Earnings season is approaching! Amazon may become the focus of options investors

According to the Zhitong Finance APP, this week, several tech giants will announce their quarterly earnings reports, including Amazon (AMZN.US), Apple (AAPL.US), Meta (META.US), and Microsoft (MSFT.US). The market's focus is not only on the financial performance of these companies but also closely watching the stock price fluctuations after the earnings reports are released, especially in the options market.

On the eve of the earnings report, options traders typically significantly increase the trading prices of related call and put options for the company, reflecting their expectations of substantial stock price volatility. A commonly used reference indicator is the "straddle" price, which is the combined price of buying a call option and a put option with a strike price close to the current stock price, representing the market's prediction of potential volatility.

Taking Amazon as an example, the company will release its earnings report after the market closes on May 1. Assuming the stock price is around $185 on the eve of the earnings report, if the combined price of the call and put options expiring on May 2 with a strike price of $185 is $13, it means the market expects the stock price to potentially fluctuate by $13 after the earnings report, or about 7%. Looking back at the past 10 quarters, Amazon's stock price has fluctuated more than 7% after the earnings report 4 times, while it was below this level 6 times. Therefore, purchasing straddle options at the current price does not appear to be a guaranteed profitable trade based on historical probabilities.

However, if the straddle option price decreases in the next two days, for example, to 6.7% of the stock price, it would make it a more attractive speculative opportunity. After all, considering the current overall market sentiment is cautious, and other large tech stocks have also experienced significant post-earnings volatility in the past two quarters, Amazon's options offer a decent risk-reward ratio.

In contrast, the options prices for Apple and Microsoft seem less "favorable." Apple will release its earnings report after the market closes on May 1, and the at-the-money straddle price on that day is about 5.3% of the stock price, while in the past 10 quarters, only twice did the post-earnings volatility exceed this level; for Microsoft, the earnings report will be released after the market closes on April 30, with options prices around 5% of its stock price, but only 4 out of the past 10 times did the volatility reach or exceed 5%. Buying straddles at the current options prices does not have an advantage in most cases.

In contrast, Meta's situation is somewhat special. Its earnings report will also be released after the market closes on April 30, and the straddle option price on that day is about 8.3% of its stock price. From the performance of the past 10 earnings reports, there were 5 instances where the stock price volatility exceeded this level, with 3 instances even exceeding 20%; while the other 5 instances had volatility below 4.4%. In other words, Meta's stock price tends to either experience significant rises or falls after the earnings report or show little to no volatility, lacking intermediate movements.

Therefore, if investors believe that Meta will experience significant volatility, the current straddle price is not too expensive, but if its stock price continues the "silence" trend of the past few quarters, it may face a considerable risk of loss