Volatility Outlook On Earnings Q2 2023: How Are People Positioning?

There has been a lot of noise made over the possibility that earnings will decline rapidly this quarter. I reviewed 16 different large-cap company earnings coming up by using the tools in Volland (https://www.vol.land) and ORATS (https://orats.com/).

For the most part, earnings expectations are making a slight comeback this month. Most companies are not bouncing back to levels they were at before the Fed hawkish pivot, but are exceeding the earnings per share (EPS) they had in Q1.

Many companies, particularly tech, had many upside revisions to earnings expectations as the quarter advanced. Also, the volatility expected by earnings, bullish or bearish, is down across the board.

One odd thing is that selling calls has been the strategy taken to hedge almost all these earnings reports. Calls are being sold across the board, giving clear earnings price targets. Very few of these stocks have many puts being bought to hedge, which again leaves the door open for downside.

However, in the case where implied volatility (IV) will decline as event vol moves away, the more likely scenario is an advance to the target presented by the sold calls and then a retreat from that price (sometimes even before the market opens the next day). This happened last week with Tesla, Inc. (NASDAQ: TSLA) and Netflix, Inc. (NASDAQ: NFLX), and today with General Motors Company (NYSE: GM). In all three of these cases, earnings have been remarkably positive, yet the price plummets after the initial surge. This reflects the customer "sold call" method of hedging as dealers need to sell deltas off their increasing long deltas.

If the earnings were encouraging and showed true growth for these companies, I would expect the earnings peaks to be revisited eventually. That is the typical pattern of dealer long OTM calls after positive events when there was no put buying as a hedge.