US Equity Derivatives Strategy
Q3 Earnings Volatility, Trading AI Rotation Beneficiaries into Reporting
Earnings expectations look elevated on the surface, but they’re achievable. Consensus sees S&P 500 3Q EPS up ~24% y/y, but this is a clear deceleration from last quarter and the headline figure is top-heavy: the median company is expected to grow a more modest +8%. Our strategists expect earnings to help underpin markets this quarter, with breadth improving even as AI continues to lead. Earnings volatility is moderately rich. Options imply elevated moves (~80th %ile) and screen modestly expensive vs. realized. The premium reflects earnings uncertainty, high rates, geopolitical risk, and shakier sentiment across the AI complex. We screen for attractive long and short gamma setups into earnings. Following the sentiment-driven drawdown in AI-exposed names (driven by datacenter buildout concerns, tighter credit for levered “neocloud” capex, and renewed memory pricing risk post-CXMT), we’re avoiding exposed high‑beta AI for now; a bottom may form, but timing is unpredictable and optionality is expensive. Into earnings, we favor trading segments with strong fundamentals that can benefit from improving breadth and rotation out of exposed upstream AI: The US consumer remains resilient: Chase card data show September consumer spending +6.6% y/y, with strength broad-based across income cohorts, and bank management teams reaffirmed consumer resilience last week. Express it via XRT call spreads given low implied vols and flat skew, JP2RTL call spreads for broader retail exposure, and/or single-name call spreads on sold-off consumer stocks with attractive leverage. Trade Quality AI rotation + cloud beats: buy worst-of-calls on [AMZN, GOOGL, MSFT] as a levered way to express hyperscaler earnings upside on strong cloud dynamics and a potential rotation from higher-beta upstream AI into “quality AI”. Buy AMZN call spreads into the print on continued AWS momentum and a resilient consumer backdrop. Buy HWM calls for a potential beat-and-raise and a sharp snapback from the recent sentiment-driven sell-off tied to competitor headlines. Buy T short-dated calls into this week’s earnings for an expected beat-and-raise, with upside potentially amplified by short covering and retail flows.
Q3 Earnings Season Preview
Consensus expects S&P 500 3Q EPS to rise ~24% y/y. While this may appear elevated at face value, our Equity Strategists see it as less demanding in context. It represents a significant slowing vs. last quarter’s +50% y/y, and is top-heavy: excluding NVDA and MU this quarter’s hurdle rate falls to +15%, while the median S&P 500 stock is expected to grow a more modest +8% y/y.
Global PMIs accelerated through the quarter to multi-year highs and are projecting a strong EPS delivery, while our strategists’ leading earnings indicator remains in an uptrend. AI continues to do the heavy lifting, but earnings strength is broadening.
Despite headwinds from higher energy prices (oil/diesel ~+35% q/q) and higher rates (US 10Y yield +80bps q/q), our strategists view the hurdle as achievable and expect earnings to provide support for the market this quarter.
Most companies (~80% of the Russell 1000 market cap) are expected to report by mid-November, with the weeks of Oct 26th and Nov 2nd the busiest (Figure 1). Figure 2 provides an earnings calendar by sector for S&P 500 names, listing the percentage of each sector’s market cap that reports each week.
Options are pricing moderately above-average earnings volatility again this quarter. Across our universe (Russell 1000 names with liquid options that have yet to report), implied moves are elevated (~80th %ile versus history, Figure 4) and screen modestly rich vs. realized, reflecting earnings uncertainty, high rates, geopolitical risk, and weaker sentiment around AI. The average option implied earnings day move is 6.8% vs. a 6.6% average realized move over the last 3 years and 6.7% average realized move (Figure 3). Sector-wise, implied moves look rich (vs 3Y realized history) in Utilities, Energy, and Materials, and but cheap in Staples and Communication Services.
Using the volatility term structure for a particular stock, we can estimate how much the options market is implying the stock will move on the day of its earnings announcement. We compare this “implied earnings day move” to the average earnings day move that the stock has historically delivered. Figure 5 plots the implied vs. historical earnings day moves for the top ~60 S&P 500 members. Names above the diagonal have a rich implied move compared with what the stock has delivered on past earnings days, and names below the diagonal are cheap relative to history.
