Options after earnings

Before any earnings release, there’s often a great deal of discussion about “positioning.” Are traders buying or selling the stock—or certain options—aggressively as the announcement approaches? The goal is typically to gain some insight into the sentiment surrounding the upcoming numbers.  

Aside from whether the stock initially rallies or falls sharply, there tends to be less discussion about positioning after earnings, especially in the options market. An example from Thursday suggests it may offer useful insights into emerging market dynamics, but it can take a little digging to give it context.

SL Green Realty (SLG), a real estate investment trust (REIT) focused on Manhattan office space, fell nearly 6% in early trading Thursday after releasing mixed numbers late Wednesday—it beat consensus earnings estimates (although it posted a per-share loss), missed revenue estimates, and upped its forward guidance. By midday, though, the stock had bounced well off its intraday low:

Meanwhile, the LiveAction scan for unusual call options activity showed volume of nearly 10,000 contracts—a little more than 32 times average:

And although SLG also appeared on the LiveAction scan for unusual put volume, those numbers weren’t as big—less than 3,000 contracts, which was about 13 times average.

While a quick takeaway at midday may have been that the more robust call options activity (complemented by the stock’s intraday bounce) meant some traders were possibly rethinking SLG’s earnings sell-off, the options chain wasn’t necessarily confirming that hypothesis:

First, almost all the call volume was in the $65 strike expiring today (top half of chart). Barring a 5.7% rally above yesterday’s close, these options will expire worthless when the closing bell rings. That could mean traders who previously bought these calls were selling them before they lost all their value.

The bottom half of the chart shows the put activity was a different story. Volume of 2,200 contracts in the August $57.50 put (vs. open interest of only 1,300) means there was a good chance a trader was opening a new position in contracts with a strike price below the current stock price. A put buyer in this case would likely need the stock to decline further from yesterday’s levels to realize a profit on the position.

So, even though call volume far outpaced put volume on Thursday, total open call positions may have been shrinking, while total put positions may have been expanding. While this balance of options positions could change today, tomorrow, or next week, etc., as of yesterday options buyers didn’t appear to be leaning toward the long side of the market.

Stocks often overshoot—up and down—after earnings announcements, and it’s common for contrarian-minded traders to anticipate at least a short-term counterreaction. But as this example illustrates, it can be helpful to consult all the information the market is providing before assuming a price move is a potential “head fake.”

Today’s numbers include (all times ET): housing starts and building permits (8:30 a.m.), consumer sentiment (10 a.m.).

Today’s earnings include: Alcoa (AA), American Express (AXP), 3M (MMM), Schlumberger (SLB).

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