Interactive Brokers Insights: Options Market Expectations for Apple, Amazon, and Payrolls

The stock market took investors on a roller-coaster ride yesterday, with the S&P 500 (SPX) experiencing a sharp drop of -1.38%, marking its worst performance since April 25th. The Nasdaq 100 (NDX) didn't fare much better, plummeting -2.21%, even surpassing its recent decline on July 20th. Adding to the frenzy, the Cboe Volatility Index (VIX) woke up from its slumber, surging from 13.93 to 16.09, and bond yields rose across the yield curve. As the market opened this morning, it seemed like yesterday's turbulence was no fluke, as stocks continued to fall, and both volatility and yields remained high.

In the midst of all this chaos, three critical data releases are poised to shake things up further. Today, after the market close, all eyes are on earnings reports from two tech giants, Apple (AAPL) and Amazon (AMZN). Additionally, tomorrow morning brings the eagerly awaited July's Nonfarm Payrolls and Unemployment reports. These economic indicators are crucial, with the payrolls report being the most closely watched among a range of economic data. Furthermore, AAPL and AMZN hold the top positions in the US market capitalization ranking, making them pivotal players, accounting for a combined 10.5% of SPX and 16.75% of NDX. AAPL alone constitutes around two-thirds of these values.

What are the numbers to watch for in the Nonfarm Payrolls report？ Economists predict an increase of 200,000 jobs, slightly below June's figure of 209,000. As for the Unemployment Rate, it is expected to remain unchanged at 3.6%. However, the market's reaction to these numbers is uncertain. If the payrolls diverge significantly from the estimates, it could raise concerns about the Federal Reserve's interest rate decisions in response to a stronger job market or worry investors if the numbers fall short, possibly indicating a potential recession.

Normally, options traders would analyze various measures such as probability, implied volatility, and skew for options expiring tomorrow to gauge how the market is pricing in different outcomes. But with the intermingling effects of today's earnings reports and tomorrow's economic data, a more collective approach is needed.

According to Interactive Brokers' IBKR Probability Lab for SPY options, the sentiment among options traders is still predominantly bullish for short-term options. The peak is observed in the 450-451 range, above the current price of $448.88 for SPY.

Analyzing the skew for SPY options expiring tomorrow, it appears quite steep, especially when compared to the relatively linear skew for monthly options expiring on August 18th. However, at-money implied volatility is holding steady at a robust 20%, indicating an expected daily move of approximately 1.25%.

Let's dive into the key metrics for individual options of AAPL and AMZN:

AMZN is known for its post-earnings volatility, as evidenced by its higher Price/Earnings ratio and expectations of faster growth based on estimated earnings. Surprisingly, it has a low PEG ratio compared to AAPL, despite investors paying more for the latter's relatively slow growth.

AAPL's peak probability is displayed in at-money options, suggesting that options traders are more focused on this range.

In terms of implied volatilities for options within a +/- 6% range around the current price, AAPL options have implied volatilities in the 75-80% range, translating to an implied daily move of nearly 5%.

AMZN options, on the other hand, display more risk aversion, understandable given the stock's history of falling after its last three reports and 4 of the last 6. The peak is in the 122-123 range, which is about 5% below the current stock price:

The skew for AMZN options expiring this week is relatively flat, with a notable dip in implied volatility around the $115 range. The 150% implied volatility for at-money options indicates expectations for a daily move of about 9%, well above the average post-earnings move for AMZN.

Earlier this earnings season, prior to Microsoft (MSFT), Alphabet (GOOG, GOOGL), and Meta Platforms (META) reporting, there was a hypothesis suggesting that better-performing stocks face higher earnings day hurdles than underperformers. This theory still holds weight, although META turned out to be an exception. Both AAPL and AMZN, despite experiencing declines from their recent highs, have seen impressive year-to-date gains of 48% and 53%, respectively. It is worth considering how the market might react similarly to MSFT, TSLA, NFLX, etc., where EPS beat estimates, but investors focused on other aspects of their reports, leading to stock price declines. Handset sales for AAPL and cloud computing for AMZN are among the potential factors at play.

While the common narrative touts this earnings season as generally successful, a closer look at major indices reveals a different story. Since the beginning of the earnings season on July 14th, when JPMorgan (JPM) and other large banks reported, SPX has seen a meager rise from 4,510.04 to 4,513.39, merely a 0.07% increase. NDX, on the other hand, faced a decline from 15,571.98 to 15,370.74, a drop of 1.29%.

As we approach tomorrow's numbers, the market is eagerly anticipating how they will shape the earnings narrative. For real-time updates on the latest market developments, download and install the WikiFX App on your smartphone here: https://www.wikifx.com/en/download.html. Stay tuned for further insights and analysis to stay ahead in these dynamic market conditions.

Please make sure to access the official Interactive Brokers website by visiting their page on WikiFX's dealer section. Avoid dealing with any cloned brokers.

You can find the link to Interactive Brokers' official page on the WikiFX dealer section here: https://www.wikifx.com/en/dealer/0001646186.html