An options strategy that bets on stocks logging larger-than-expected moves on corporate results has been a surprising winner this earnings season, data from options analytics service ORATS showed.
Buying options straddles on U.S. companies reporting results over the last three weeks – a strategy that combines a put and a call option – is paying off this quarter, ORATS data showed.
Calls convey the right to buy shares at a fixed price in the future and puts offer the right to sell shares. Owning both these contracts is a way for traders to profit from larger-than-expected post-earnings stock swings.
For the last three weeks, options straddles on U.S. companies reporting results fetched an average return of 8%, ORATS data showed. That compares with an average return of -2% over the last 12 quarters.
“It is not usual for straddles to pay off,” ORATS founder Matt Amberson said, noting that the strategy has tended to be a slight loser in recent quarters.
Generally poor expectations for stock gyrations at the start of earnings season – the Cboe Volatility Index hovered near a more than 3-year low as earnings kicked off – may have helped set up the trade favorably by making it cheaper for investors to bet on heightened stock moves.
With volatility expectations low, stocks handily topped options-implied moves as earnings season progressed.
That, however, may be changing, Amberson said.
As volatility has picked up, these bets have become more expensive, making it harder for the strategy to post a win.
Of the 422 companies in the S&P 500 that have reported earnings as of Aug. 4, 79.1% beat analysts’ expectations, the highest rate since the third quarter of 2021, I/B/E/S data from Refinitiv showed.
https://www.investing.com/news/stock-market-news/options-bets-on-earningsfueled-volatility-in-us-stocks-paying-off-3147235
