By Saqib Iqbal Ahmed
NEW YORK, Feb 12 (Reuters) – An options strategy that bets on stocks logging larger-than-expected moves on corporate results has performed unusually well this earnings season, data from options analytics service ORATS showed.
Buying options straddles on U.S. companies reporting results over the last four weeks – a strategy that combines the purchase of 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, without making a call on which way the stock will swing after results.
For the last four weeks, options straddles on U.S. companies reporting results fetched an average return of 45%, ORATS data showed. That is far in excess of the average return of 2% over the last 12 quarters.
“It has been a really good season for straddle owners,” ORATS founder Matt Amberson said.
“Earnings announcements are important again. Everyone wants to know how companies are faring in this economic environment and what sort of guidance companies expect,” he said.
“If the news is good, we see large up moves. If news is bad, stock prices are getting punished,” Amberson said.
Microsoft and Meta are two notable large-cap stocks that experienced significant earnings-driven price swings, with Microsoft shares dropping 10% and Meta shares surging about as much following their reports.
Generally poor expectations for stock gyrations at the start of earnings season – the Cboe Volatility Index hovered near multi-month lows at the start of the year – may have helped set up the trade favorably by making it cheaper for investors to bet on heightened stock moves.
Of the 353 companies in the S&P 500 that had reported earnings as of February 12, 75.4% beat analysts’ expectations, according to an analysis of I/B/E/S data by Tajinder Dhillon, head of earnings and equity research at LSEG Data & Analytics.
(Reporting by Saqib Iqbal Ahmed, Editing by William Maclean)
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