Single Stock Trades
Buy AMZN call spreads to position into an expected earnings beat driven by AWS momentum
Amazon (AMZN) delivered a strong 2Q print, highlighted by sharp AWS acceleration and overall OI upside. The stock jumped ~15% on the release, moving above $280 per share, and then traded sideways for the remainder of the quarter as positioning in AMZN (and hyperscalers more broadly, ex-META) stayed muted. Attention shifted toward higher-beta AI exposures (particularly upstream AI names), while some investors have also focused on concerns that agentic AI could disintermediate the e-commerce business, posing risks to the high-margin retail media advertising business.
Into 3Q earnings, the setup looks supportive across both of Amazon’s key businesses.
On the consumer side, trends appear resilient based on Chase card data (noted above). In cloud, conditions remain constructive; AI adoption continues to rise, backlog demand from AI labs remains strong, and incremental capacity is coming online into what still looks like a supply-constrained environment. JPM’s estimates for the hyperscaler cloud group (MSFT, GOOGL, AMZN) point to further acceleration in 3Q.
Ahead of the print (10/29 post-mkt), our internet analysts (Doug Anmuth and team) raised their AWS growth expectations. They model AWS accelerating to roughly 40% growth in 2027 and look for 3Q AWS growth to move into the low 40s, which they note could still prove conservative. They see upside drivers including scaling the OpenAI partnership, deploying an incremental ~2 million GPUs over 2027-2028, and continued pricing power. AWS recently announced a 15% increase to GPU reserved pricing starting 10/7, marking its fourth consecutive quarterly price increase for reserved AI compute capacity across GPU classes, with pricing up roughly 40%-75% YTD. They maintain a $365 price target (46% upside) for Dec’27.
In a tape where sentiment has periodically disconnected fundamentals from price action, AMZN is our preferred AI earnings setup: cleaner positioning and fewer concerns around the frontier AI race or funding constraints from the credit backdrop keep focus on the potential for a beat-and-raise. That said, sentiment-driven volatility post-release could persist and still leave AMZN range-bound.
AMZN options imply a 6.4% earnings move, in line with its average realized earnings move of 6.3% over the past three years. We like owning call spreads into the print as a nimble way to position for upside on earnings.
- Buy AMZN 30-Oct-26 270-285 call spreads for $2.11 (~0.8% of notional), indicatively (7.1x max leverage, 249.45 ref price)
Buy HWM calls on an expected earnings beat and sentiment reversal
Howmet Aerospace (HWM) is down ~25% after a “shoot first, aim later” sell-off sparked by three sentiment shocks over the past two months (Figure 12):
- On 8/31, SpaceX (SPCX) announced plans to develop turbine blades in-house, and HWM traded down ~8%
- Next, on 9/8, HWM fell another ~11% after GE Aerospace (one of HWM’s largest customers) announced its acquisition of Consolidated Precision Products (CPP), a competitor to HWM.
- Broader aerospace sentiment weakened on concerns that “higher for longer” oil prices could slow air traffic growth, potentially reducing maintenance demand on older aircraft and accelerating retirements as new deliveries ramp. This could ultimately impact spares activity for HWM, though HWM appears less exposed than many of its peers given its ability to earn across both new builds and maintenance, and the new-engine production ramp should continue even if air traffic moderates.
Our Aerospace & Defense analysts (Seth Seifman and team) are overweight HWM with a $350 price target for Dec’27 (58% upside). They see scope for estimates to move higher this quarter (10/29 pre-mkt release) and expect management to remain confident in the outlook for durable Aero and Industrial Gas Turbine (IGT) growth.
Our analysts view the recent sell-off as unwarranted and believe the market is overreacting to both the SpaceX and GE headlines. In IGT, power remains a key constraint on the AI compute buildout, implying turbine-blade demand should increase overall; meanwhile, our analysts believe SpaceX does not intend to provide power or IGT equipment to third parties. In Aero, GE’s upgrades to CPP will take years to implement and its capabilities should still lag those of HWM, which will continue to invest. At the same time, a growing fleet of new generation engines mean the overall market should continue growing for HWM.
