Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
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Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
Volatility report - week 04
Koen Hoorelbeke
Investment and 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 - week04
(Jan 22 - Jan 26, '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
Last week, the market showed a careful approach as investors dealt with a mix of earnings reports and economic data. The VIX, which tracks how much the market is expected to swing, showed moderate changes, signaling that investors were feeling a mix of hope and caution. At the start of the week, the VIX went up a bit, showing that traders were on alert as they waited for big financial companies to report their earnings. Even though the market was closed on Monday, there was still a sense of anticipation, with VIX futures suggesting some nervousness. Yet, actual market movements were limited, with no major earnings causing big ups and downs, even though the VIX and related indices like the VVIX and SKEW went up.
By midweek, caution increased with the VIX jumping up, partly due to higher interest rates on government loans. But later in the week, this nervousness calmed down, thanks to strong performances in tech and AI sectors and muted reactions to new jobless claims and manufacturing data. The calm continued into Friday, with the strength in the tech sector pushing the market to new highs and giving a strong sense of confidence.
Looking forward, the market is getting ready for what looks like a busy week with important economic data on GDP and PCE that could tell us more about inflation and where the economy is heading. With a lot of major companies set to share their earnings, we could see more ups and downs. The expected slight increase in movement for the S&P 500 and Nasdaq 100 shows a market that's hopeful but ready for whatever the next economic updates and company reports bring.
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Expected moves and volatility
Volatility and Expected Moves Analysis
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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Previous Volatility Reports:
- 15 Jan 2024: Volatility report - week 3 - 15 jan 24 -- 19 jan 24
- 04 Dec 2023: Volatility report - week 49 - 4 dec 23 -- 08 dec 23
- 28 Nov 2023: Volatility report - week 48 - 27 nov 23 -- 01 dec 23
Listen to our podcast "Saxo Options Talk":
- 17 Jan 2024: Options Talk - Episode 03 - Long Calls
- 10 Jan 2024: Options Talk - Introducing -Options Talk by Koen and Peter- -Your Weekly Podcast on Options Trading
Related articles:
- From zero to hero - buying options
- From zero to hero - selling options
- From zero to hero - option strategies
- From zero to hero - options lexicon
- Why options strategies belong in every traders toolbox
- Understanding and calculating the expected move of a stock etf index
- Understanding Delta - a key guide for Investors and Traders - part 1
- Understanding Delta - a key guide for Investors and Traders - part 2
- Trading 0DTEs - get your feet wet - without drowning - part 1
- Trading 0DTEs - get your feet wet - without drowning - part 2
Previous "What are your options" articles:
- 18 Jan 2024: What are your FX options - EURUSD elevated volatility
- 12 Jan 2024: What are your options - Coinbase after BTC ETF approval
- 21 Nov 2023: What are your options - Nvidia earnings
- 08 Nov 2023: What are your options - Disney earnings
- 26 Oct 2023: What are your options - Nasdaq Selling Premium
- 29 Aug 2023: What are your options - Salesforce earnings
- 25 Aug 2023: What are your options - the Qs - Nasdaq etf
- 23 Aug 2023: What are your options - Nvidia - earnings - market reactions
- 21 Aug 2023: What are your options - swing trading semi-conductors - stocks vs options
- 18 Aug 2023: What are your options - using TLT as an inverse proxy for the 10 year yield
Previous "Investing with options" articles:
- 08 Jan 2024: Investing with FX options - Hedging currency risk
- 30 Nov 2023: Investing with options - striking gold (GLD)
- 23 Nov 2023: Investing with options - hedging the Nasdaq 100
- 17 Nov 2023: Investing with options - Nvidia - pre-earnings
- 10 Nov 2023: Investing with options - AdYen - post investor day
- 31 Oct 2023: Investing with options - Novo Nordisk earnings
- 31 Oct 2023: Investing with options - Apple earnings
- 24 Oct 2023: Investing with options - Amazon earnings
- 24 Oct 2023: Investing with options - Meta Platforms earnings
- 23 Oct 2023: Investing with options - Alphabet earnings
- 20 Oct 2023: Investing with options - Microsoft earnings
- 18 Oct 2023: Investing with options - Tesla earnings
- 17 Oct 2023: Investing with options - long bonds - TLT
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.
This article may or may not have been enriched with the support of advanced AI technology, including OpenAI's ChatGPT and/or other similar platforms. The initial setup, research and final proofing are done by the author.
This article may or may not have been enriched with the support of advanced AI technology, including OpenAI's ChatGPT and/or other similar platforms. The initial setup, research and final proofing are done by the author.
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