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3 Options Strategies For Roku Based On Its Historical Reaction To Earnings

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3 Options Strategies For Roku Based On Its Historical Reaction To Earnings

Roku Inc (NASDAQ: ROKU) is due to report earnings for its December quarter on Thursday, Feb. 13 after the market close.

Here are the consensus Wall Street estimates for Thursday:

  • Earnings Per Share: $(0.14)
  • Revenue: $391 million

Roku has beaten those estimates every single quarter since its IPO in 2017. But beating Wall Street’s estimates is not always indicative of how the stock will react.

roku_pro.png
Source: Benzinga Pro

How Roku Historically Moves Ahead Of Earnings

In its previous nine quarters as a public company, Roku has historically moved higher into earnings, according to data from options research platform Market Chameleon.

The table below shows how ROKU has historically moved before each of its previous nine earnings reports.

roku_before.png
Source: Marketchameleon.com

While the stock doesn’t always trade higher in the days leading up to an earnings report, it does trade higher more often than not. The only time period that is the exception is in the two trading days leading up to an earnings report, in which ROKU is more likely to trade down.

How Roku Historically Moves The Day Of Earnings

Roku shares have moved higher in the 24 hours after reporting earnings five times out of its nine previous reports. We can see this in the "Earnings Move" column. 

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Source: Marketchameleon.com

The biggest thing to note here is ROKU's volatility. Because of its position as one of Wall Street’s favorite growth stocks, ROKU can be especially volatile after earnings.

The absolute average of ROKU’s opening gap move—meaning the average percent change from the pre-earnings close to the post-earnings open—is 14% in either direction. However, it’s important to note that the stock can be even more volatile after that opening gap. The absolute average of the stock’s earnings move from the pre-earnings close to the post-earnings close is 23% in either direction. This volatility creates an opportunity for options traders.

How Roku Historically Moves After Earnings

Despite the fact that the company routinely beat estimates, shares of Roku are more likely to trade down in the 48-72 hours after earnings. However, because the stock’s historical moves to the upside have been so great, the stock’s overall average post-earnings move is still positive.

roku_after.png
Source: Marketchameleon.com

Two days after earnings, ROKU has traded lower five out of the previous nine quarters. The same can be said for the stock three days after earnings. Looking out a little longer term, the stock is far more likely to trade higher two weeks after earnings, which shares trading higher seven times out of nine by an average of 10%.

Interestingly, it appears the options market is underestimating ROKU’s post-earnings move this time around. Currently, the stocks’ implied volatility—the expected post-earnings move calculated from the implied at-the-money straddle of the expiration nearest the earnings date— is 15.5%. Over the last four quarters, the average move is 22.6%.

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3 Options Strategies You Can Use To Trade Roku’s Earnings

According to Market Chameleon, the three options strategies with the highest theoretical edge ahead of Roku’s earnings— meaning the expected average return per trade is greatest based on calculations of historical data—as of this writing are a debit iron condor, bull put spread, and bull call spread.

The cards below show what each trade involves.

The most important thing to note on each card is the difference between the market price, the option strategy’s current value, and theoretical value, the strategy’s value based on historical data. The trades with market prices lower than the theoretical value are being offered at a discount, while a higher market value indicates the trade is more expensive than historical prices.

screen_shot_2020-02-12_at_4.41.46_pm.png
Source: Marketchameleon.com

Go to Market Chameleon for more information on how to use each of these strategies ahead of ROKU’s earnings.

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