Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Volatility Kings is our list of companies having a tendency to experience increasing option implied volatility as their quarterly reporting dates approach. Increasing implied volatility reflects uncertainty or the width of the possible stock price distribution on the report date. However, the degree of uncertainty for the current report may not be comparable. Indeed, some companies are on the list one quarter and not the next while others seem to remain on our list quarter after quarter. Since the focus is on earnings, others with high implied volatility due to takeover speculation or FDA announcements do not appear along with those lacking sufficient liquidity due to low option volume.
We begin with brief updates for the S&P 500 Index and VIX futures premium.
Market Review
S&P 500 Index (SPX) advanced 20.02 or +1.04% for the week including Friday?s unusual reversal gain of 27.54 points after the nonfarm payroll report. After retesting the August 25 low last Tuesday and turning higher forming a potential double bottom pattern the upward momentum Fridayseems to suggest the recent decline may be ending. However, until reaching the rising wedge minimum downside measuring objective down near 1800 as shown last week.?The current advance may only be another retracement and selling opportunity as it advances back toward 2000. Then another successful retest of the August 25 low, should it occur, would suggest the formation of a trading range, while a further advance above 2000 would add support for the double bottom interpretation.
CBOE Volatility Index? (VIX) , based on real-time prices of options on the S&P 500? Index, constructed to reflect investors’ consensus view of future (30-day) expected stock market volatility, declined 2.68 for the week including -1.61 Friday.
The table below shows the VIX cash compared to the next two futures contracts as well as our calculation of Larry McMillan?s day-weighted average between the first and second months.
While the premium remained slightly negative should the SPX advance further it will turn positive and in the past when the premiums turned positive, it offered a buying opportunity suggesting the pullback was complete however, since the long-term uptrend ended August 20 it may no longer be a reliable buying signal.
26 Volatility Kings
In a continuing effort to keep the list size manageable and focused upon the ones with good option liquidity, those with one week and one month average option volume less than 20,000 contracts were deleted from last quarter?s list, although volume may increase for some as their earnings dates approach. The initial scan begins with the Top 200 by options volume, found at the top right of the Rankers and Scanners section of our home page. Those with a current price under 5 were also eliminated since there are not usually enough strike prices or liquidity for spreads or other strategies, with the possible exception of short puts that come with assignment risk.
In addition, since the objective is to find regular volatility opportunities only those with IV differentials from last quarters? earnings announcement high to the subsequent low that are greater than 10% are included. While the objective is to identify the ones that increase regularly, called ?permanent residents,? newly added ones due to unusual temporary sector conditions such as oil & gas or biotechnology, called ?temporary visitors,? may not appear in subsequent quarters.
Price in column 3, are closing stock prices as of Friday October 2, 2015.
Next Rpt in column 4 is the next expected reporting date. Check on them often as these are only estimates and companies routinely change their reporting dates. Time in column 5 is the time during the day to expect the report, where B is before the open, A is after close.
Estimate in column 6 is the current consensus earnings estimate per share, also subject to change before the report date. Some may also have higher or lower ?whisper? estimates.
Last Q IV in column 7 is the implied volatility index mean (IVXM) of the puts and calls reached just before the last quarterly report, but may not necessarily be relevant this quarter. Further the near term at-the-money implied volatility could be considerably higher than the index mean shown above.
IV Min Ex in column 8 shows the implied volatility low after the last earnings report making it easier to compare the pre-report high to the subsequent low. For some, depending upon the last report date, the implied volatility may still be declining.
Events unrelated to earnings reports can also affect implied volatility, such as changing S&P 500 Index implied volatility as reflected by the VIX that has been higher than average since August 25.
IV Now in column 9 is the implied volatility index mean, (IVXM) as of Friday October 2, 2015.
IV Est/Now in column 10 is the ratio of the estimated implied volatility to the current implied volatility based primarily on the high reached the previous quarter. Those with higher ratios have a potentially greater opportunity to increase going into their next report date and many have already started increasing anticipating the next report. However, since the August 25 flash crash, most are elevated due to increased market volatility that may remain high for this quarter but they are still most likely to increase as their report dates approach.
To help identify implied volatility highs, lows, and forecast where they may go along with other details, make sure to check the volatility charts at either our complimentary Basic Options or our more detailed Advanced Historical Data pages on our website.
Comments and Observations
The typical pattern is for implied volatility to decline for 4-6 weeks after the reporting date followed by a subsequent rise for about 3-4 weeks before the next report date, but they vary with each having its own unique pattern.
Those with ratios less than 1 are currently experiencing high-implied volatility for reasons that may be unrelated to their upcoming earnings report such as the elevated market volatility since August 25. For example, CAT just reduced guidance and SPLS is attempting to merge with its competitor.