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And so it begins, the start of this quarter’s megacap earnings releases. Tesla (TSLA) has opened the festivities in prior quarters, but this year it is joined by Alphabet (GOOG, GOOGL) on opening day. Megacap tech earnings are always worth watching, but last week’s tech-led decline further highlighted their importance.
It’s tough to choose who we should analyze first, but even though TSLA is by far the more active stock on our platform, we’ll sort them by size. TSLA’s market cap is about $785 billion; GOOG/GOOGL’s is roughly $2.26 trillion. As a result, the combination of GOOG/GOOGL is about 4.2% of the S&P 500 (SPX) and 5.39% of the Nasdaq 100 (NDX); those weights for TSLA are about 1.49% and 3.12%, respectively. And it’s apparent that both of those companies have an even greater psychological weight in investors’ mindsets than those numbers imply.
We see from the graphs below that at-money options in GOOGL are pricing in a bit more than a 5% daily move between now and their Friday expiration. Considering that GOOGL is famously sparse with forward guidance, that 5%+ seems a bit sanguine, but not exceptionally so. This is roughly in line with the longer-term post-earnings performance of the stock, even if the last three reports led to larger moves (last six: +10.22%, -7.50%, -9.51%, +5.78%, -0.13%, -2.75%).
GOOGL Skews for Options Expiring July 26th (dark green, top), August 2nd (lighter green, top), August 16th (yellow, top); Volatility Term Structure (bottom)
Source: Interactive Brokers
The top chart is another sign of the relative lack of risk aversion that is priced into GOOGL options. The skews for near-term options, including Friday’s, are almost pancake flat for about +/- 13% from the current stock price. It clearly implies that traders don’t know what to expect, but when we consider that equity skews ahead of earnings tend to show some steepening for downside implied volatilities, there is seemingly equal concern about missing an up move as protecting against a downdraft. The IBKR Probability Lab (below) shows something similar – a relatively symmetrical set of probabilities centered just below the current stock price:
IBKR Probability Lab for GOOGL Options Expiring July 26th, 2024
Source: Interactive Brokers
Moving over to TSLA, the picture is a bit more risk averse. The Probability Lab’s peak outcome is for a decline of roughly 5%, and there is a pronounced asymmetry:
IBKR Probability Lab for TSLA Options Expiring July 26th, 2024
Source: Interactive Brokers
Furthermore, the skews for near term options are very steeply biased towards the downside. Considering TSLA’s recent rapid ascent ahead of its now-delayed robotaxi announcement, it is understandable why some traders might be showing some risk aversion:
TSLA Skews for Options Expiring July 26th (dark green, top), August 2nd (lighter green, top), August 16th (yellow, top); Volatility Term Structure (bottom)
Source: Interactive Brokers
That said, the >8% daily volatility that is being priced into options expiring Friday seems a bit low when we consider that TSLA’s last six earnings reports all resulted in nearly double-digit percentage moves or more (+12.06%, -12.13%, -9.3%, -9,74%, -9,75%, +10.97%). Ahead of last quarter’s earnings, we noted the following:
The contrast between the relatively sanguine view that the options market held last quarter and the more normal view held today are what leads me to the potential for a contrarian bounce today.
Indeed, like last quarter, TSLA options show some risk aversion, whereas in prior quarters, a remarkably sanguine approach ruled. Notice that the more balanced approach to risk led to a bounce while the more risk tolerant approaches presaged declines. It is of course up to each of these companies, GOOGL and TSLA, to deliver market expectations for revenues, earnings, and guidance. Furthermore, there are a multitude of other measures that matter to investors in each of these companies, such as margins and cash flows for TSLA, and growth in key sectors like cloud computing and artificial intelligence for GOOGL.
My concern for this earnings season is that investors harbor expectations even above the published consensuses. We have seen good reports lead to declines nonetheless in companies like Micron Technologies (MU) and Netflix (NFLX). Good numbers are necessary for a post-earnings bounce. Will they be sufficient?
Related: The “Routation” Continues