Volatility report - week 03 Volatility report - week 03 Volatility report - week 03

Volatility report - week 03

Options 10 minutes to read
Koen Hoorelbeke

Options Strategist

Summary:  Our weekly Volatility Report includes a Market Overview, expected stock movements, implied volatility rankings for upcoming earnings, key indices, ETFs, and upcoming economic indicators affecting market volatility.

Volatility report - week03
(Jan 15 - Jan 19, '24)

Welcome to this week's Volatility Report, a guide for traders and investors seeking to navigate the dynamic world of stock market fluctuations. In this report, we list the expected movements and implied volatility rankings* of stocks with upcoming earnings announcements, as well as key indices and ETFs.

Market Overview

Market Overview

The VIX has demonstrated a decline over the previous week, moving from a high of approximately $14.00 to a close of $12.70. This is reflective of volatility levels seen in more stable market periods historically similar to those in 2013 to 2016 and again in 2018 to 2019.

In the past week, the S&P 500 has shown an increase from an opening value of 4703.70 to a closing figure of 4783.83, which is an actual move exceeding the expected 55.20 points calculated at the beginning of the week. The New York Federal Reserve's consumer survey reported a decrease in inflation expectations, which contributed to the advance on Monday, particularly within the technology sector.

Early-week optimism was moderated following Wednesday's release of higher-than-anticipated CPI figures. Despite this, the uptrend persisted into Thursday, albeit with diminished momentum compared to earlier in the week.

A similar pattern was observed in the Nasdaq 100, where movements mirrored the S&P 500's trend but with an even more pronounced effect on the index's trajectory.

The current earnings season is underway, with financial institutions such as Morgan Stanley and Goldman Sachs slated to release their Q4 results this week, which could potentially set the tone for market sentiment. The subsequent week will shift attention to the technology sector, where earnings reports from prominent companies like Microsoft, Netflix, and Tesla are expected. These announcements are likely to be significant drivers for market trends.

Key economic data releases are also on the horizon, with Retail Sales figures due on Wednesday, Initial Jobless Claims and the Philadelphia Fed Manufacturing Index on Thursday, and Existing Home Sales for December to be reported on Friday. These indicators have traditionally introduced volatility into the markets and will likely be closely monitored for their impact on market dynamics.

As the market absorbs the implications of these financial reports and economic indicators, adjustments in market volatility are anticipated.

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Expected moves and volatility

Volatility and Expected Moves Analysis

The market's focus this week centers on earnings reports from the financial industry and the tech sector. Expected moves**, derived from at-the-money strike prices post-earnings**, indicate potential price volatility.

In the table above you'll find the following data:

  • Volatility Comparison: Implied volatility (IV) is currently contrasted against the 30-day historical figure to assess market expectations. A significant disparity often marks a prime scenario for premium selling.
  • IV Rank Insights: IV Rank situates the current IV within the past year's range. Values above 20% generally signal higher-than-average volatility, favoring premium selling, while lower values suggest caution for such strategies.
  • Sector Highlights: Financial firms, including Morgan Stanley and Goldman Sachs, are poised to report, with anticipated modest price movements. In contrast, larger expected moves for tech companies like Microsoft and Netflix indicate market anticipation of their earnings results.
  • Strategic Considerations: For traders, higher expected moves in the tech sector suggest the potential for volatility strategies, while lower moves in financials may align with range-bound positions.
  • Upcoming Economic Data: Key releases, particularly Retail Sales and Initial Jobless Claims, may introduce additional market volatility, reinforcing the value of expected move and IV in strategy development.

* Understanding these metrics is important for anyone involved in volatility-based trading strategies. The 'Expected Move' is an invaluable tool that provides a forecast of how much a stock's price might swing, positively or negatively, around its earnings announcement. This insight is essential for options traders, allowing them to gauge the potential risk and reward of their positions. Read more about it here: Understanding and calculating the expected move of a stock etf index

Moreover, the 'Implied Volatility Rank' (IVR) offers a snapshot of current volatility expectations in comparison to historical volatility over the last year. This ranking helps in identifying whether the market's current expectations are unusually high or low.

In addition to the Expected Move and Implied Volatility Rank, it’s also crucial to understand the concepts of ‘Implied Volatility’ and ‘Historical Volatility’. Implied Volatility (IV) is a measure of the market’s expectation of future volatility, derived from the prices of options on the stock. On the other hand, Historical Volatility (HV) measures the actual volatility of the stock in the past.

The relationship between these two types of volatility can serve as a valuable indicator for options traders. When IV is significantly higher than HV, it suggests that the market is expecting a larger price swing in the future, which could make options more expensive. Conversely, when IV is lower than HV, it could indicate that options are relatively cheap. Some traders use this IV-to-HV ratio as a signal for when to buy or sell options premium, adding another layer of sophistication to their trading strategies.

** A crucial application of the expected move in options trading is evident in strategies such as iron condors and strangles, particularly when these are implemented through short selling. In these strategies, the expected move serves as a pivotal benchmark for setting the boundaries of the trade. For instance, in the case of a short iron condor, traders typically position the short legs of the condor just outside the expected move range. This strategic placement enhances the probability of the stock price remaining within the range, thereby increasing the chances of the trade's success. Similarly, when setting up a short strangle, traders often choose strike prices that lie beyond the expected move. This ensures that the stock has to make a significantly larger move than the market anticipates to challenge the position, thus leveraging the expected move to mitigate risk and optimize the success rate. Utilizing the expected move in this manner allows traders to align their strategies with market expectations, fine-tuning their approach to volatility and price movements.

In this report, the calculation of the expected move for each stock and index is based on a refined approach, building upon the concepts outlined in our previous article. Traditionally, the expected move can be estimated by calculating the price of an at-the-money (ATM) straddle for the expiration date immediately following the event of interest. However, in this analysis, we've adopted a variation to enhance the accuracy of our predictions.

Our method involves a blend of 60% of the price of the ATM straddle and 40% of the price of a strangle that is one strike away from the ATM position. This hybrid approach allows us to closely mirror the expected move as indicated by the implied volatility (IV), offering a more nuanced and precise estimation. By utilizing this simplified yet effective method, we are able to provide an expected move calculation that not only resonates with the underlying market sentiments but also equips traders with a practical tool for their volatility-based strategies.

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