Volatility Trading Digest - Earnings Express
Volatility Trading Digest - Earnings Express
Although expectations have already been reduced this is week the quarterly earnings reports really get moving as the number of companies scheduled to report greatly increases. The current momentum darlings are likely to attract particular scrutiny, as several appear overextended.
Strategy
S&P 500 Index (SPX)
From a technical perspective, a lot happened last week starting with a close below the active upward sloping trendline followed by a close below the 1378.04 support from February 29. By the end of the week, it appeared to be attempting to make a right shoulder rally in what could now become a complex Head & Shoulders Top pattern with two heads, although there could be some confusion about the left shoulder. However, it is clear that a close below the last pivot at 1358.98 made on April 11 would be a failure of the rally up from the pivot and would suggest a downside-measuring objective at 1300. While more caution and hedging is a good idea we would wait for a close below 1358.98 before adding many more put spreads to the strategy mix. A few disappointing earnings reports could do it.
Although the technical picture deteriorated the VIX futures premium is sending a somewhat different signal as the premiums decline last week.
S&P 500 Index Implied Volatility (IVXM)
Since last week, the Implied Volatility Index Mean increased from 14.74 to 17.77, while the CBOE Volatility Index (VIX) increased from 16.70 to 19.55. The updated day-weighted average table follows.
The day weighting applies 10% to April and 90% to May resulting in the average premium of 1.98 or 10.10% shown above. Our alternative volume weighting between April and May results in a 7.14% premium.
For this short-term indicator the premium to the cash is a SPX sell signal suggesting professional expectations for the cash to increase toward the futures price. In the past premiums in excess of 20%, have usually preceded corrections, although not a precise timing tool it does appear to be a good way to measure professional hedging sentiment.
Update
KB Home (KBH)
Here is the plan for this homebuilder first suggested last month. The original April 11 put sale was for a credit of .58. Now that the stock has declined to support at 8 we suggest rolling the put out and down. Here is the adjustment.
The prices above are Friday's bid and ask as indicated. In the event it closes below 8 at the June expiration be prepared to take the stock by assignment and then sell calls.
Illumina, Inc. (ILMN)
Two weeks ago, we reported something new was about to happen since the implied volatility has risen to 45 and then provided a long call short put idea. We booked the suggestion at the Monday close for zero cost. However, on Thursday the stock closed below our SU stop at 50 so we closed the position Friday for a 3.75 loss according to the trade plan.
Chipotle Mexican Grill, Inc. (CMG)
This fast-casual fresh Mexican restaurant chain is scheduled to report 1Q earnings on Thursday, April 19 after the close, with a consensus estimate of 1.92 per share and a whisper estimate of 1.95 per share. In Digest Issue 14, we suggested using a long April 420 straddle going into the report and booked it on Monday's close for a 24 debit.
As expected, the implied volatility has risen along with the stock price so the mark-to-market was 29.50 on Friday. Since the options expire this Friday, the position needs closing Thursday before they report. We are expecting a further increase in implied volatility going up to Thursday for this momentum stock.
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