Earnings season amid heightened vol
Higher IV, more expensive options, careful with the hedges
Quick summary:
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The options market has seen a sharp increase in implied volatility (IV), signaling heightened market anticipation and higher hedging costs as the U.S. elections approach on November 5th.
After yesterday’s holiday, major earnings reports are due this week from leading financial institutions like Goldman Sachs, Morgan Stanley, and Citigroup, along with key updates from healthcare giants UnitedHealth Group and Johnson & Johnson, and tech firms such as Taiwan Semiconductor and Netflix.
No other major economic data this week (some housing data), so we’ll keep an eye on heightened IV and how earnings go. The weekend read will be about year-end expectations.
The competition
The second week of our competition aligns with a surge in market volatility and a series of important earnings reports. With the financial landscape influenced by firms such as Netflix and Goldman Sachs, It’s a key moment to either advance or maintain our leaderboard rankings.
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Last week’s performance
Over the past few weeks, we've observed a significant uptick in implied volatility in the options market, particularly as the U.S. elections on November 5th draw near. This metric, which forecasts potential price swings in stocks or indices, has soared due to increased hedging activities—pushing the VIX levels from 15 last month to over 20 now. The heightened demand for options, both calls and puts, has led to higher prices, making hedging more expensive for those looking to protect their positions from potential market shifts.
Last week, this surge in implied volatility influenced our short-duration options strategy at the ORCA BASON Fund, where we primarily deal with options expiring within the same week. Despite a correct upward prediction in market movement, the gains were relatively subdued at about 1%, due to the inflated cost of options which eroded profits. This scenario is typical when elevated volatility leads to higher option premiums, which then decay rapidly as we approach expiration—unless offset by substantial favorable market movements.
Looking ahead, this high volatility and cost of options are expected to continue until the elections. After that, we anticipate a decrease in volatility and a corresponding drop in option prices, similar to patterns observed post-major events like FOMC meetings.
Adding to the financial landscape this week, major firms across the financial, healthcare, and technology sectors are poised to release their quarterly earnings. Notably, Goldman Sachs, Morgan Stanley, and Citigroup will provide updates, potentially reflecting the robustness of investment banking and financial services amidst market volatility. The healthcare sector will see reports from UnitedHealth Group and Johnson & Johnson, offering insights into revenue trends and operational challenges. In technology, Taiwan Semiconductor Manufacturing and Netflix will draw attention, particularly for updates on subscriber growth and sales performance.
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