Volatility Kings™ 3Q Update
Volatility Kings™ is our list of companies having a tendency to experience increasing options 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. While these companies have experienced increasing implied volatility when they previously reported, the level 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 announcement events are excluded along those lacking liquidity due to low options volume.
Volatility Kings 3Q Master List
Price shown in column 4 are closing prices as of Friday October 11, 2013.
Next Rep in column 5 is the next expected reporting date. Check these dates as these are only estimates and the companies routinely change them. Time in column 6 is when during the day to expect the report, where B is before the open, A is after close and D is during market hours.
Estimate in column 7 is the current consensus earnings estimate.
Last Q IV in column 8 is the implied volatility index mean (IVXM) reached just before the last quarterly report, but may not necessarily be relevant this quarter, especially since market implied volatility as measured by the VIX is higher than in some previous quarters.
IV Min Ex in column 9 is new addition, showing the implied volatility low after the last earnings report making it easier to compare the pre-report high to the subsequent low.
IV Now in column 10 is the implied volatility index mean, (IVXM) of the puts and calls as of Friday October 11, 2013.
IV Est/Now in column 11 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 report date, but many have already started increasing anticipating their 3Q reports.
Comments and Observations
The recent VIX spike turned the IVXM of some stocks higher, but many remain unaffected.
The typical pattern is to decline about 4 weeks after reporting followed by a subsequent rise 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 for example, Facebook (FB) and Yelp (Yelp) are currently experiencing high-implied volatility for reasons that are most likely unrelated to their upcoming earnings report.
Some experience predictable declines after reporting such as SanDisk (SNDK) having gone from 40 to 27 although it is now back at 36 in anticipation of their 3Q report so the ratio of 1.11 does not tell the whole story. Since there are quite a few in this category, use the Master List as a reference and check each of their volatility charts using either our complimentary Basic Options or our very affordable subscription based Advanced Historical Data service.
For example, here is the updated 3Q Basic Options volatility chart for SanDisk with green arrows indicating the decline in implied volatility at previous earnings reports. Note the regular pattern of advances into the earnings report date and the subsequent declines after reporting. Scheduled to report 3Q earnings Wednesday after the close it is likely to advance somewhat higher and then decline on the report.
To further analysis on the Volatility Kings or other stocks in your portfolio, here is how to find the complimentary volatility charts, located on our website on the Basic Options page.
From our home page go to Analysis Services in the left column, and then find Basic Options listed seventh from the top. After opening the page enter the symbol where indicated (the default symbol SPX is already entered). Next, scroll down to the Volatility Chart heading located on the right side of the page near the bottom. Click on the small chart image and you will see a new enlarged data table along with the volatility chart for the last year displaying both the implied volatility and the historical volatility of the underlying symbol as well as the options volume. Previous earnings report dates are easy to find by the volume spikes accompanied by implied volatility declines like the ones above.
Some Strategy Ideas
Long straddles and strangles are two alternatives to use going into the reporting dates with plans to close them just before the report. The estimated implied volatility at the report date is a guideline based upon the most recent reports and may not be relevant in the current quarter. The actual reporting dates need scrutiny since they vary by the data source and are subject to change by the reporting companies.
Frequently calendar spreads are used for quarterly reporting by selling the near term option with higher implied volatility and buying the same strike price in the deferred month with a lower implied volatility. However since it has short gamma or the rate of change of delta, any large move of the underlying on the report date will result in a loss.
Option prices continuously change in response to changing expectations. The higher the uncertainty the more valuable the option, implying there is a much wider distribution of possible outcomes. When they become more predictable, the implied volatilities no longer increase dramatically before the reporting dates.
As for earnings reports, the range of earnings estimates or the difference between the high and low estimate for the upcoming earnings report reflects uncertainty. Those with high and rising IV going into the report usually have a tendency to show a greater divergence of opinion between the analysts, which seems very logical. Although there are shortcomings, implied volatility is a way to quantify stock price uncertainty.
Since the Volatility Kings list constantly changes, we can always use your help identifying new candidates. If you have any suggestions please let us know. Send them to Support@IVolatility.com