Global stocks had a sluggish start to the week, with declines seen in both European and US markets on Monday. However, the FTSE 100 bucked this trend, nearing the highs achieved last week, thanks to performances from AstraZeneca and the London Stock Exchange. AstraZeneca’s shares climbed after their hypertension drug met all targets in a late-stage trial. The company expects this drug could generate $5 billion annually and boost its mergers and acquisition efforts, following its acquisition of CinCor Pharma in 2023.

Crypto Market Surge

In the US, stocks related to cryptocurrency rose sharply as Bitcoin soared to a record over $121,000. The House of Representatives plans to review important legislation that could expand Bitcoin’s use, potentially impacting the digital currency market. This week is crucial for US equities as earnings season heats up, with JP Morgan, Goldman Sachs, and Netflix among the companies set to report. Analysts have lowered earnings expectations due to concerns about the economy, particularly in the energy sector. Despite this, some companies remain positive. The tech sector is giving mixed signals, suggesting varied performances ahead. The banking sector’s earnings reports will be carefully watched for insights into profits and loan loss provisions that could reveal the state of the US economy and consumer health. The KBW banking index has risen 44% since its low in April and is close to the record highs of 2022. About 40 S&P 500 companies, including big names like Pepsi Co and United Airlines, are scheduled to release earnings this week.

Netflix Earnings Expectations

Netflix’s upcoming earnings report is highly anticipated, as it is the first major tech company to report this season. Analysts forecast revenue of $11.04 billion, up from Q1, with net income expected to reach $3.17 billion. Historically, Netflix’s stock tends to rise after earnings reports, maintaining a positive outlook for Q2 and Q3 revenues. Given the mixed market trends, we think derivative traders should prepare for increased volatility in specific sectors rather than betting on overall market direction. The calm surface, as shown by a CBOE Volatility Index (VIX) consistently below 15 for much of the past month, hides significant underlying tensions ripe for opportunity. AstraZeneca’s success in its drug trial signals strength. We view this as more than just a stock event; it could catalyze growth in the healthcare sector. Currently, the implied volatility on healthcare ETFs like XLV is quite low. We are considering buying long-dated call options on select pharmaceutical companies with promising pipelines, which may benefit from further M&A activity while carefully managing our risk. On the cryptocurrency front, things are heating up. Although Bitcoin reached record highs, it has since retreated from its March 2024 peak of over $73,000 and is currently in a consolidation phase. This pause comes ahead of significant legislative actions, like the FIT21 Act, which passed the House in May, creating a build-up of potential energy. For traders, this situation is less about choosing a direction and more about preparing for volatility. High option premiums for crypto-linked ETFs and stocks like Coinbase indicate the market expects significant moves. We are looking at strategies like straddles or strangles for these names, aiming to benefit from any breakout once more regulatory clarity or new narratives emerge. Earnings season is the main stage now. Even though analysts have cut forecasts, FactSet reports that the S&P 500’s estimated year-over-year earnings growth for Q2 is still a solid 9.0%. This creates a “beat the lowered bar” opportunity. The banking sector is particularly noteworthy. The banking index’s increase has been impressive, but it largely depends on net interest margins. As the Federal Reserve’s rate path remains uncertain, we will analyze the big banks’ reports for any updates on loan loss provisions. In Q1 2024, major US banks collectively set aside over $9 billion for potential bad loans; any changes in this trend will significantly impact the sector. A pairs trade—going long on a bank showing strong investment recovery while shorting a regional bank more tied to commercial real estate—could be a smart strategy. Lastly, Netflix’s report will influence the tech sector. Historically, the stock sees an average price move of about +/- 10% after earnings. With analysts predicting nearly 4 million net subscriber additions for the quarter, any surprises could easily trigger this kind of movement. This creates a perfect scenario for selling option premiums using strategies like an iron condor if we expect the move to be smaller than anticipated, or buying a straddle if we believe there will be a strong reaction to guidance on ad-tier revenue and password-sharing regulations. Create your live VT Markets account and start trading now.

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