Over the past week I have written about how November futures on the CBOE Volatility Index (VIX) have crept above their October counterparts, and I asserted that the rationale was post-election uncertainty. Remember that VIX measures the market’s best estimate of 30 day forward volatility, so Election Day volatility would be encompassed by the futures that expire in mid-October.
Then this occurred to me: what if the bump in November volatility is the result of earnings, rather than the election?
Although earnings season begins prior to the October expiration of monthly options on October 16th, the deluge of earnings from major companies is at its peak over the following two weeks. Since most of these major companies have weekly options, we can check whether the options that correspond to their earnings releases represent peaks in volatility assumptions.
I decided to look at QQQ as a proxy for the effect of earnings on an index. As we have discussed at length, the NASDAQ 100 Index that underlies the QQQ ETF is extraordinarily top-heavy. Three stocks, Apple (AAPL), Amazon (AMZN) and Microsoft (MSFT) comprise about one-third of its capitalization, and seven make up about one-half. Any earnings volatility bumps would be evident in that index. Yet the peak is seen in November, as evidenced by the charts below. In the upper chart, we see the curves for November and December ride above those for October 16th, 23rd and 30th, at least for near-money options. In the lower graph, we see indeed see peak at-money implied volatility in November, with high readings into the ensuing expiries.
(For TWS users, these graphs were created with Analytical Tools -> Options Analysis -> IV Viewer + Term Structure)
Source: IBKR Trader Workstation
With that in mind, I decided to look at the graphs for some of that ETF’s leading components. It is typical to see peaks in companies’ implied volatilities around their expected quarterly earnings releases. Yet this is not the case for these two market leaders. We can see that the pattern we saw above in QQQ also holds for AAPL (earnings expected in the week ending 10/30) and AMZN (earnings expected in the week ending 10/23):
Source: IBKR Trader Workstation
I could continue with several other examples, but those two companies represent just under one quarter of the NDX. While it is logical that the largest stocks have implied volatility surfaces that roughly mimic QQQ – otherwise there would be arbitrage opportunities – this provides yet another piece of evidence that nervous investors are looking beyond corporate earnings and toward larger macro worries about Election Day and beyond.
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