HWM options imply a 4.9% earnings move, which screens cheap vs. its average realized earnings move of 6.8% over the past three years. We favor owning outright calls to position for a rebound if an earnings beat reverses recent sentiment and refocuses investors on fundamentals.
- Buy HWM Nov’26 240 calls for $4.60 (~2.1% of notional), indicatively (220.96 ref price)
Buy T calls on improving sentiment following an earnings beat driven by continued share gains
AT&T (T) stock has had a bumpy year. The Street entered the year optimistic, pushing T to near multi-year highs (~$29/sh) on strong fundamentals and continued share gains.
Sentiment then deteriorated on concerns that SpaceX (SPCX) could enter wireless via Starlink and pressure the “big three”, driving T shares down roughly 20% on disruption fears.
More recently, sentiment took another hit after SPCX announced the acquisition of low-band spectrum assets from Grain Management, reinforcing its commitment to building a terrestrial network and adding a broader coverage layer. There are also concerns that SPCX could bid up spectrum prices at upcoming auctions, though SPCX likely has higher near-term cash priorities tied to its AI buildout. T appears best positioned on spectrum, given its recent secondary-market purchases from Echostar.
Our telecom analysts (Sebastiano Petti and team) have T as a conviction pick this year.
The stock is on the JPM Analyst Focus list with a $33 price target (41% upside). They view fears around SPCX as overblown and expect strong 3Q results (10/21 pre-mkt), driven by persistent share gains, increased penetration in the Lumen footprint (acquired Feb’26), and improving convergence trends. They raised their 3Q fiber net adds estimate to 390K (from 375K), citing accelerating convergence momentum driven by value-segment share gains (broader offers) and the Lumen footprint (capturing pent-up demand). They expect Fiber net adds to accelerate further in 4Q as T advances its build engine and continues to penetrate the Lumen footprint. They maintain their 3Q postpaid phone net adds estimate of 430K and wireless service revenue of $17.65B (+4.3% y/y), and they expect wireless service revenue growth above management’s 3.3% guide.
T options imply a 3.4% earnings move, in line with its average realized earnings move of 3.3% over the past three years. Short interest remains elevated (~1.8% of float, Figure 13) alongside retail buying, which could amplify upside on a positive print. We favor owning short-dated calls into earnings to position for an outsized move, driven by a beat-and-raise that eases recent negative sentiment.
- Buy T 23-Oct-26 24 calls for $0.31 (~1.3% of notional), indicatively (23.44 ref price)
Cheap/Rich Stock Volatilities into Q3 Earnings
In Table 1 we screen for names that appear attractive to own volatility (be long options) into their reporting dates, as they satisfy the following criteria:
- Option implied earnings day move is at least 1.5 percentage points below the average move delivered by the name on earnings days over the last 3 years
- 3M ATM implied to EWMA (exponentially weighted moving average) realized volatility ratio is less than 105% (vs. a cross-sectional average of 112%), so volatility is inexpensive relative to recent carry
- Average daily options notional volume exceeds $25Mn per day over the last month
Meanwhile, the names in Table 2 screen as attractive to sell volatility (be short options) into their reporting date, as they satisfy the following criteria:
- Option implied earnings day move is at least 1.5 percentage points greater than the average move delivered by the name on earnings days over the last 3 years
- 3M ATM implied to EWMA realized volatility ratio is greater than 115% (vs. a cross-sectional average of 112%), so volatility is expensive relative to recent carry
- Average daily options notional volume exceeds $25Mn per day over the last month
Calculating the implied earnings day move
We assume that the market prices implied volatility with one day of excess volatility on the earnings announcement day, and all other days with a lower “background” volatility.
We use two potential indicators of what the “background” volatility of a stock may be, excluding the earnings day itself:
- The forward-starting implied volatility between the 2 option expiries falling directly after the earnings announcement, or
- The implied volatility of the option expiry that falls prior to the earnings announcement day.
Having estimated the background implied volatility, we can estimate the excess volatility for the earnings announcement day that is implied by the volatility term structure. We convert this excess volatility into an “expected earnings-day move.” This figure can then be compared to the size of stock moves on previous earnings announcement days, in order to highlight potential opportunities. Note that we include an additional constraint that the earnings day move should never be less than the estimated “background” volatility.
