By Ryan Vlastelica
NEW YORK (Reuters) - With some of Wall Street's more volatile names set to report in the next couple of days, traders who bet on big swings in shares are hoping to see moves more like Facebook than Netflix.
Netflix, along with Gilead Sciences
For volatility investors, the direction of the move is not important, just the magnitude. Traders use an option strategy known as a straddle - buying a bullish call option and a bearish put option at the same strike price - in a bet that a stock will move by a certain amount. Even if a stock rises, the trader can lose money if it moves less than implied by the combined cost of the put and call options.
On average, the realized stock change on earnings is about 1.5 percent lower than expected, according to derivatives strategists at Credit Suisse in New York.
"Many of the companies that are typically volatile have had in-line numbers, which wouldn’t result in a materially volatile stocks afterwards," said Doug Kass, president of Seabreeze Partners in Palm Beach, Florida.
Expedia and Tesla are both due to report results on Thursday. Over the past eight quarters, both have averaged a move of about 15 percent following results, according to Thomson Reuters data. Based on where they traded on Monday, investors expect a move of 9.4 percent for Expedia and 7.8 percent for Tesla.
Investors trading options in 3D Systems Corp
Recent days have seen more volatility among individual names. Amazon.com Inc
Amazon lost more than $34 on the day after reporting results. The options market had priced in a $22 move. Facebook shares rose as much as $5.45, beyond the $4.92 move estimated by the options market, said Adam Sarhan, chief executive of Sarhan Capital in New York.
Still, moves like these have been the exception this season, in an environment where the CBOE Volatility index <.VIX> is less than 13, well below its historical average of 20. Netflix Inc
"One might expect a little more volatility to the downside, which we haven’t seen," said Peter Cecchini, managing director and chief market strategist at Cantor Fitzgerald in New York. "We could be in a calm before the storm, there’s a lot of complacency."
"Last quarter the people who played an Apple straddle really got rewarded," said Dennis Dick, proprietary trader at Bright Trading LLC in Las Vegas. Apple gained 11.4 percent in the week after results.
"This time they bid it up too much, and those people got beat up."
Sarhan said that selling volatility in high-growth names can still be dangerous, even in a quiet market.
"You’re going into a situation where you know these names have had big moves in the past," he said.
(Editing by Nick Zieminski)