Measuring the Options Implied Move For Earnings, Using YY Inc

• Posted by Greg Harmon
• on August 4th, 2014

Many of you see quick posts intraday where I or my partner Derald Muniz, or a host of others talk about what the options market is saying about a stock. One use for options outside of protecting capital and a position, is as a measure of what traders think may happen in a stock about to report earnings. It is straight forward and unbiased based upon the myriad of trades and pricing of the existing options contracts.

But to the uninitiated, anything around options can be scary. This is one place that absolutely should not be the case. Let me share an example.

YY Inc, is scheduled to report earnings after the close on Wednesday. One way to measure what traders think the movement in the stock will be is to look at the nearest expiry options contract. For YY that happens to be the ones expiring this Friday. I have captured some data from about 11 am on Monday to use as an example.

If you know how to read the data it gives a very simple way to see what traders are thinking in 2 quick steps. First, note which strike options are nearest to the current stock price. In this example with YY trading 79.73×79.86 the 80 Strike is the closest. The second step is to find the value of the Straddle at that Strike. A Straddle is just the combination of a Put and a Call at the same price. So for this example, the August 8, 2014 80 Strike Straddle is both an 80 Strike Call and an 80 Strike Put. With the call trading 3.10×3.50 and the Put at 3.20×4.20 you have to do a little averaging. If you pick the middle of both you get 3.30 on the Call and 3.70 on the Put. So the Straddle will cost $7.00. This is what the Options market sees as a move in the stock price by Expiration on Friday. It is not a perfect estimation of the implied move for the event itself as there is some time value but it is close enough to use for an approximation, and a pretty good one since the options only have a few days left to expiry. The one thing this estimate does not tell you is which direction the move will go. So for this example you can estimate a range of 72.73 to 86.86 in the stock price based on the price the stock was trading at the time.

Quick and Easy: Price the Straddle to approximate the move.

Get my book, Trading Options: Using Technical Analysis to Design Winning Options Trades.

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