Buyside Strategies EQD Research Sponsored Articles Volatility

EQD Research: Did VOLQ Predict A Quiet Earnings Season?

Aug 13, 2021

By Russell Rhoads,
head of research

A characteristic of VOLQ relative to VIX is a seasonal factor that normally pushes VOLQ to relatively high levels compared to VIX during the four earnings months. The input used to calculate VOLQ is Nasdaq-100 (NDX) options and option implied volatility on the larger NDX components increases in anticipation of an earnings announcement.

The following table summarizes the relationship between VIX and VOLQ by month starting with January 2015 and running through June 2021. The earnings season months of January, April, July, and October are the four blue rows.

Over the period tested, VOLQ closed at a premium to VIX just under 62% of trading days. However, during each of the earnings months this figure is higher, with October showing up as the biggest outlier. After calculating the figures for this table, I decided to keep up with VOLQ versus VIX over the course of this past July. The following chart shows the relationship between VOLQ and VIX in July 2021.

In July 2021, VOLQ closed at a premium to VIX 11 of 21 trading days or about 53%. This figure is much lower than history, but also something else stood out to me while watching VOLQ and VIX, VOLQ was at a premium for the first half of the month and a discount during the second half of the month. This is exactly the opposite of what I would expect to happen as the last week of July had eight of the top ten companies in the NDX reporting earnings.

As I monitored earnings reactions from these large NDX components, one by one, they all did not experience outlier reactions. The following table shows the earnings reaction date, stock price change in reaction to earnings, and a summary of stock price reactions to earnings over the previous two years (eight quarters).

NVDA and ADBE both report earnings outside of the normal quarterly cycle so that data is excluded from the table. Out of the eight companies that reported earnings during the final week of July several stocks had muted reactions. The two largest components, AAPL and MSFT, experienced very small price changes relative to history with AAPL dropping 1.22% (versus an average move of up or down of 3.46%) and MSFT was almost unchanged at a loss of 0.11% (versus an average move up or down of 2.29%). Only AMZN and PYPL had price reactions outside of the historical average. Both stocks lost value, but the AMZN reaction was close to the biggest drop in the past two years and PYPL only eclipsed the biggest move by just over 1%.

In summary, VOLQ did not behave as expected as earnings announcements approached. In fact it did exactly opposite of what would be expected. Does this mean VOLQ signaled a quiet earnings season for the large NDX components? It appears so, but more work is needed to solidify VOLQ’s ability to predict a calm or stormy earnings season. That work commences now and I’ll report back shortly in this space and suggestions of how to proceed are welcome at