One FAANG Is Out, More to Come

Yesterday’s close brought us the release of Netflix’ (NFLX) earnings.  Earlier this week we discussed how options markets were pricing in an unusually high likelihood of an upside reaction in the stock price, despite a poor historical record of that occurring even after positive earnings surprises.  The company reported a slight miss, and NFLX shares are down about 6.5% as I write this.  While NFLX has a different line of business than most of the other NASDAQ megacap leaders (though there are overlaps with Amazon (AMZN) and Apple (AAPL)), the largest technology stocks share a very similar mindset among investors.  They have attracted their huge valuations because of their perceived ability to grow their earnings at a high and steady pace.  It is important to see if that sort of enthusiasm is priced into the other leading names.

Next Thursday afternoon will be the mother of all earnings releases.  We expect reports from AAPL, AMZN, Microsoft (MSFT), Facebook (FB) and Alphabet (GOOG, GOOGL).  Those are the top 5 companies in the NASDAQ 100 Index (NDX), representing nearly 45% of NDX’ market capitalization!  For perspective, those stocks represent about 22% of the S&P 500 Index (SPX) market cap as well.  It is crucial to see what the options market expects for those names.

For that, we will use the Implied Volatility Viewer on the TWS, as we did for NFLX and Tesla (TSLA) recently.  In all cases, we look at the 3 expirations that begin with the week of October 30^th and a 20% range around the current stock price.  Consider these charts:

Source for charts: Trader Workstation

I expect to go into more detail in the coming days, since expectations can change as we approach the earnings date, but for now we can see relatively normal skews for the relevant options.  AMZN is the largest exception, with a bias to the upside that is similar to what we witnessed in NFLX and TSLA.  I have referred to TSLA as a somewhat faith-based stock, but AMZN was the original cult holding.  As with Mr. Musk, those who based investment decisions on trust in Mr. Bezos rather than on conventional valuation metrics have been richly rewarded throughout most of the company’s history.  That faith is displayed in traders’ willingness to pay higher implied volatilities for upside calls than for protective puts. 

Of the remaining names displayed above, all have fairly typical skews.  AAPL is flatter than normal, but that stock has risen 8 times after its last 10 earnings releases (AMZN rose 5, for comparison).  I see that as traders playing the established odds more than displaying euphoria.

I was on a webinar with NASDAQ yesterday, discussing hedging strategies with NDX and NQX options, and this mega-earnings date came up in conversation.  While this may be an excellent opportunity to utilize NDX as a hedge, because of the potentially market moving news that will affect an immense index weight, remember that the news is idiosyncratic.  For example, let’s say AAPL rises as AMZN falls.  The two moves could balance each other out, causing little movement in the overall index.  But just for comparison, we should see if the index itself is telling us a different story:

Source for charts: Trader Workstation

We see a normal skew and implied volatilities that are generally lower than the following week.  To be fair, the following week contains Election Day, which is more likely to move indices in one direction than potentially conflicting earnings. 

As of now, the options markets are not signaling anything too crazy for the megacap earnings release expected next week.  But traders need to stay tuned and stay vigilant if those signals change in the coming days.