Let's Get Fiscal: What The Options Market Is Projecting For Apple Over Earnings...Forbes Magazine.
https://www.forbes.com/sites/brandonchapman/2018/04/30/lets-get-fiscal-what-the-options-market-is-projecting-for-apple-over-earnings/#fdacf8861817
After the market close on tomorrow, Apple Inc. is set to announce their Q2 earnings report. As of today, the average analyst earnings estimate for the quarter is $2.71 a share. It's not unusual to see a stock beat earnings and see the price decline or vice versa. For people that own the stock, the question isn't always whether the earnings announcement is positive or negative, but rather the market's reaction to the news. In other words, how much is Apple going to move?
One of the great features of options and how they are priced is that expected movement is reflected or "implied" in the price. Information related to the strike price, the stock price and the time to expiration are already given. Therefore, the amount of premium that is variable due to supply and demand is reflected in what's called implied volatility. The amount of movement and the probability of the move can be derived from the implied volatility and is useful when evaluating which option strategy to use or just providing a price forecast.
Most of the time, traders will look at the average level of implied volatility. However, the available information that can be derived is actually much deeper. With options, each strike price and expiration has it's own implied volatility. Looking at how volatility is distributed across strike prices and expirations is another indication of the potential direction of the move and degree of movement.
A great example of this is what happens to implied volatility right before earnings. For Apple, the weekly option set to expire this Friday has an average implied volatility of 53.91 percent compared to 39.52 percent for the May 11 expiration. When the near term expiration is higher than the longer dated expiration it is referred to as volatility skew. The degree of skewness provides a clue as to the expected movement for Apple's earnings tomorrow. This is a result of option buyers bidding up the price for this Friday's expiration relative to expirations with more time. Trading software packages, like thinkorswim, will run a calculation based on the degree of skew and the implied movement in the stock price. As of Monday, the thinkorswim software projected a $6.82 move by Friday's expiration. That means the options market is projecting Apple to move positively or negatively by 4.12 percent. Since the earnings report is tomorrow after the market close, the level of implied volatility would be expected to drop significantly on Wednesday. That means that virtually all of that movement would be expected to occur on Wednesday.
Now you have an idea what the options market is projecting, the next step is to decide your comfort level with that amount of movement and how you plan to trade it or protect yourself against it.
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