Options playbook: These stocks fell after earnings — How to bet on what comes next

Published Sun, Aug 8 20218:07 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

Earnings season led to some major moves for big-name stocks, and those shifts created new ideas and opportunities for options traders. Options are a popular way for investors to position ahead of corporate earnings, but volatility can continue outside of those quarterly events as well. Here's a look at some of the options ideas and trends from Wall Street this week as the second-quarter earnings season approaches its end. Betting on next steps Shawn Quigg, the equity derivatives strategist at JPMorgan, said in a note to clients on Thursday that traders should take a look at a few technology companies that sold-off after earnings. One of these names was Amazon , which fell 7% after its second-quarter revenue came up short of expectations. But even after that move, Amazon's implied volatility is low, and the stock has upside potential, JPMorgan said. "Investors continue to favor Staple-Tech over Disruptive-Tech, and this momentum is likely to continue to favor AMZN," the note said. Quigg recommended buying October call options for Amazon at a strike price of $3,600, which is more than 7% above where the stock was trading on Friday. A call option gives a trader the right to buy a stock and set price before the contract expires. Buying a call option becomes "in the money" when the share price rises above the strike price. The only risk to a trader in this deal is the premium paid to purchase the option. Paypal was another tech stock that tumbled after its earnings report , but JPMorgan kept its overweight rating. After the report and subsequent slide, the market is pricing in more volatility for Paypal, and that presents an opportunity for options traders to make some extra cash. "Implied volatility remains rich, and until these tailwinds become more evident, we recommend monetizing this elevated volatility" by selling strangles on the stock, the JPMorgan note said. A strangle is an options strategy that involves a call option and a put option on the same stock at different strike prices. Put options work in a similar way to call options but in reverse and are a bet that the stock will fall below the strike price. In this case, JPMorgan recommends selling a strangle where both options are out of the money. When selling options, a trader gets to collect premiums from buyers. Selling a strangle does entail more risk that simply buying a put or a call. For example, if the stock falls below the strike price for the put option, the seller of the option would be forced to buy the stock at an above market price. Similarly, if the stock rises above the call option strike price, then the seller of the option would have to sell the underlying stock at a below-market price. A macro trade The Wall Street world saw a major divergence this week when two top firms took different stances on how stocks would finish the year. Citi downgraded U.S. stocks to neutral , saying that interest rates would rise and hold back tech shares. However, Goldman hiked its year-end target on the S & P 500 to 4,70 0, which would be a jump of about 5% for the index. For investors who agree with one prediction or another, or want to hedge a major move in either direction, options on the SPDR S & P ETF Trust (SPY) or the index itself are worth taking a look at. Susquehanna's Christopher Jacobs said in a note on Thursday that investors were buying a lot of calls on the ETF, suggesting that market participants agreed more with Goldman's outlook. "Through Wednesday's upside call purchase, perhaps the investor is simply looking to monetize a belief that the market is now underestimating the upside tail potential relative to the downside, with so much focus on areas of concern and relatively few actually making the case for further upside in the near-term," the Susquehanna note said. Just like with stocks, traders can buy or sell call options and put options on widely traded ETFs. In this case, an investor wanting to hedge downside risk may want to buy put options on the broad index. On the other hand, an investor who is bullish on the market but isn't quite ready to buy up more stocks, purchasing a call option to capture some upside is one strategy that could make sense. -CNBC's Michael Bloom contributed to this report.

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Earnings season led to some major moves for big-name stocks, and those shifts created new ideas and opportunities for options traders.