Volatility Limits Options Market Bets on Earnings-Driven Swings in US Stocks, According to Reuters

By Saqib Iqbal Ahmed

NEW YORK – An options strategy that bets on individual stocks experiencing larger-than-expected moves following corporate earnings reports had a successful run this season. However, recent volatility has disrupted its momentum.

This strategy involves purchasing options straddles, which consist of both put and call options for a particular stock ahead of its earnings announcement. Data indicated that this approach performed particularly well in the weeks leading up to this one, as post-earnings stock movements exceeded market expectations reflected in option pricing.

However, a surge in stock volatility this week led to increased option prices, complicating efforts for traders to secure profits. This situation is just one of several strategies—such as short volatility and dispersion trading—that thrived in more stable market conditions but faltered amidst recent economic uncertainties and the unwinding of yen-funded carry trades that impacted stock markets.

“The rule of thumb is that earnings straddles are more profitable when volatility is low," noted the founder of ORATS, Matt Amberson. "When macro events escalate, the earnings move tends to be less than what market straddles anticipate; this is a prime example of the current earnings season."

During the first week of earnings reports, stocks that posted results exhibited average price swings that were 21% greater than the implied movements from options, resulting in successful straddle trades 56% of the time.

In the following two weeks, the volatility continued, with stocks moving 62% and 33% more than the straddles had anticipated, yielding win rates of 62% and 58%, respectively.

This week, however, the stock movements for companies reporting earnings fell short, registering at only 86% of the expected volatility based on option pricing. This caused the win rate for the straddle strategy to dip to 50%, the lowest performance recorded during this earnings season, according to ORATS data as of Wednesday.