As earnings season heats up, market participants are closely watching the Magnificent Seven (Mag7) stocks for signs of volatility and directional momentum. With upcoming earnings reports, options pricing reveals heightened expectations for post-earnings moves.
Heavyweights Set to Drive Market Volume and Volatility
Six of the seven Mag7 companies reported earnings at the end of July — Google and Tesla reported on July 23, followed by Meta, Microsoft, Apple and Amazon the following week. Nvidia does not report earnings until late August.
Options on the Mag7 make up about 25% of the single stock option volume daily. There are 8 million Mag 7 options contracts traded per day, equating to about $5 billon in premium. In total, Mag 7 stocks trade half a billion shares per day, or 4% of spot volume for single stocks. The cohort is popular with retail traders because of their performance, media coverage, volatility, and opportunities for leverage.
How Options Pricing Reveals Earnings Expectations
Immediately ahead of an earnings release, short-dated options prices reflect the market expectations of how a stock is likely to react. The simplest way to estimate the magnitude of the reaction is by comparing the straddle price to historic moves. Mathematically, a comparison between near-term volatility and longer-dated volatility results in the expected standard deviation for the post-earnings day. Note that options pricing generally does not imply the direction of a reaction – just how much the stock is expected to move in either direction. In some cases, positioning and put/call skew can add some context to expectations.
A quick look at how traders are pricing in potential upcoming Mag 7 moves shows standard deviations based on implied volatility, converted into an expected move using a 2/3 rule of thumb to estimate the highest probability point.
Traders Temper Reactions Ahead of Earnings
Generally, these single stock options price in moves slightly below historical averages, suggesting traders are not expecting any major impact to the stock price based on earnings results. Including Netflix (NFLX) in the analysis gives us a recent point of comparison, with a downward reaction that was generally in-line with the implied expectation.
In terms of direction, it’s a mixed bag for these stocks historically, however, there does seem to be some clustering, where most of the stocks move in the same direction in each quarter.
For options traders, earnings periods can present opportunities, but the potential for large gap moves introduces greater risk. Understanding the data and historical behavior is crucial to managing expectations and making informed decisions, serving as a useful tool for any strategy.
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