How To Trade The Netflix And Tesla Earnings Reports Using Options

The following originally appeared on Options AI

Earnings season is in full swing. And with that, it’s a good opportunity to talk about event-trading using options – with particular focus on using the expected move to your advantage in price target and strike selection.

We’ll focus on two big names set to report, Netflix Inc NFLX and Tesla Inc TSLA.

What is the Expected Move?

The expected move is the amount that options traders believe a stock price will move up or down. It can serve as a quick way to cut through the noise and see where real-money option traders are pricing the future of a stock. On Options AI, it is calculated using real-time option prices and displayed on a chart like this in Netflix:

Knowing this consensus before making a trade can be incredibly powerful, regardless of whether you’re using stock or options to make your trade. A helping hand with setting more informed price targets as well as a useful basis for starting strike selection. Let’s go to some examples, using Netflix, which reports earnings Tuesday after the close.

The bullish consensus for this Friday is around $570 and the bearish consensus near $490.

Income Generating Strategies

First, we’ll look at a neutral view and income-generating trades. This is “selling the move” to both bulls and bears. A view that both buyers of calls and buyers of puts are over-estimating the size of any potential stock move. Premium (or income) received from selling options is kept if the stock stays within a range.

The Iron Condor is one strategy used for this purpose. The Iron Condor involves selling a call spread and simultaneously selling a put spread, generating upfront income to the seller and offering defined-risk if things go wrong. With four option legs involved, strike selection can be a lengthy and confusing process. But using the expected move we can set strikes to sell to those looking for moves beyond the crowd, as seen on this chart:

Directional Trading – Bullish

Using a bullish price target, we can set up two spread trades also based around the expected move: a debit call spread to the bullish consensus, and a credit put spread, to the bearish consensus:

Directional Trading Beyond the Expected Move

Those are examples for either positioning to the expected move or inside the expected move. What about outside? For those expecting moves beyond the expected move, you can look to take advantage of the market potentially underpricing the possibilities. In this case, the expected move can still be a useful guide. Taking an example price target, to $600, well outside the expected move:

Here we see a debit call spread with the long call set at the current stock price and the short call at the target, but also a less expensive call spread with the long call set at the expected move and the short call at the target. (The same thinking can be used for bearish targets.)

Tesla

Looking at Tesla the numbers change but the concepts remain the same. Here’s the expected move to this Friday, with a bullish consensus about $465 and bearish near $400:

Comparing trade types directly, we can see the difference in cost and probability of a call spread (to the expected move) versus an outright call, but we can also dive deeper into the components of that call spread to compare it to out of the money calls:

The +430/-465 call spread is almost half the price of the +430 call. And if we look at the components of that call spread we see that the cost of the spread is 11.70, versus the -465 call that costs nearly $9. So, for just a few dollars more, one can buy the call spread with a break-even $10 higher in the stock, rather than buying the out of the money call that has a break-even $43 higher in the stock:

Summary

The expected move can provide actionable insight to consider before making any trade, particularly into an uncertain event. Whether gut-checking your own expectations versus the options crowd, generating trade ideas from option market signals, or for more informed strike selection.

Options AI is an online brokerage. But it has just launched some free tools, including an expected move calculator and earnings calendar where one can compare expected moves (using end of day options prices). Give it a try here: Options AI Expected Move Calculator

Options AI does not provide investment, tax or legal advice and does not endorse or recommend the purchase or sale of any particular security or trading strategy. All content is meant for informational and reference purposes only. Any data or information regarding the likelihood of various investment outcomes is hypothetical in nature, does not reflect the opinions of Options AI and is not a guarantee of future results. Options transactions involve risk and are not suitable for all investors. Prior to deciding to invest in options please review the Characteristics and Risks of Standardized Options.