If you like to trade earnings and swing for the fences, you need to check out the feature in thinkorswim® that can clue you into potential moves.
When researching potential movers with upcoming earnings announcements, you can start your due diligence by going to the Calendar feature in the MarketWatch page of thinkorswim, where you’ll see what companies are up for earnings releases. Then view the Market Maker Move (MMM) to see which “swing for the fences” trade might carry the ball furthest.
Located in the upper-right-hand side of the Trade page when visible, the MMM is a measure of the expected magnitude of price movement based on market volatility. This doesn’t mean that it measures expected movement, but rather the implied move in dollars versus percent (to help the mathematically challenged) based on the volatility differential between the front and back month.
This is useful in cases where an event (i.e. earnings) takes place in the front month and you would like to estimate the implied move due to that event between now and the front-month expiration.
The MMM looks at options-pricing models backwards. It uses current option pricing to “reverse engineer” an estimate of the potential daily price movement of an underlying instrument based on assumptions about implied volatility. How it’s calculated is our version of the Colonel’s Secret Recipe, so we can’t give it away. But broadly, we arrive at this calculation by using stock price, volatility differential, and time to expiration.
Now, you won’t always see the MMM quote. If the volatility differential is positive, the MMM will be displayed. If negative, it will not. In other words, if the near term expiration has greater volatility than the back month, the MMM value will show.
One caveat: notice we didn’t say that the stock would go up when the MMM is displayed. Only that it has the potential to move—up or down. So don’t go loading up on long calls just because the big yellow button appears when earnings happen to be around the corner. It’s not a crystal ball. So do the work and figure out the best strategy based on what you can afford to lose, not what you expect to make!
FIGURE 1: PAINT BY NUMBER. The Market Maker Move on TD Ameritrade’s thinkorswim® platform clues you into stocks with potentially bigger moves (up or down) based on comparing front-month to back-month volatility. For illustrative purposes only.
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