07-24-2021, 03:31 AM
INTEL - Why is it down on such good earnigns?
<!-- SC_OFF --><div class="md"><p>TL;DR - <em>price moves down on positive earnings for a complex options-play reason and you need to look at how within the expected move the price change was.</em></p> <p>This is a concept I'm still trying to get my head around as well, but it's generally true. Earnings seems like a confusing time, good earnings sends a price lower, stocks on bad earnings sends a stock higher, why is the world upside down?</p> <p>Perhaps someone can give a more technical explanation but it largely has to do with the <strong><em>bull put spread</em></strong> options strategy to capture expected moves.</p> <p>An options trader in this strategy doesn't care that the price might go down somewhat - as long as it stays within the spread (<strong>the expected move</strong>) they make money. Quite handsomely.</p> <p>Because an option's inherent volatility is dependent upon how negative the gamma is, as traders pile into <strong><em>puts</em></strong> to take advantage of the UPSIDE of a good earnings report while covering their potential downside, they cover their downside to within the expected range and not less.</p> <p>They could cover it more but then you're eating at profits.</p> <p>At the risk that if the expected range is bigger you lose everything (100%).</p> <p>So as IV increases, gamma negativity increases which in turn means institutional investors <strong>now need to sell stock when selling puts.</strong></p> <p>Because institutional investors need to remain directionally neutral so they make money off the spread of selling puts and calls to buyers....to remain directionally neutral when their gamma is negative they need to sell.</p> <p>This is why a BULLISH SENTIMENT drives the price like a tent peg right into the ground.</p> <p>It's a temporary phenomenon of a very smart play where you can't lose as long as the earnings is bullish...you can easily lose if the surprise is negative and the sentiment turns bearish. But most people know when a stock is expected to have a good surprise and a company like INTEL was definitely bullish.</p> <p><strong>Conclusion:</strong></p> <ul> <li><em>A lot of bull put spreads were bought,</em></li> <li><em>gamma became negative,</em></li> <li><em>institutions with $billions invested had to sell short to remain directionally neutral,</em></li> <li><em>price comes down.</em></li> <li><em>Evaluation of bullishness is how close to within expected range a stock moves. The closer to the expected range the stronger the bullish sentiment on th earnings. After all 300% returns aren't free. If something is good, it gets squeezed down into 8% returns or so.</em></li> </ul> <p><strong><em>Final note: The bear put spread captures negative earnings and covers a potential upside caused by the delta-hedging of institutional buyers, which needs to stay within the expected move. The larger the move the more "bearish" the sentiment.</em></strong></p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/DarthTrader357"> /u/DarthTrader357 </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/oq5qf3/intel_why_is_it_down_on_such_good_earnigns/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/oq5qf3/intel_why_is_it_down_on_such_good_earnigns/">[comments]</a></span>Kind Regards R
<!-- SC_OFF --><div class="md"><p>TL;DR - <em>price moves down on positive earnings for a complex options-play reason and you need to look at how within the expected move the price change was.</em></p> <p>This is a concept I'm still trying to get my head around as well, but it's generally true. Earnings seems like a confusing time, good earnings sends a price lower, stocks on bad earnings sends a stock higher, why is the world upside down?</p> <p>Perhaps someone can give a more technical explanation but it largely has to do with the <strong><em>bull put spread</em></strong> options strategy to capture expected moves.</p> <p>An options trader in this strategy doesn't care that the price might go down somewhat - as long as it stays within the spread (<strong>the expected move</strong>) they make money. Quite handsomely.</p> <p>Because an option's inherent volatility is dependent upon how negative the gamma is, as traders pile into <strong><em>puts</em></strong> to take advantage of the UPSIDE of a good earnings report while covering their potential downside, they cover their downside to within the expected range and not less.</p> <p>They could cover it more but then you're eating at profits.</p> <p>At the risk that if the expected range is bigger you lose everything (100%).</p> <p>So as IV increases, gamma negativity increases which in turn means institutional investors <strong>now need to sell stock when selling puts.</strong></p> <p>Because institutional investors need to remain directionally neutral so they make money off the spread of selling puts and calls to buyers....to remain directionally neutral when their gamma is negative they need to sell.</p> <p>This is why a BULLISH SENTIMENT drives the price like a tent peg right into the ground.</p> <p>It's a temporary phenomenon of a very smart play where you can't lose as long as the earnings is bullish...you can easily lose if the surprise is negative and the sentiment turns bearish. But most people know when a stock is expected to have a good surprise and a company like INTEL was definitely bullish.</p> <p><strong>Conclusion:</strong></p> <ul> <li><em>A lot of bull put spreads were bought,</em></li> <li><em>gamma became negative,</em></li> <li><em>institutions with $billions invested had to sell short to remain directionally neutral,</em></li> <li><em>price comes down.</em></li> <li><em>Evaluation of bullishness is how close to within expected range a stock moves. The closer to the expected range the stronger the bullish sentiment on th earnings. After all 300% returns aren't free. If something is good, it gets squeezed down into 8% returns or so.</em></li> </ul> <p><strong><em>Final note: The bear put spread captures negative earnings and covers a potential upside caused by the delta-hedging of institutional buyers, which needs to stay within the expected move. The larger the move the more "bearish" the sentiment.</em></strong></p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/DarthTrader357"> /u/DarthTrader357 </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/oq5qf3/intel_why_is_it_down_on_such_good_earnigns/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/oq5qf3/intel_why_is_it_down_on_such_good_earnigns/">[comments]</a></span>Kind Regards R