# Calculate implied move in a stock from earnings based on options prices

Have you ever listened to CNBC on a marquee company earnings day and heard something along the lines of “options are pricing in a 4% move in this stock post-earning, either up or down”  and wondered how that was calculated?  Here is how I do it:

Yesterday (5-2-2017) Apple (AAPL) reported Q1 earnings of \$2.10 per share.  It was one of those scenarios where earnings beat expectation, but guidance was weak, so the stock opened the next day down 1.49%.  How close did that 1.49% on Wednesday match what the options market told you on Tuesday?

First, start with the shortest term option available.  Options always expire on a Friday, so for AAPL you need to look at the options that expire on 5-5-2017. Prior to close on Tuesday AAPL was trading at \$147.63 per share.  Look at at-the-money calls and puts – so look at the \$148 call. That option was trading on 5-2 at \$2.41

So that means a bullish speculator (3 day options is definitely speculation, not investing!) believes AAPL will get to at least \$150.41 by Friday.  There are only two things at play between Tuesday and Friday — 1 is the earnings call (obviously) and 2 is the overall market volatility on Wednesday through Friday.  So a speculator believes those 2 forces will equal a total move of 1.88% (the difference between 150.41 and 147.63).

Now look at the way the options were trading on Wednesday morning.  With the stock now at \$145.31 a call for \$146 on Friday expiration was trading at \$0.80.  Again this implies a break even price of \$146.80, or a 1.02% move.  The only thing from Wednesday to Friday is normal overall market volatility, so this tells you that Wed-Fri market vol accounts for 1.02%.

Doing the math on the only other force at play (earning announcement) means that the earnings announcement was 1.88% – 1.02% = 0.86%

Let’s do it now for the downside using at-the-money puts.  The Tuesday \$147 put cost \$2.27 implying a break even price of \$144.73 or a move down of 1.96%.

On Wednesday the \$145 put cost \$1.34 implying break even at \$143.66 or a move down of 0.92% between Wednesday and Friday.

Doing the math, 1.96%-0.92% = 1.04%

So the options told you to expect a 0.86% move up or a 1.04% move down in AAPL post-earnings.

So really the options did an okay job of predicting the move.  The predicted downside move was 1.04% and the actual was 1.49%.  Kinda close, but not spot on.