What the Options Market is Expecting for Apple and Amazon

The pressure is on Apple (AAPL) and Amazon (AMZN) ahead of their earnings reports after today’s close.  They are the largest and fourth-largest companies in the US by market capitalization and have much to prove after the second and third-largest companies fell sharply yesterday after their own earnings releases.  Microsoft (MSFT), the current #2, fell by 7.7%, while Alphabet’s two share classes (GOOG, GOOGL) that combine to be #3, fell by over 9% each.  Add in the fact that Meta Platforms (META), which was once firmly in the top 10, is down over 20% – again! – after its latest earnings debacle, and it becomes clear how much is riding on these two market stalwarts.

Earlier this year we asserted that the distinction between growth and value shares was shrinking, and that we now all need to think like value investors.  META has taught us more than once about what happens when growth stocks shrink, and now MSFT and GOOG have taught us how painful it can be when investors retrench their expectations about the premia that they pay for growth that they hope is reliable. 

The earnings woes of MSFT and GOOG have certainly made traders warier about AAPL and AMZN.  They fell 2% and 4% respectively yesterday, and both are down over 2% as I write this.  We saw consumer facing businesses disappoint at both MSFT and GOOG, and the cloud computing business, which is key for AMZN, appears to be an expensive battle for market share among a group of well-capitalized, unyielding tech titans.  Furthermore, the options markets were relatively optimistic about MSFT and GOOG earnings, which of course proved to be incorrect.  Let’s see if the options market has changed its opinion ahead of tonight’s megacap releases.

Interestingly, the IBKR Probability Lab shows a peak in the $148-$150 range, about 2.5% above current levels.  Traders are taking a contrarian view, thinking that we might have already priced in whatever bad news is to come:

IBKR Probability Lab for AAPL Options Expiring October 28^th, 2022

Source: Interactive Brokers

The high likelihood that the market puts on a post-earnings bounce for AAPL are reflected in the implied volatilities of above-market, near-term options.  That said, the at-money implied volatility of at-money options is a steep 110, implying a move of over 6%.  That compares to a long-term average of 4.46%, with the last four moves being 3.28%, -3.66%, 6.98% and -1.82%.  That isn’t much of a pattern.  The near-term skew is also quite steep.

Multi-Expiry Skew for AAPL, October 28^th (top), November 4^th (mid), November 18^th (bottom)

Source: Interactive Brokers

What we wrote for the Probability Lab view of AAPL largely applies to AMZN.  The peak probability is about 2.5% above the current price, though there is a higher cumulative probability being placed upon a downward move.

IBKR Probability Lab for AMZN Options Expiring October 28^th, 2022

Source: Interactive Brokers

The at-money volatility for AMZN options is an eye-watering 182.  That implies a reasonable potential for a move of over 10%.  This is not at all surprising when we recall that the last four post-earnings moves for AMZN have been 10,36%, -14.05%, 13.54% and -2.15%

Multi-Expiry Skew for AMZN, October 28^th (top), November 4^th (mid), November 18^th (bottom)

Source: Interactive Brokers