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July Earnings Analysis

Analyzing the impact of July earnings announcements on stock prices and the stock options market

Stock Price Summary | Extreme Moves | Market Leaders | Sector Results | Impact on Options Market

Stock Price Summary

July was a particularly busy month for earnings releases, as the market saw 1,724 companies announce quarterly results, including 280 of the S&P 500. The earnings announcements apparently did little to slow the momentum of the market, as SPY closed the month up +3.6% from where it opened. On the whole, 923 of the stocks were gainers on earnings, representing 53.5%, for an average gain of +4.3%. 773 stocks were losers on earnings news, making up 44.8% of the total, and averaging a -4.0% loss. 28 stocks [1.6%] were unchanged or had no applicable data. Relatively speaking, it was a slightly more muted earnings season than what we saw in July of 2015, when 1,895 stocks reported earnings results.

If we limit the results to only view earnings for stocks that are Mid- or Large-Cap (meaning at least $2 Billion market capitalization), the results were of similar proportions, though the swings in stock price were not as great.

Extreme Moves

There were a number of stocks that had very large swings in stock price on earnings news in July, though the majority of them were low-price or Lower-Cap stocks, including:

  • Technology stock [$WIX], which gained +15.4% on July 27th earnings
  • Drug store company GNC [$GNC], which fell -25.5% on July 28th earnings

However, there were some Mid-Cap and Large-Cap leaders in this space, such as:

  • Wireless carrier Sprint [$S], which jumped +27.7% from $4.62 to $5.90 after July 25th earnings
  • Internet TV service Netflix [$NFLX], which dropped -13.1% from $98.81 to $85.84 on July 18th earnings
  • Technology stock Twitter [$TWTR], which fell -14.5% from $18.45 to $15.77 on July 26th earnings

Overall, 69 stocks that released earnings in July experienced losses of -10% or greater immediately following the announcement, while 99 stocks saw their prices jump with gains of +10% or more.

Market Leaders

Several market leaders released earnings during July as it was the peak of earnings season, and for the most part, their effect was a net positive on stock prices. Technology giant Alphabet Inc. [$GOOG, $GOOGL] and consumer goods icon Apple [$AAPL] released earnings during July and both companies saw significant boosts. AAPL's release on July 26th resulted in a +6.5% jump from $96.67 to $102.95, which was a big shift from the same quarter last year, when the stock fell -4.2%. Both Alphabet's Class A [$GOOGL] and Class C [$GOOG] stocks gained on earnings news, +3.3% and +3.1% respectively. In the same quarter last year, both classes of stock soared more than +16.0%, so the positive gains this year were not nearly as extreme.

Sector Results

The Healthcare sector experienced great earnings gains throughout the month, with 58.4% of its stocks reporting as net positive price effects, for an average gain of +6.5%. Only 40% of Healthcare stocks saw negative movements due to earnings, though at an average loss of -6.1%, they were significant.

Healthcare was led by Biogen [$BIIB], a biotechnology stock that jumped +7.6% after earnings on July 21st, and by pharmaceutical company Astrazeneca [$AZN], which gained +8.7% on earnings July 28th. On the flip side, biotech stock Gilead Sciences [$GILD] fell -8.5% after earnings on July 25th, and drug delivery provider Alkermes [$ALKS] dropped -7.0% after its quarterly release on July 28th.

Utilities ended the month as the worst performing sector throughout earnings. Only half [50%] of the sector's 26 reporting stocks experienced net positive price changes due to earnings, while the other half showed negative results. The average gain of +1.3% was matched by an equal average loss of -1.3%, meaning the sector was both the least successful as well as the least active.

Impact on Options Market

Examining the impact of earnings on option markets can illuminate some significant differences in trading strategies around important events. In addition to tracking changes in stock price when a company releases earnings, we also tracked changes in the value of the company's options, given they are listed. Many times when a company receives a positive earnings effect, the change in stock price can be dwarfed by the change in option prices, particularly for out-of-the-money calls. Often times traders will buy out-of-the-money calls when they are expecting positive earnings results, and they will buy out-of-the-money puts when they are anticipating a negative movement. So, along with the changes in stock price due to earnings, we followed the movements of the option markets in three different ways:

  • Out-of-the-money 25-Delta call options, unhedged
  • Out-of-the-money 25-Delta put options, unhedged
  • At-the-money straddles [1 call, 1 put], hedged once at the time of the trade

We only tracked these movements for the products that actually listed options, and we tracked them for the nearest expiration [the front month] around the date of the earnings release. The results were narrowed to include only those options where the bid and ask of the option were not too wide to preclude any kind of trading.

After examining the results, we found that throughout the July earnings season, the average change in stock price immediately following earnings was a little over +0.5%. However, the average change in 25-Delta call options for those same stocks was over +1.5%, and the change in value for 25-Delta put options was -8.3%. An example of the difference in strategies can be seen in a stock like Groupon [$GRPN], which released earnings on July 27th. While the stock had a big gain the following day, moving +28.8% from $3.78 to $4.87, the change in value of the 25-Delta call options was several times greater, jumping +275.0%. For healthcare provider Cigna [$CI], which fell after its July 29th earnings -5.2%, the advantage can be seen of buying the 25-Delta puts -- they gained +242.6% in value over the day.

Buying the at-the-money straddle is a slightly more challenging proposition. Option markets will often times price in large premiums to at-the-money options around earnings because traders are aware of the extreme effects that earnings can have on the value of the options. If you're buying the straddle before earnings, you're not making a bet on which direction the stock will move, but simply that the movements in the stock price will be sufficiently volatile enough to cover those extended premiums. When analyzing products that had appropriate at-the-money straddles listed, we found that the average stock price for these products moved +0.8% during earnings, while the average return when buying an at-the-money straddle was -1.9% for the same time frame. An example of this discrepancy would be Facebook [$FB]. Even though the stock went up +1.3% in the day following the earnings release on July 27th, the return on buying the at-the-money straddle in the front expiration was -71.3%. This is likely because the option markets were already pricing in a very high implied volatility to those options, so when the earnings came out and the movement in the stock was minimal, the volatility the next day dropped significantly, greatly reducing the value of the at-the-money options.

During the course of a positive earnings season like we had in July, the results would indicate that buying the out-of-the-money 25-Delta call options is a better strategy than simply buying the stock ahead of earnings. This is because the options usually start very low priced, but have the opportunity to jump in price significantly if the stock does well. Of the 431 products we tracked with applicable call options, 86 of them [20%] had returns of +50% or greater, including 63 [14.6%] that had returns of +100% or greater. While the average return on buying the call options for these products was +1.5%, only 136 [31.6%] of the products actually returned a greater profit by purchasing the call options instead of the stock. The averages are skewed up by the products that returned significant positive results after earnings, but in many cases, the return was negative, even alarmingly so. 202 products [46.9%] suffered -50% or worse returns on 25-Delta call options, and 77 [17.9%] lost -90% or worse. So while the strategy showed positive results over this earnings season, it's worth noting that in many cases, the returns can be negative, and sometimes detrimentally so.