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I believe fellow tigers who has seen some of my article where I share about using Option implied move. I think it might be better to share what exactly is Option Implied Move, how it is derived and how is the accuracy like.

What is Option Implied Move?

Option implied move, also known as the implied earnings move or expected earnings percent move, is a prediction of how much a stock is expected to move in percentage terms following an earnings announcement. It is derived from the pricing of options on the stock, particularly at-the-money straddle options, and is used by traders and investors to gauge market expectations around an earnings report.

The implied move is a measure of the expected price change in a stock or index based on the pricing of options contracts.

Options pricing models, like the Black-Scholes model, help traders estimate the expected future price volatility by examining the premiums of options with different strike prices and expiration dates.

The implied move represents the market's expectation of how much the underlying asset's price will change over a specific period, based on the prices of these options.

How Accurate Is Option Implied Move for Expected Earnings Percent Move

There are several factors we might need to consider when we use implied move to help us gauge market expectations around earnings announcements.

But do remember the accuracy varies from stock to stock and can be influenced by various factors, including market sentiment and unexpected news.

Market Expectations

The implied move is a reflection of the collective expectations of market participants. It's not a guarantee of how much a stock will move, but rather an estimate of the expected magnitude of the move. It's often considered relatively accurate in capturing the market consensus.

Volatility Factors

The implied move is based on option pricing, which takes into account various factors, including historical volatility, implied volatility, time to expiration, and interest rates. These factors make it a robust estimate of future stock price movements.

Historical Accuracy

Traders and analysts often track the implied move's historical accuracy for a specific stock or for a broader index. Over time, you can get a sense of whether the implied move tends to be a good predictor for that particular stock or index.

Implied Volatility Skew

Different stocks can have different implied volatility skew patterns, which means that implied moves may not be equally accurate for all stocks. For some stocks, implied moves may overestimate or underestimate the actual post-earnings move due to market dynamics.

Earnings Surprises

Sometimes, a company may report earnings results that significantly differ from market expectations. In such cases, the actual stock movement can be much larger or smaller than the implied move. This is why it's important to use the implied move as an estimate, not a certainty.

Market Sentiment

Market sentiment can play a significant role in how accurate the implied move is. If there's a lot of uncertainty or unusual market conditions, the implied move may not be as reliable.

Risk Management

Traders often use the implied move to set stop-loss levels or establish trading strategies around earnings announcements. While it's not a surefire prediction, it can help in risk management.

Here are some example of Option Implied Move for the earnings projected for 24, 25, 26 Oct. It might change, so we should always gather the latest value closer to the earnings date.

24 Oct 2023

$Microsoft(MSFT)$ $Alphabet(GOOGL)$

25 Oct 2023

$Meta Platforms, Inc.(META)$

26 Oct 2023

$Amazon.com(AMZN)$

Summary

The option implied move is a useful tool for gauging market expectations around earnings announcements, and it is based on sound financial principles.

However, its accuracy can vary from stock to stock and can be influenced by various factors, including market sentiment and unexpected news.

And it should not be used solely, there are other elements like Absolute Average Actual Move over different quarters and Option Valuation relative to different quarters. The example I gave is only some of it.

We as traders or investors should use it as one of information gathering in our decision-making, rather than relying on it as a definitive prediction of a stock's post-earnings movement.

Appreciate if you could share your thoughts in the comment section whether you think Option Implied Move would be a good information tool to help us in decision-making while we ponder through stock earnings result.

@TigerStars @Daily_Discussion @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.