With second-quarter earnings reporting well underway, the time has come 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 and has been steadily declining ever since, usual increasing implied volatility of individual stocks before earnings appear insignificant and even hard to detect for some.

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 best options volume and liquidity, the weekly option volume requirement is set at those with greater than 35K contracts, up from 20K previously, since with many new IPOs and heightened uncertainty due to the Covid-19 pandemic, option volume increased significantly in many stocks. In addition, when market implied volatility remains elevated more companies will meet the volume threshold. 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 found in the Rankers and Scanners section of Top 200 stocks by volume / open interest our home page about one-half way down the page, at the top left. Individual stocks with options volume less than 35K are excluded along with those with prices less than 10 since when prices are too low there are usually not enough option strike prices or liquidity for attractive option strategies.

Volatility Kings™ 2Q 2020

To explain, descriptions and details for the column headings in the table above follow. 

Price in column 3, are closing stock prices as of July 17, 2020.

When in column 4, shows the next expected earnings report date. They require checking often as these are only estimates and companies often change the dates. Time in column 5, shows the time during the day to expect the report, where B is before the open, 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 may change before the report date. In addition, stock prices move on forward guidance as much, or perhaps more than on reported revenues and earnings especially this quarter as earnings estimates were drastically reduced at the end of the first quarter as the global economy shut down due to Covid-19. Now with lowered estimates watch all the fanfare when the reports come in better than expected.

Last Q IV in column 7 shows the Implied Volatility Index Mean (IVXM) of the puts and calls reached just before the last quarterly report, but may not necessarily be as relevant this quarter.

IV Min Ex 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 after reporting low.

IV Now in column 9 is the Implied Volatility Index Mean, (IVXM) as of July 17, 2020. Depending upon the last report date the implied volatility of those having recently reported may still be declining, such as Micron Technologies (MU), Netflix (NFLX) and Zoom Video (ZM).

52R displays the current Implied Volatility Index Mean (IVXM) relative to the 52-week range, where .69 is above the midpoint for Amazon (AMZN) while most others are closer to the bottom after they spiked up in mid-March.

IV Est/Now 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 Micron Technologies (MU), Netflix (NFLX), and Zoon Video (ZM).

Typically implied volatility declines for 4-6 weeks after the reporting date followed by a subsequent rise for about 3-4 weeks before the next report, but vary with each having 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, declined 1.53 points or -6.88% last week ending at 20.71% after peaking at 77.15% on March 16.

Now closer to the long-term mean implied volatility may remain somewhat elevated due to uncertainty caused by the global pandemic and dislocations in some sectors, such as hospitality and retail. The charts of individual stocks showing a dramatic spike in March followed by a drifting decline back toward their means are very similar.

To help identify implied volatility highs, lows, and estimate 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 Historical Data Charts on our website. 

Earnings Strategy Ideas

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 position 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, when the near term implied volatility is high, the results are known quickly.

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 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 and with long gamma. Examples to consider for this approach are Micron Technologies (MU), Netflix (NFLX) and Zoon Video (ZM).

Summary

Based upon the implied volatility of the S&P 500 Index option prices have declined significantly since spiking up in the middle of March. Although second-quarter earnings reporting is already underway many widely followed favorites will report this week and next. For volatility traders and strategists, our Volatility Kings™ list suggests two alternative Calendar Spread volatility strategies to consider.