Options-straddle prices in Amazon.comand Applecontinue to predict that the stocks could move by 12% or more following earnings. But the straddle prices in Baidu.comhave reached rarified levels ahead of its earnings on Wednesday evening.
An options investor uses a straddle, which is the simultaneous purchase of a call option and a put option with the same strike price, when there is uncertainty over the direction of the underlying stock.
The chart above shows the recent surge and pullback in the Chinese internet search company. Even with the slide in the stock, the August 180 Baidu.com straddle is pricing in a potential move of more than $32, or nearly 20% in shares of the company after it reports earnings.
Adam Warner, a professional options trader and author of The Daily Options Report and contributor to Minyanville.com, says that with volatility at 85% in the August options the breakeven point for the straddle buyers means the stock will have to move a "whopping 18% in either direction".
That, writes Warner, is "as high as I remember seeing in a major stock in some time. I didn't even figure out these sort of numbers back in in the bubble, but this sure has the vintage of a 'fine 1999 Juniper,'" referring to Juniper Networks, one of the Internet darlings that went from $250 to $5 a share.
By way of comparison, the Amazon August 70 straddle and the Apple August 140 straddle are pricing in potential moves in the companies shares of a little about 12%. Amazon reports after the bell today, Apple after the bell on Wednesday.
Susquehanna Financials Stacey Gilbert says her firm has suggested to it clients long in Amazon shares to consider selling August 85 calls into earnings to collect the premium.
The practice Gilbert refers to is known as covered call writing, where a holder of shares writes or sells call options and collects the price, or premium, of the calls sold on the belief the stock will not rally to the strike price of the calls.
Gilbert says Amazon has been a volatile stock "moving 25% twice around earnings just in the past year." She also says "with the valuation up there, it's tough not to know what's priced into the shares," adding that if she owned the stock she wouldn't be "unhappy to sell some August 85 calls".
Shares of Amazon are up more than 80% this year.
Speculation related to earnings doesn't always have to happen ahead of an earnings report. AK Steel posted second-quarter earnings which more than tripled on record sales and shipments. The company's bottom line beat analysts estimates by 28-cents a share.
The blowout numbers have pulled more bulls into the stock and its options. Speculators are piling into the August 42.5 calls on the expectation there will be enough momentum to carry the stock above the strike price before expiration on the third Friday of the month. Over 8,000 August 42.5 calls have traded, eclipsing open interest of 1,544 contracts.