“Options traders break down a massive Alphabet trade into earnings” — watch on CNBC.
Brent Kochuba, founder of SpotGamma, joined Options Action Live on cnbc.com to break down dealer positioning in Microsoft, Alphabet and Oracle around earnings, and why income-driven call selling sits where it does.
The Fed left rates where the market expected, Alphabet traded roughly 20% below its highs, and Microsoft sat just off an all-time high, with both companies due to report that same afternoon. Brent Kochuba, founder of SpotGamma, joined Options Action Live on cnbc.com to look at how the options market had positioned around those two prints.
Call Selling Builds Resistance Above Spot
A large share of mega-cap options flow comes from investors who own the stock and sell calls against it to generate income. That selling leaves dealers holding positive gamma at those strikes, and when dealers hold positive gamma they sell into rallies and buy dips, so their hedging leans against a price move rather than with it. In Microsoft, the heaviest call selling sat around $550, with the stock near $530 and an implied move of roughly 4.5% into the report. Those sold calls sit almost exactly where the options market priced the top of the expected range, which tends to make that area a stalling point.
Thinner Support Below Than Above
Overwriting builds resistance above spot, but it rarely creates a matching cushion underneath, because the same investors are not buying puts in anything like the same size. Brent sees more upside resistance than downside support across the mega-caps, which makes a break lower the risk he is more concerned about into these reports.
Alphabet looked similar, with positive gamma above the market and some genuine downside hedging as traders guarded against a Meta-like reaction to a strong quarter. The options market priced a move of about 5.6% in Alphabet, a shade above its longer-run average near 5%, and the last two reports delivered roughly 10% and 7% in opposite directions.
The Microsoft Trade: A Short-Dated Diagonal
Brent walked through a diagonal in Microsoft built strictly around the event: selling that week’s $550 calls and buying the following week’s $560 calls against them. The position works if Microsoft holds below $550 into Friday’s expiration, and it also holds up if the stock falls hard, since both legs sit above the market. If the $550 call expires worthless, the long $560 call can be carried into the following week. Implied volatility usually contracts once results clear, and a structure short the nearer expiration is built to collect that contraction rather than to call the direction of the move.
Oracle: Short Puts Below, Long Calls Above
Oracle jumped about 11% during the show on free cash flow figures from its investor day. Positioning in the name shows the buy side short puts below $120, which helped carry the stock through its lows, and long calls from $135 up toward $140. That upper band leaves dealers short gamma, so their hedging chases price higher instead of fading it. Above $150 the positioning thins out, which suggests relatively few traders are placed for a move of that size.
Pricing looks consistent with that positioning, because implied volatility near 56 sits against one-month realized volatility of about 55, which leaves the premium in Oracle options slim relative to how much the stock has actually been moving, and defined-risk upside structures look reasonably priced rather than rich.
Brent Kochuba founded SpotGamma and appears on CNBC. He was previously a portfolio manager at Seven North Capital Management, building options-based strategies, and a derivatives broker at Wolverine Execution, Credit Suisse and Bank of America.
Watch the full segment on CNBC.
Options Action Live runs Wednesdays at 1:30 p.m. CT on cnbc.com.