Why The Option Market Prices In An 8% Move On Snowflake's Earnings – Investor's Business Daily

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Snowflake (SNOW) reports quarterly earnings Wednesday after the closing bell and the results are eagerly anticipated by the market. Last time SNOW reported earnings, the option market was pricing in a 9.6% move. The stock moved less than 2% higher in early-afternoon trading.

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The fiscal Q3 results, covering the August-to-October time frame and released on Dec. 2, saw the stock move 16.1% against an expected move of 12.1%.

This time around, market makers are predicting an 8% move for SNOW stock.

One popular trade among option traders is a short straddle that is held over the earnings announcement. This trade involves higher risk. It involves the sale of naked options, so it is not recommended for beginners. The losses are potentially unlimited.

Analysts polled by FactSet think the innovator in cloud-based data management will lose 16 cents a share in the April-ended first quarter and record sales of $212.9 million, up 96% vs. a year earlier.

Setting Up An Earning Straddle In SNOW Stock

Specifically, we’ll look at a short straddle with a May 28 expiration date.

To set up a short straddle, traders would sell the at-the-money bullish call option and sell the at-the-money bearish put. SNOW closed near 230 Tuesday, so the at-the-money strike would be at 230.

At the close of trading Tuesday, the 230 call was trading around $9.25 and the 230 put was also trading for $9.25.

Selling these two options in SNOW stock would generate $1,850 in premium with break-even points at 211.50 on the low side, and 248.50 at the upper end.

How To Calculate The Expected Move

Market makers set option prices based on the expected move over the life of the option. Currently the implied move for SNOW stock over earnings is around 8%. To calculate this, take the premium of $18.50 divided by the stock price of 230.30.

It also means SNOW stock can move up or down by 8% before the short straddle trade starts to suffer losses.

While the stock stayed well inside the expected move last time, there is no guarantee that will happen again this time.

If the move turns out less than 8% the straddle sellers win. If the move is more than that, the straddle buyers win. Selling straddles over earnings is a popular trade for option traders. However, it’s important to be aware of the risks when trading naked options.

Always remember that options are risky! Investors can lose 100% of their investment.

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions. Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ

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