With fourth quarter earnings reporting already underway, the time has come once again to update our Volatility Kings list of companies that have a regular tendency to experience increasing option implied volatility as their quarterly reporting dates approach.

Since implied volatility of the entire market spiked up in the middle of March last year and has been steadily declining ever since, the usual increasing implied volatility of individual stocks before earnings appears insignificant, making their regular quarterly patterns harder to visualize. 

The degree of uncertainty for upcoming reports may not be comparable to previous quarters. While some companies are on the list one quarter and not the next, others seem to remain on our list quarter after quarter. Focused on earnings, others with high-implied volatility due to takeover speculation, vaccine news, FDA announcements, or other extraordinary events, are excluded, along with those lacking sufficient liquidity due to low option volume described below.

In order to focus on those with the greatest options volume and best liquidity, the weekly option volume requirement is set at those with a weekly average of greater than 35 thousand contracts. The objective is to find those stocks with sufficient options liquidity and therefore reasonable bid/ask spreads to use for various multiple leg strategies, such as Calendar Spreads, Butterflies, Iron Condors, Straddles, and more.  

The selection process begins at our daily listing of top 200 stocks by volume/open interest found in the Rankers and Scanners section of our home page. Individual stocks with options volume less than 35 thousand are excluded along with those with prices less than 10, as when prices are too low there are usually not enough option strike prices or liquidity for attractive option strategies.

This quarter, the selection became more subjective as those on the list meeting the minimum volume criterion expanded significantly due to new IPOs, SPACs, rotation into value along with smaller capitalized stocks, and greatly increased speculative call volume.   

Volatility Kings 4Q 2020

For price in column 3, the information lists the closing stock prices as of Jan. 15, 2021. For column 4, the information shows the next expected earnings report date. They require checking often as these are only estimates and companies often change the dates. The data in column 5 shows the time during the day to expect the report, where "B" is before the open and "A" is after close.

Est. or Estimate in column 6 represents the higher of the current consensus or "whisper" per share earnings estimate according to Earnings Whispers, and this information may change before the report date. In addition, stock prices move on revenue and forward guidance as much, or perhaps more than, on reported earnings. The earnings game lowers estimates in advance and then cheers when they beat the lowered estimates, all in an effort to boost stock prices.

The Last Q IV information in column 7 shows the Implied Volatility Index Mean (IVXM) of the puts and calls reached just before the last quarterly report, but this may not necessarily be as relevant this quarter. The IV Min Ex information in column 8 shows the Implied Volatility Index Mean (IVXM) low after the last earnings report, making it easier to compare the pre-report high to the subsequent post reporting low. 

The IV Now information in column 9 is the Implied Volatility Index Mean (IVXM) as of Jan. 15, 2021. Depending upon the last report date, the implied volatility of those having recently reported may still be declining, such as with Bed Bath & Beyond (BBBY) which reported on Jan. 7.

The 52R data displays the current Implied Volatility Index Mean (IVXM) relative to the 52-week range, where .83 is above the midpoint for Baidu (BIDU) and GameStop (GME) at .70. Most of the others remain closer to the bottom compared to mid-March when they all spiked up.  

The IV Est/Now information in column 11 (yellow highlight) shows 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, such as Amazon (AMZN) at 1.37 and NIO (NIO) at 1.50.

Typically, implied volatility declines for four to six weeks after the reporting date followed by a subsequent rise for about three to four weeks before the next report, but this varies as each stock has their own somewhat unique pattern.

In addition, market implied volatility plays a role. The S&P 500 Index implied volatility, measured by our IVolatility Implied Volatility Index Mean (IVXM) using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, increased 1.91 points or +11.28%  last week, ending at 18.84, up from 16.93 the week ended Jan. 8.

By finding stocks that have a regular tendency to experience rising implied volatility ahead of earnings reports, such as Netflix (NFLX) or Workhorse (WKHS), this approach offers opportunities to gain a meaningful edge as implied volatility declines after reporting and then advances again before the next report date. 

Earnings Strategy Ideas

As a nomenclature reminder, spreads executed with a debit are referred to as long positions, while those with a credit are short positions.

Long Calendar Spreads buy deferred month options with lower implied volatility and sell near-term options with higher implied volatility with the same strike prices. However, since this approach has short gamma or the rate of change of delta, any large move of the underlying stock on the reporting date will result in a loss. However, when opened just before reporting, at which point the near-term implied volatility is high, the results are quickly revealed.

Short Calendar Spreads take a different approach by buying near-term options and selling deferred options before the implied volatility of the front month begins to advance in anticipation of the next report date. The deferred short option implied volatility is less likely to advance while the implied volatility of near-term increases going into the earnings date.

Then one is to close the position near the top of the implied volatility just before the earning date. The risk of a harmful stock price gap diminishes by closing the spread before the earnings report release. However, timing is more important since the position will be open longer, with long gamma and market risk.

Some other volatility strategies include:

• Covered Calls - sell out-of-the-money calls against long stock.
• Sell Puts - cash covered out-of the-money puts or put spreads with defined risk.
• Iron Condors - sell both sides out-of-the money. An out-of-the-money call spread and an out-of the money put spread with the implied volatility near the 52-week high, like Game Stop or Baidu. But remember to check the price chart and avoid those in downtrends. Ideally, look for those with high implied volatility and the stock in a well-defined range.

Summary

While the market implied volatility of the S&P 500 Index increased somewhat last week, and assuming ~20% represents the current mean, option indicators confirm bullish sentiment at all time highs, according to some analysts. Earnings reporting is already underway, and will begin to accelerate this week with lowered estimates for many widely-followed stocks.