Let’s talk about implied moves and Salesforce ($CRM) (March 04, 2019)


CRM, Salesforce ( NYSE: CRM ); why am I looking at this? Well, the company reported earnings after hours and typically we look at these earnings plays as just that, plays. You are playing the extreme move of a stock after it reports earnings. I want to explain something to you, this is really important; also it has to do with whether you are going to sell a stock before earnings and then also what you are going to do with it after the fact.

First of all, let me explain the implied move in a stock. Here, if you look at the options market and as far as how the market implies a move and this and that, that’s for another time, I can’t go into everything in one video. In this case, we will say that just generally speaking, and I am just using easy mental math, the options market implied a $10.00 move in this stock in reaction to earnings. That would be at 158.50, it could move up to 168.50 on the upside and down to, I have 148.00 so fine, whatever, on the downside, it would be 148.50. So this is what the options market expects and those who were option sellers would be happy if the stock moved within this range. If it moves outside, if it moves above 168.50 then those people who sold calls, assuming a move to 168.50 and no higher, those folks are under water.

On the other hand, if the stock falls down those folks who sold puts under the implied move, the assumption would be that the stock would not trade anymore below 148.50. If the stock falls below that level then those folks are losing money. The idea is for option sellers (I will tell you why that is important), for option sellers, as long as the stock stays in the green it is all good.

The reason we are looking at selling prices and that is, what the bid price is on the call and what the bid price is on the put, which by the way is the closest strike price to where the stock is trading at. The reason we are looking at the bid is that is what the seller would just say, “Okay, I am selling a put or I am selling a call.” So we have to look at those numbers and it means that if somebody sold a call and the stock went way up here then they have an obligation to buy the stock and give it to whoever is on the other side of that trade because they were assuming that the stock is going to stay in the green box here.

On the other hand, if the stock falls down to 120.00 or so those folks who sold puts are not in a good situation because they were assuming, based on the implied move calculations, they were assuming that the stock wasn’t going to go down any further than this. And so with the stock going down, suddenly that little money that they took in for selling the 145.00 puts or even the 150.00 puts, now all the sudden they are losing a lot of money.

The idea is, when the options market is SURPRISED, when the stock falls way down here or moves WAY up here ABOVE and BELOW the implied moves on the call and the put respectively. When it does that it is like it is a rubber band. It is like it is a rubber band that is stretched super tight and then at some point that stock is going to come back here. Ultimately, what the options market is doing is implying that the rubber band is going to be this wide and no wider. So any stretch to the upside or any stretch to the downside is ultimately supposed to, boom, go there.

So because Salesforce ( NYSE: CRM ) is still in the old green box here it means that the options market is not surprised. You are not going to see a big snapback move tomorrow. Nor, should you see a big, massive sell-off, unless there is more of a sell-off in the market, unless there is more of a sell-off in the overall market, nobody can predict that.

With respect to Salesforce ( NYSE: CRM ) here’s the deal: Those that were holding the stock over earnings and their risk profile called for the stock to stay ABOVE the implied move here, this 148.50, they’re happy because they’re not getting stopped out. Of course, they would have liked to have had the stock move up but it has moved down and that is okay for them, it is acceptable to them.

I hope this helps you. Again, it is not a complete video, I didn’t intend it to be. But I want to kind of whet your appetite about the things that you need to be thinking about if you are going to be successful. And that is, deciding before you hold a stock over earnings, what’s the probability as far as where a stock is going to go? Where is the options market saying the outside limit of the move is? Once you know that it is almost, but not quite, it is almost as good as somebody saying, “Hey, I can guarantee you that the stock is not going to fall below 148.00 or 168.00. What do you want to do?

Again, there are no guarantees but this is ALMOST that good because options markets tend to be very efficient. And when something IS way, way, way outside, that lends a whole new different trade. Now you can truly trade the snapback. Here, this is just a regular old rubber band. Don’t get caught in a day trade on this, I just don’t think it is going to work.

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