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Impressions from freshly listed options
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Traders,
Earnings season is winding down with many of the heavy hitters already having stepped up to the plate. While few scored massive gains in their share prices, even fewer suffered outsized losses. The stock market remains steady near record highs suggesting that the numbers were good enough to keep buyers’ conviction red-hot.
If there’s one theme that persisted through earnings season, it’s that volatility was subdued. The options market reveals ahead of time what the expected post-earnings gap size will be. The so-called Market Maker Move or MMM can be found in the Trade tab in ThinkorSwim. Rather than flying blind into these quarterly events, you can use MMM to build your own expectations for how much movement traders are pricing in.
Based on options pricing theory, the MMM represents a one-standard deviation move. In other words, there’s a roughly 68.2% chance that the stock will move less than the expected move. This also implies there’s a 31.8% chance the stock will move more than the MMM.
I don’t have the data in front of me, but if we were to analyze every stock’s earnings response this quarter, I suspect the percentage of gaps that fell within the MMM was well above 68.2%.
That’s what I mean when I say the volatility throughout earnings season was subdued. The implication, then, is that options sellers did very well. Anyone who shorted premium into the events via strategies like naked puts, credit spreads, and condors likely departed with fatter pockets than when they first arrived.
#TeamTackle
Chart of the Day
Activision (ATVI) Market-Maker-Move
The day before earnings, Activision showed a Market Maker Move of +/- $4.14. Given its share price of $91.15, this translates into a move of 4.5%. By the time this message is published the stock will have reported earnings. Analyze the gap based on the open on May 5th. Did it gap more than 4.5%? If it follows the path of most companies this earnings season, it probably didn’t.
Video of the day
The Queen’s Court
Traders Lounge 11 AM EST
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Trading Lounge at Night 8:30 PM EST
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Halftime Report 12:30 PM EST
The Halftime Report starts at 12:30 EST and covers what news is driving the market, chart analysis from the movers and shakers of the day and fun in a way that only Matt and Tim can deliver.
Trade Masters 7:00 pm EST
Join us for a special webinar with the coaches where they’ll analyze some trade setups.
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