cases we see that implied volatilities have risen across the board over the past few days.  That is not at all surprising, since implied volatilities tend to rise as companies approach their earnings dates.  The magnitude is enhanced by the nervous market selloffs that have raised volatility measures like VIX and VXN this week.

For AAPL, we see a flattish skew with a slight depression in the 118 area.  That leads to a fairly symmetrical probability distribution centered around today’s trading price.

For AMZN, both the skew and the cumulative probability show the highest likelihood outcome is a dip to about 3100, erasing today’s gain but not much more.  This is a change, because AMZN had been showing a fairly sanguine view, as evidenced by the upward slope in the lowest line on the chart above

The probability graph for GOOG is rather unusual.  Markets are implying a that the stock could rise or fall about 2% as more likely than if it stayed unchanged.  In fact, there is about a $100 range of outcomes around the current price that appear to be likely.  This could be because Alphabet is notoriously close-mouthed about earnings guidance, meaning that there is even less consensus as usual around their quarterly results.

Finally, FB options appear to imply that the most likely outcome is for the stock to give back today’s 5% bounce.  Though the skew is roughly flattish, it is clearly sloped toward downside options.  It makes me wonder what today’s buyers see in the stock that the options market doesn’t.

Chart Sources: Trader Workstation