Tesla and Alphabet Will Surge After Earnings, Making This an Excellent Bullish Options Bet

Earnings season is in full swing, with Tesla and Alphabet, Google's parent company, set to report their latest results after the market closes on Tuesday.

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These two giants make up 8% of the Nasdaq and are among its top 10 components by market capitalization. Their earnings reports are expected to cause significant price movements in the tech sector.

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Here’s a six-month daily chart of the Invesco QQQ Trust, which closely tracks the Nasdaq-100's price movement and serves as a proxy for trading tech stocks. Two potential support zones are highlighted, with a noticeable mild bounce around the $475 area. I’m considering a bullish trade in QQQ for Wednesday, depending on a positive market reaction to the earnings reports from GOOG and TSLA.

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Earnings reports typically lead to a spike in implied volatility (IV), making buying naked calls and puts less attractive due to the inflated premiums. Instead, by buying and selling options simultaneously, one can mitigate the negative impact of increased IV.

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I propose a "bull call spread" for this trade. QQQ, being a highly liquid ETF, offers $1 wide strikes in its option chain. This allows the construction of a $1 wide bull call spread, risking as little as $50 to potentially make $50 per winning trade. To increase risk, more contracts can be added. For instance, a 50-contract trade would risk $2,500 to make $2,500. The trade will double the investment if QQQ increases by $1 by the expiration date.

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Exact Trade Setup

• Buy $482 Call July 26 expiry
• Sell $483 Call July 26 expiry
• Limit Price: 50 cents

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This trade is a conditional directional bet based on the expectation of a positive response to the earnings reports from GOOG and TSLA. The 482-483 call spread is suggested because QQQ is currently trading at 482. If the earnings are strong, QQQ is likely to gap up and open at a higher price the next day. In such a case, constructing a bull call spread around the current price level should achieve the desired outcome.

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Tesla and Alphabet’s earnings reports are pivotal due to their substantial influence on the Nasdaq. As high-profile tech stocks, their performance can drive broader market sentiment. By examining the Invesco QQQ Trust chart, we identify potential support zones and consider how the market might react post-earnings.

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Given the heightened implied volatility surrounding earnings announcements, traditional options strategies like buying calls or puts outright become expensive and risky due to inflated premiums. The bull call spread strategy mitigates this issue by simultaneously buying and selling options, effectively balancing the cost and reducing the impact of IV spikes.

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In this specific setup, purchasing the $482 call and selling the $483 call with a July 26 expiry offers a cost-effective way to leverage the anticipated positive movement in QQQ, driven by strong earnings from Tesla and Alphabet. The limit price of 50 cents ensures that the potential profit and loss are balanced, making this trade manageable and scalable depending on the trader’s risk appetite.

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Potential Outcomes

1. Positive Earnings Reaction: If Tesla and Alphabet report strong earnings, QQQ is likely to open higher, validating the bull call spread strategy. The $1 wide spread should benefit from the upward movement, potentially doubling the initial investment if QQQ rises by $1.
2. Neutral Earnings Reaction: If the earnings reports are neutral, with no significant positive or negative surprises, QQQ may experience limited movement. In this case, the risk is contained to the initial $50 per spread, as the trade relies on a $1 increase for profitability.
3. Negative Earnings Reaction: Should Tesla or Alphabet report disappointing earnings, QQQ could drop, rendering the bull call spread unprofitable. However, the predefined risk of $50 per spread (or more if additional contracts are traded) helps manage potential losses.

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The proposed bull call spread strategy is a calculated bet on positive earnings reports from Tesla and Alphabet. By carefully selecting the strike prices and limit price, the trade aims to capitalize on the anticipated market reaction while mitigating the risks associated with high implied volatility. This approach allows traders to potentially double their investment with a well-defined risk, making it a prudent strategy for navigating the earnings season.

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