Facebook (FB) really exceeded my expectations with its latest results and the stock is paying big dividends for those who held through earnings. While I was optimistic, I did not think bulls could break $118, but this is an impressive move this morning. And there is another batch of volatility headed our way with Amazon (AMZN), Baidu (BIDU), LinkedIn (LNKD), Skyworks Solutions (SWKS) and Expedia (EXPE) scheduled to report. Real Money's Chris Laudani took a look at Skyworks earlier today. Give it a read before the close.
Meanwhile, I'm going to take a slightly different look at AMZN, LNKD and EXPE here.
Expectations are for Amazon to move around 7.75% tonight. The stock is bouncing around today, but a good range of reference is to expect a move of $50 based on options. Rather than looking at the current chart, I plotted the past six moves and created a regression analysis on a linear model, above. The oldest post-earnings move is farthest to the left, and moving right we eventually arrive at today's expectations.
So, what to take from this? Well, the best fit linear line gives us an R-squared of .289. That's low, so one might assume it's a negative, but I would argue otherwise. A low R-squared tells us the linear line is not a good fit for earnings expectations, but we are talking about psychology and reaction. It's an unknown, so we should expect the unknown, which is exactly what .289 tells us. In fact, it lends support to the idea of expecting volatility and a move that meets or exceeds expectations of current pricing.
The other takeaway on Amazon here is comparing the far right dot (current expectation) with the past moves. When looking for a lottery ticket or a big mover in earnings, I prefer to see this dot below all the other dots (previous moves) or at least very close to the bottom. We can see from the Amazon chart, today's expectations are very close to the last two reactions and well below the previous four reactions. That lends additional support to the thesis the Amazon move should be at least in line with expectations, if not greater. In other words, shorting volatility for Amazon doesn't look like a very good risk-reward here.
Examining the past five reports from LinkedIn, we find an R-squared half of what we measured in Amazon. Before we declare LNKD even more unpredictable, however, note the big move from last quarter has skewed the results. In fact, the expectations for tonight have only been exceeded twice in the past five reports. That said, LNKD has been a double-digit percentage mover all five times.
This one screams diagonal spreads to me. Something where the long strikes are 10-11% out-of-the-money and the short leg is 12.5-13% out-of-the-money. If I were shorting volatility either through calendar spreads, iron condors or short strangles, then I would be looking to be at least 12% out-of-the-money net.
Last on my list is Expedia. The most interesting thing here is not that Expedia had five straight moves of over 7%, which is close to current expectations, but that all those moves have been higher. The current expectation (far right dot) is near the bottom of the previous reports, which is positive in terms of looking for a volatility trade. Given the history of the stock, targeting a call side spread with the long side 4-5% out-of-the-money and the short side 10-12% looks the most attractive when attempting to maximize upside potential based on previous moves.
