Option Markets are Predicting a ±18.5% Earnings Move
Sea Limited American Depositary Shares Each Representing One Class A Ordinary Share (SE) is scheduled to release earnings on Monday, March 4, 2024, before the market opens. The option markets are currently pricing in a ±18.5% stock move for SE after the earnings announcement. That is the biggest expectation leading into an earnings release since May 2022. In this article, we will analyze the market's current expectation against the results from actual historical earnings moves.
How did historical predictions in SE compare to actual earnings moves?
In the chart below, the blue brackets indicate what the SE options traders expected the earnings move to be (in either direction), while the red and green bars show the actual moves that occurred over the last 12 periods. On average, traders priced the estimated over/under earnings move at 12.4% over the last 12 quarters. In comparison, the actual average move was 15.2%. That translates to a 2.8% differential between the expected moves and the actual moves.
Expected Earnings Move vs. Actual
Since 2021, Options have Overestimated Earnings Moves 50% of the Time
How Does a ±18.5% Move Measure Up to Historical Stock Moves?
We look at the current SE expected earnings move of ±18.5% and compare it to actual historical stock moves from the 3 different perspectives below:
- 1-day earnings moves using close-to-close prices
- The opening gap move immediately following earnings, from the prior close to the open price
- The largest intraday move, from the previous day's close to either the high price of the day or the low price of the day
The 3 charts below show the current market prediction of a ±18.5% earnings move highlighted in blue, while the green bars show historical earnings moves that were up and the red bars show historical earnings moves that were down.
Actual 1-Day Moves Post-Earnings
Historically, the average earnings move was ±13.4% on the day after the release. There have been 7 instances in the last 7 years where the stock moved more than ±18.5% on the day after earnings. The highest single-day move was 36.0% on November 15, 2022. Since 2017, 72% of the actual earnings moves were less than 18.5% (in either direction).
28% of Historical 1-Day Earnings Moves were above 18.5%
Earnings Gaps
SE has averaged an opening gap of 8.7% after earnings. The largest opening gap over the last 7 years was 21.7%, which would be 3.2% higher than the current implied earnings move. 88% of the historical gap moves were smaller than ±18.5%, up or down.
12% of Historical Earnings Opening Gaps were above ±18.5%
Historical Probability of Touch
In 5 of SE's last 16 earnings dates, the stock price moved beyond ±18.5% at some point during the day -- including moves to the intraday high or intraday low. The largest move that occurred during this time was on November 15, 2022, when the stock gained 43.3% to the high of the day.
31% Historical Probability of Touch for ±18.5% Move
Conclusion
Based on history, there is a small chance (31%) that, at some point during the day, the stock will make a move beyond ±18.5% from the previous close. However, a ±18.5% move close-to-close is more rare, occurring in only 25% of instances. And it is even less likely that the stock makes an opening gap move that exceeds ±18.5%, happening in only 13% of cases.
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