Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Volatility Kings Reporting
From our Volatility Kings?list from two weeks ago, here are the companies scheduled to report earnings this week.
Unless analysts have the consensus estimates right shown in column four, Friday could be a rough day, but the implied volatilities are not yet suggesting concern.
Earnings Idea
Express Scripts Holding Company (ESRX) up 1.59. Scheduled to report 3Q earnings Tuesday October 27 after the close with a consensus estimate of 1.44 the same amount they reported July 28. Friday it broke out above resistance at 85 as implied volatility advanced making it our number one ranked advancing implied volatility leader, up 5.68 or +23.94%.
The current Historical Volatility is 16.25 and 20.84 using the Parkinson’s range method, with an Implied Volatility Index Mean of 29.40 up from 25.67 the week before. The 52-week high was 35.25 on August 25, 2015 while the low was 13.78 on November 25, 2014. The implied volatility/historical volatility ratio using the range method is 1.41 so option prices are slightly expensive relative to the recent movement of the stock. Friday?s option volume was 53,437 contracts traded compared to the 5-day average volume of 19,270.
Here is a short-term call spread idea for next week based upon the breakout above the resistance and increasing implied volatility before the earnings report. The trade plan assumption is both the stock price and the implied volatility will advance into the earnings report. However, since both may decline after the report the plan is to close the position Friday October 22 before the options expire.
Using the ask price for the buy and mid for the sell the call spread debit would be .36 about 18% of the distance between the strike prices with a slight implied volatility edge. Since both options are out-of the- money with just one week to expiration the spread partially hedges time decay and implied volatility. Should it decline back below 85 early in the week close it out sooner, otherwise the plan is to close it Friday.
The above suggestion uses Friday?s ask price for the buy and middle price for the sell presuming some price improvement is possible. Monday?s option prices will be somewhat different due to the time decay over the weekend and any price change.
Summary
The advances made two weeks ago apparently began with short covering after the nonfarm payroll report and continued higher when minutes from the FOMC meeting seemed to confirm the Federal Reserve is less likely to increase interest rates anytime soon. The continuing market breadth improvement along with help from China and crude oil kept the ?risk on? upward momentum on track although there was ample evidence economic conditions in the US and elsewhere are deteriorating. With more than a 100 S&P 500 Index companies along with many in the DJ Industrial Average reporting this ?all about earnings? week the upward momentum could stall if they come in short of already reduced expectations.