Implied moves for earnings explanation

I get quite a few questions around implied moves for earnings so figured I would try and put a quick explanation together. First, let me explain how I get the implied move. Then I will explain how I use it.

Here is an example of the implied moves I try and send out every week:

How I get the implied move:

I use the at-the-money, nearest dated straddle to determine the implied move.  For example, if a stock closed at $100 yesterday, I would add  the $100 weekly call and put together for next week, then divide by the share price to get the implied move. So if the call and put were $5 each, that would make the straddle $10. Dividing that number into the share price would give you a 10% implied move.

If the company reports  before Friday, this method does not take into account the rest of the week, but I am only concerned about the implied move into the event. And obviously the implied moves will fluctuate throughout the week into the event.

Determining the implied move of any stock using the option market is not an exact science and there are many other ways to do it including taking a 75% or so  of the  current weeks straddle, then taking  25% or so  of next months straddle which helps level out the volatility. Again, there is no definitive way to and it is not an exact science. Using the at-the-money straddle is what works best for how I trade.

How I use the implied move:

Hopefully now you can see the implied moves I send out are not my personal predictions on where a stock will trade after earnings, but from the option market itself. As with many things in the stock market, the option market pricing into binary events is not perfect which opens opportunities and is how I use the implied moves.

If I see a stock reporting that seems to have a lower implied move then normal or seems low, I will dig further to see if there is an opportunity to put a trade on into earnings. Maybe the stock has been oversold, or there is a nice chart setup. Maybe other companies in the sector have reported a strong quarter, or the stock has a high short interest,  along with many other possible factors. Once I see a stock meeting some of that criteria, I will check for a possible strike to trade into the report.

Take for example FSLR, which reports Thursday with an implied move of 7.4%. After the past 15 earnings reports  FSLR has closed only 4 times with a move less than 7.4%. Also looks like there is a potential bull-flag setting up on the daily chart. Lastly, the company sports a 14%+ short interest. This is one I am taking a look at this coming week for a potential trade into earnings.

Trading options into binary events like earnings is extremely risky. If your in calls and the stock drops, your position will be decimated. If your in calls and the stock is flat your position will take a hit. If your in calls and the stock is higher, it is possible your position could still be in the red if the move is not more than the implied move.  But if the stock soars past the implied move and you are holding out-of-the-money calls, you can be rewarded with a serious multi-bagger. The above i how I determine if the risk is worth the potential reward. Hope this helps.

If you have any questions or feedback on the above, feel free to comment below or you can send an email to optionmillionaires@gmail.com

-JB

 

 

JimmyBob (Scott)has been trading equities for over 15 years, a majority of which were OTC micro-cap stocks. He started trading high risk stock options over the past 7 years, and has proven winning trades in excess of 15,000%.

As one of the Co-Founders of optionmillionaires.com, Scott enjoys sharing his knowledge with other investors through timely blog posts, daily watch lists in the forum, weekly webinars, and helpful advice within the chatroom.

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One thought on “Implied moves for earnings explanation”

  1. Thanks for explaining how to calculate the implied move; armed with that information, what would be a suitable trade, given that the direction of the move is not known? In the example you cited above, with the stock at $100 and a 10% implied move, what would be a recommended trade?

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