The options market is pricing in stronger-than-usual post-earnings moves
McDonald's (MCD) kicked off a busy week of big-cap earnings bright and early this morning, with the shares last seen trading up 5.2%. Dow stocks Merck & Co., Inc. (NYSE:MRK) and Pfizer Inc. (NYSE:PFE) could also be poised for potentially volatile trading, with both pharmaceutical firms scheduled to report first-quarter earnings before the open tomorrow, May 1.
Merck Options Traders Bet on a Round-Number Breakout
Over the past eight quarters, Merck stock has averaged a single-session post-earnings move of 2%, though this time around, the options market is pricing in a slightly higher 4% swing. It's been a flip of the coin as to whether the earnings reactions have been positive or negative, but the two most recent quarters have resulted in moves to the downside.
The stock has been racing higher since bottoming at a two-year low of $52.83 earlier this month -- thanks to optimism surrounding the company's Keytruda lung cancer treatment -- and was last seen up 13% at $59.63. However, this rally recently stalled out near the $60-$61 region, which coincides with a 61.8% Fibonacci retracement of the stock's late October sell-off, its 320-day moving average, and a short-term floor in January.
Options traders don't seem too worried about the overhead resistance, though. The May 60 call has seen the biggest rise in open interest over the past 10 days with 6,527 added, and data from the major options exchanges confirms mostly buy-to-open activity here. The last time Merck stock closed north of the round $60 mark on a weekly basis was Jan. 26.
Pfizer Call Writers Target Long-Term Technical Ceiling
Pfizer has moved 1.6% either way in the session after the company reports, looking back eight quarters. All but two of these post-earnings sessions have been negative for the stock, including the last four in a row. For tomorrow's trading, the options market is pricing in a 3.2% move for PFE, regardless of direction.
PFE is also headed for a big monthly win, up 3.8% so far in April to trade at $36.89. However, this rally really started in late March, when the security took a sharp bounce off its 320-day moving average -- a trendline that also contained Pfizer's pullback from its 15-year high of $39.43 from Jan. 29. The shares are now facing off with the $37.00-$37.40 region, though, which marked tops in December and February.
This level has caught the eye of options traders, too, with the June 37 call home to peak open interest of 38,101 contracts. The May 37 call is not far behind with 35,401 contracts outstanding, and data from Trade-Alert points to notable sell-to-open activity here back in mid-April when PFE stock was trading near $36.30.