Options playbook: This stock could fall after earnings. How to prepare for volatility

Published Sun, Jul 25 20217:34 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

After Wall Street saw a return of some volatility in the stock market last week, more active traders and investors might believe it is time to add some options to their portfolio ahead of a busy week of earnings. Here's a look from CNBC Pro at some of the options trends and trade ideas from top Wall Street shops this week. Earnings season Corporate earnings season always brings a chance at increased volatility, and there are several interesting plays in the weeks ahead, according to a note from JPMorgan derivatives strategist Bram Kaplan. One potential stock with downside potential is Beyond Meat , which reports on Aug. 5, according to JPMorgan. "Earnings volatility is cheap, and we see little supporting the stock with a loss of the Dunkin' business adding risk to the quarter," the note said. One way to bet on Beyond Meat falling would be to buy a put option on the stock. Holding a put option gives the trader the right to sell a stock at a set price, called a strike price, before the option expires. The put option becomes a winning trade when stock price falls below the strike price, and the only risk to the trader is the premium paid for the option up front. Investors looking to make a more optimistic bet could turn to semiconductors, specifically the VanEck Vectors Semiconductors ETF (SMH) , JPMorgan said. "Buy SMH calls outright as upcoming earnings could be a near-term catalyst to spark a rally in the group," the note said. Call options work in a similar way to put options, but they are bets that a stock will rise instead of drop. Big Tech volatility Earnings reports from top tech stocks like Apple and Amazon will be a major story of the markets next week, but the options market doesn't appear to expect big moves. For many of the Big Tech stocks, the market is pricing in smaller movers than last year, when the Covid pandemic was still leading to volatility in the markets, according to Garrett DeSimone, head of quantitative research at OptionsMetrics. If a trader thinks the moves could be big, they could buy a straddle option. A straddle option is a pair of a call and put option on the same stock and serves as a bet on volatility in either direction. "If you look at it from the perspective of a trader that believes implied volatility is going to be higher after the news, or you think there's going to be an outsized move, it's a good opportunity be long volatility, or long a straddle, for example," DeSimone said. Betting on rates Another hot topic on Wall Street in recent weeks is the decline in Treasury rates, with the 10-year yield briefly falling below 1.2% last week. Goldman Sachs derivatives analysts Vishal Vivek and John Marshall said in a note on Wednesday that the move in rates hasn't played out in the stock markets as history suggests, meaning that it could be time to make a bet ahead of a delayed reaction. "Over the past three weeks, we find a basket of these 35 long-short pair (on an equal weighted, total return basis) have dislocated from their relationship to the US 10-yr yield, despite the high historic correlation. We believe this is an opportunity for investors to gain from a potential closing of this gap," the note said. One way to play this is to buy calls on stocks negatively correlated to Treasury yields, such as Regeneron Pharmaceuticals and Advanced Micro Devices , which also have low options prices relative to the last two years, according to Goldman. -CNBC's Michael Bloom contributed to this report.

Beyond Meat "Beyond Burger" patties made from plant-based substitutes for meat products sit on a shelf for sale in New York City.

Angela Weiss | AFP | Getty Images

Here's a look from CNBC Pro at some of the options trends and trade ideas from top Wall Street shops this week.