What You Need to Know in Options this Week. Alibaba, Netflix, Wells Fargo, Bed Bath and Beyond, Aphria and more.

The Broader Markets

Last Week – The SPY closed last week at new highs, up more than 2.5% on the week, a move well beyond the 1.1% move options were pricing. Despite that outsized move, market implied volatility in options fell even lower. The VIX is now below 17 and at its lowest level in a year.

Expected Moves for the Week of April 12th:

  • SPY 1%
  • QQQ 1.6%
  • IWM 2.3%

SPY options are pricing a 1% move in either direction for the upcoming week. That corresponds to about $406 as a bearish consensus and $415 as a bullish consensus. A 1% expected move is down significantly from the 3% weekly expected moves from just a few months ago. Here’s this week’s expected move in SPY, highlighted on the chart (via Options AI):

From a trader’s perspective, hedges and outright directional positioning costs less than they have in more than a year. Actual moves in the market can quickly go beyond what options are pricing. Last week’s 2.7% move higher in the SPY is a prime example.

Short premium strategies, where an investor collects premium (income) from selling options, are also affected by lower volatility. It forces a choice between selling options that are closer to the current stock price (giving less room to be wrong) or continuing to sell further out the money options and receiving less premium (giving a lower risk / reward ratio).

On Friday we highlighted and compared two short premium strategies, the covered call and Iron Condor.

Although the current levels of implied volatility are the lowest in more than a year, they are not historically low. The VIX was 12 before the Covid sell-of in early 2020, it has spent the last few months compressing from the 30’s to where it is now.

In the News

Chinese stocks have been in the news the past few weeks, with VIPS and BIDU a part of both the Archegos story and the related potential of US de-listings. More recently, Alibaba (BABA) and the Chinese government reached a settlement on anti-trust accusations, the news was released late in the day Friday. As of Friday’s close, BABA options were pricing in about a 3.5% move for this week, and a nearly 8% move for the next month. That 3.5% expected move for this week corresponds to about $231 for a bullish consensus and roughly $215 for bearish:

Expected Moves for Companies Reporting Earnings

The lower levels of implied volatility in the broader market coincide with the beginning of earnings season. This week sees some of the large financial institutions like JP Morgan, Bank of America, Goldman Sachs and Wells Fargo. The latter part of the month features some of the largest tech names including Netflix, Apple, Tesla, Amazon and Facebook.

The Options AI Earnings Calendar is a free resource to keep up to date on upcoming earnings, how options are pricing potential moves, and how that compares to actual stock moves on prior earnings events. (links go to the stock’s expected move page):

APHA / Expected Move: 12% / Recent moves: +21%, -18%, -19%

FAST / Expected Move: 4% / Recent moves: -3%, -5%, 0%

JPM / Expected Move: 3% / Recent moves: -2%, -2%, +1%

WFC / Expected Move: 4% / Recent moves: -8%, -6%, -5%

GS / Expected Move: 3% / Recent moves: -2%, -0%, +1%

INFY / Expected Move: 5% / Recent moves: -1%, -7%, +3%

BBBY / Expected Move: 13% / Recent moves: -11%, +25%, -25%

TSM / Expected Move: 4% / Recent moves: +6%, -1%, +1%

UNH / Expected Move: 3% / Recent moves: 0%, -3%, -4%

BAC / Expected Move: 3% / Recent moves: -1%, -5%, -3%

C / Expected Move: 4% / Recent moves: -7%, -5%, -4%

SCHW / Expected Move: 3% / Recent moves: +1%, +5%, -2%

DAL / Expected Move: 4% / Recent moves: +3%, -3%, -3%

MS / Expected Move: 4% / Recent moves: 0%, +1%, +3%

Options AI puts the expected move at the heart of its chart-based platform and Learn / Options AI has a couple of free tools as well as education on expected moves and spread trading.

Here’s a peek ahead to next week and Netflix:

NFLX / Expected Move: 7% / Recent moves: +17%, -7%, -7%

Please note, any stocks and/or trading strategies referenced are for informational and educational purposes only and should in no way be construed as recommendations. The strategies depicted represent just a few of the many potential ways that options might be used to express any particular view. All prices are approximate at the time of writing. Option spreads involve additional risks that should be fully understood prior to investing.

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