Please note that there are important considerations when trading earnings-day moves, including other potential sources of excess volatility (such as M&A activity, economic data flow, product announcements, etc.) that may also explain the premium of actual implied volatility to background volatility estimates.
Risks of Common Option Strategies
Risks to Strategies: Not all option strategies are suitable for investors; certain strategies may expose investors to significant potential losses. We have summarized the risks of selected derivative strategies. For additional risk information, please call your sales representative for a copy of “Characteristics and Risks of Standardized Options.” We advise investors to consult their tax advisors and legal counsel about the tax implications of these strategies. Please also refer to option risk disclosure documents.
Put Sale: Investors who sell put options will own the underlying asset if the asset’s price falls below the strike price of the put option. Investors, therefore, will be exposed to any decline in the underlying asset’s price below the strike potentially to zero, and they will not participate in any price appreciation in the underlying asset if the option expires unexercised.
Call Sale: Investors who sell uncovered call options have exposure on the upside that is theoretically unlimited.
Call Overwrite or Buywrite: Investors who sell call options against a long position in the underlying asset give up any appreciation in the underlying asset’s price above the strike price of the call option, and they remain exposed to the downside of the underlying asset in the return for the receipt of the option premium.
Booster: In a sell-off, the maximum realized downside potential of a double-up booster is the net premium paid. In a rally, option losses are potentially unlimited as the investor is net short a call. When overlaid onto a long position in the underlying asset, upside losses are capped (as for a covered call), but downside losses are not.
Collar: Locks in the amount that can be realized at maturity to a range defined by the put and call strike. If the collar is not costless, investors risk losing 100% of the premium paid. Since investors are selling a call option, they give up any price appreciation in the underlying asset above the strike price of the call option.
Call Purchase: Options are a decaying asset, and investors risk losing 100% of the premium paid if the underlying asset’s price is below the strike price of the call option.
Put Purchase: Options are a decaying asset, and investors risk losing 100% of the premium paid if the underlying asset’s price is above the strike price of the put option.
Straddle or Strangle: The seller of a straddle or strangle is exposed to increases in the underlying asset’s price above the call strike and declines in the underlying asset’s price below the put strike. Since exposure on the upside is theoretically unlimited, investors who also own the underlying asset would have limited losses should the underlying asset rally. Covered writers are exposed to declines in the underlying asset position as well as any additional exposure should the underlying asset decline below the strike price of the put option. Having sold a covered call option, the investor gives up all appreciation in the underlying asset above the strike price of the call option.
Put Spread: The buyer of a put spread risks losing 100% of the premium paid. The buyer of higher-ratio put spread has unlimited downside below the lower strike (down to zero), dependent on the number of lower-struck puts sold. The maximum gain is limited to the spread between the two put strikes, when the underlying is at the lower strike. Investors who own the underlying asset will have downside protection between the higher-strike put and the lower-strike put. However, should the underlying asset’s price fall below the strike price of the lower-strike put, investors regain exposure to the underlying asset, and this exposure is multiplied by the number of puts sold.
Call Spread: The buyer risks losing 100% of the premium paid. The gain is limited to the spread between the two strike prices. The seller of a call spread risks losing an amount equal to the spread between the two call strikes less the net premium received. By selling a covered call spread, the investor remains exposed to the downside of the underlying asset and gives up the spread between the two call strikes should the underlying asset rally.
Butterfly Spread: A butterfly spread consists of two spreads established simultaneously – one a bull spread and the other a bear spread. The resulting position is neutral, that is, the investor will profit if the underlying is stable. Butterfly spreads are established at a net debit. The maximum profit will occur at the middle strike price; the maximum loss is the net debit.
Pricing Is Illustrative Only: Prices quoted in the above trade ideas are our estimate of current market levels, and are not indicative trading levels.
Companies Discussed in This Report (all prices in this report as of market close on 16 October 2026, unless otherwise indicated) AT&T(T/$23.44/OW), Alphabet(GOOG/$336.91/OW), Amazon.com(AMZN/$250.00/OW), Howmet Aerospace(HWM/$220.96/OW), Microsoft(MSFT/$529.05/OW)
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Completed 18 Oct 2026 11:02 PM EDT
Disseminated 19 Oct 2026 02:15 AM EDT