How to Spot a Call Skew — and Why It Might Be Wise to Avoid These Trades

by Lance Ippolito | Apr 19, 2023

I don’t know about you guys… but I’m trading small in size right now. Sure, I have a ton of positions on, but almost all of them are five contracts or less.

It’s not my favorite way to trade, but I’m decently hedged and I feel good about my book as a whole right now.

It’s a big week for earnings with Netflix having reporting Tuesday, April 18, after the close, and Tesla coming Wednesday after the close.

We covered something on Crush the Open this week that’s a good lesson for traders when looking at potential earnings plays…

We were looking at Netflix Inc. (Nasdaq: NFLX) to see if it was a good earnings trade idea… So I pointed out prior resistance around $375 (the upper pink line), and prior support around $300 (the lower pink line) with the stock trading around $338 on Monday morning.

Market makers are projecting about a $30 move up or down in response to the company’s earnings report, which is an “unknown event,” by Friday’s expiration of the weekly options.

So I’m looking at about $368 to the upside, or $308 to the downside for my calculations.

Now here’s the most important part…

Looking at the price of the options, the $300 puts were about $2.50 on Monday morning. That’s kind of expensive to me because I like trading options that are around $1.00 a contract — cheap options!

And to the upside, the $370 calls were $4.40…

This is called a “call skew,” which means the calls are priced higher than puts. This is actually shocking because puts are often more expensive because they can be used for hedging as insurance — downside protection — for large stock positions in case it tanks post-report.

This tells me that a big majority of people are leaning bullish on Netflix for earnings…

And oftentimes when everyone is of the same mind on something, the market tends to do the complete opposite.

To me, this is a dice roll, which can be fun to do because I love rolling the dice sometimes…

But probably the best thing to do in this instance is… nothing — outside of more advanced trading strategies like iron condors, iron flies or selling premium. This is a trade I wouldn’t take outside an all-or-nothing dice roll in a super small position.

So keep these calls skews in mind next time when you’re looking over potential earnings plays.

Top Order Flow:

It’s been a bit of a wild day for our old friend Dell (DELL), which reports after the close. DELL took a huge dip on the open, dropping over 7.5% at one point and crushing the open calls — of which there were MANY. The stock creeped up about 3.5% from there to about $171.80 a share as of 2:30 p.m. ET.

There were a number of dip buyers that stepped in, and we included the two biggest orders, and then a really big order that hit just before 3 p.m. Keep in mind that puts are often hedges against a long position should a stock tank (and this one is way out of the money, which is an even bigger clue it could be a hedge).

Marvell (MRVL) and MongoDB (MDB) also report after the close today. Be sure to check your market maker expected moves and, as always, respect that risk!

DELL May24 31st Strike: 170 Calls premium: $434,140 ASK BULLISH
Trade Date: May 30, 2024 Trade Time: 10:16 am
DELL Jul24 Strike: 180 Calls premium: $398,160 ASK BULLISH
Trade Date: May 30, 2024 Trade Time: 10:35 am
DELL Oct24 Strike: 140 Puts premium: $941,460 ABOVE ASK BEARISH
Trade Date: May 30, 2024 Trade Time: 2:48 pm
MRVL May24 31st Strike: 72 Puts premium: $156,723 ASK BEARISH
Trade Date: May 30, 2024 Trade Time: 10:49 am
MDB May24 31st Strike: 292.5 Puts premium: $103,635 ASK BEARISH
Trade Date: May 30, 2024 Trade Time: 11:25 am