It’s quarterly earnings season once again. Traders and investors alike have been keenly focused on companies’ first quarter results. It is fair to say that markets have been generally pleased with what they have seen thus far, as evidenced by the following chart:
S&P 500 Index (SPX), 2 Week Chart
Source: Interactive Brokers
The chart begins on April 13th, the day before earnings season kicked off in earnest with reports from JP Morgan (JPM), Wells Fargo (WFC) and Goldman Sachs (GS). Despite some volatility, SPX has trended higher as results from a wide range of major companies reported generally positive results.
But as I wrote last week, “The results have been great, the guidance and reactions less so. But what we saw this week is largely an opening act. We have yet to hear from the top 8 companies in the NASDAQ 100 Index (NDX), which represent about 50% of the index’s weight. Six of them top the S&P 500 Index (SPX), where we are still waiting for most of the companies that make up the top 25% of index weight. The main event begins next week.” In short, this is really the make-or-break week for earnings season.
The first of the mega-cap tech stocks reports after the today’s close. Tesla (TSLA) is clearly a polarizing company. Regardless of whether you believe that the company is a beacon for the future or an overhyped bubble, you need to pay attention to its results. TSLA is the 6th highest weighted company in SPX and the 5th highest in the NASDAQ 100 Index (QQQ)[i]. Like it or not, it has become too big to ignore.
According to Bloomberg data, the street estimate for TSLA EPS is $0.804. At today’s price, it implies that the P/E of TSLA will decline from nearly 1,000 to somewhere under 500[ii]. Both of those numbers are stratospheric and imply immense expectations for future growth. With any normal company, that would present an incredibly high bar and any slip-up could create a wave of disappointment. But TSLA is by no means treated as a normal company by its most faithful holders. For that reason, it is crucial to look for clues to market sentiment wherever we can find them. Fortunately, the options market gives us plenty of clues. We can start by using the Probability Lab feature on the Trader Workstation[iii].
TSLA Probability Distribution Using April 30th Options on April 26th
Source: Interactive Brokers
We can see from the results above, using options expiring at the end of this week (April 30th), options traders are currently putting the highest likelihood for a move in 710-720 area, or about 2-3% lower from the current price. That is a fairly modest decline, and we can see that the probability distribution is essentially symmetrical otherwise. That suggests a dispersion of potential outcomes among options traders and hedgers. That is perhaps unsurprising considering the polarity of opinions about TSLA.
Looking at the options using the Time Lapse Skew function[i],we can see that traders have gotten more sanguine about TSLA’s post-earnings prospects since Friday.
TSLA Skew, April 30th Expiry, Values for April 26th (dark yellow) and April 23rd (light yellow)
Source: Interactive Brokers
We can see that implied volatility rose significantly across the board since Friday. That is to be expected, as traders are loath to buy short-term options at high implied volatilities any earlier than they need to because they decay so quickly. (Here is more about theta) The at-money options are trading with an implied volatility of about 87.5%, which imply that TSLA will average about 5.5% daily volatility between now and Friday (thanks to the Rule of 16). Obviously, one would expect that the weekly volatility assessments are highly dependent on the move that could result after TSLA’s earnings announcement.
My takeaway is that TSLA options traders seem to be relatively sanguine ahead of this afternoon’s earnings release. According to Bloomberg data, the absolute value of post-earnings price changes in TSLA is 8.43%. That is well above the 5.5% noted above. Furthermore, we have seen several double-digit percentage moves – up and down – after TSLA earnings, though none since January 2020. Have traders settled into a period of post-earnings calm for what was once a highly volatile stock after earnings? That appears to be the case, at least for today. Relative calm is anticipated by the options market. Many would say that this is the mark of a maturing blue-chip company. Contrarians would say that a significant deviation from anticipated earnings or guidance could really catch the market by surprise. We’ll know soon enough who is correct.
[i] Two things to keep in mind: 1. Alphabet (GOOG, GOOGL) has two classes of shares in the indices. While TSLA has a bigger weight (~4.3%) in NDX than either class of Alphabet, on a combined basis the company has a higher weight (3.8% + 3.47% = 7.27%). 2. The rankings are different because SPX and NDX have different weighting criteria. SPX uses free-floating shares, while NDX has rules to cap the influence of its largest components
[ii] The trailing 4 quarter EPS is .275 +. 339 +. 104 + .022 = 0.74. If we replace the 0.022 from 4 quarters ago with .804, it more than doubles the trailing EPS to 1.522
[iii] On your TWS – Analytical Tools -> Options Analysis -> Probability Lab
Disclosure: Interactive Brokers
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