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EQD Research: NDX Earnings Season And VOLQ

Jan 30, 2021

By Russell Rhoads,
head of research

In very general terms, implied volatility from stock options tends to behave in an anticipatory manner.  That is it rises when a company specific event is on the horizon and then drops to lower levels once the known (timing) unknown (market impact) event has occurred. The most common of these events is a company’s quarterly earnings announcement.

The option implied volatility on broad based indexes, like the Nasdaq-100 (NDX), is more reactionary to the price action in the underlying market. Specifically, option implied volatility rises when broad based indexes sell off, hence the long term inverse relationship between the NDX and VOLQ.

However, over time an earnings season impact has started to show up in the price behavior of NDX options and price action in VOLQ.  We are witnessing bit of a boost to VOLQ when the major components of the NDX are reporting their quarterly results.  A good way to measure this is to compare VOLQ to VIX, which is based on the S&P 500 and does not exhibit the same sort of anticipatory price action around earnings.  From 2014 through early 2021 VOLQ closed at a premium to VIX about 61% of trading days and at a discount to VIX 39% of the time. However, during periods just before the large components of the NDX are about to report earnings this figure rises for VOLQ relative to VIX with 74% of earnings season pricing showing VOLQ at a premium.

This 74% figure applies to all earnings seasons from 2015 through 2020.  However, we noted that this figure increases over time and there has been only one earnings season observation since early 2017 where VOLQ closed at a discount to VIX. A reason for this trade may reside in the number of stocks that make up 50% of the NDX market cap.  The table below shows the number of companies in the NDX that sum up to 50% of the index’s market cap on the first day of each year.

Data Source: Nasdaq

As time goes by, the largest NDX companies have grown faster than other components and as of the first day of 2020 only six companies comprise 50% of the index. This concentration of stocks creates opportunities to easily trade NDX volatility versus individual stock volatility. When earnings season rolls around NDX implied volatility is higher relative to non-earnings periods. The most recent earnings period for large NDX stocks kicked off January 26 with Microsoft (MSFT) reporting after the close. On that day VOLQ finished the day up 1.15 to 25.55 while VIX was actually down 0.17 to 23.02.  Both NDX and the S&P 500 (SPX) were slightly lower on the day so the difference in the price action between VOLQ and VIX is not a result of different performance for each market. Likely it was the influence of large portions of the NDX reporting over the next few days.

As the week played out, VOLQ did drop to a discount relative to VIX, but this may be attributed to exogenous market activity spurred on by price action in GME which increased macro market concerns. By Wednesday VOLQ was at a discount to VIX which climbed to the upper 30’s for the first time in months.  However, by the end of the week VOLQ was nearing parity with VIX and it is quite possible that by February 2, with both Amazon (AMZN) and Alphabet (GOOG / GOOGL) left to report results, VOLQ may return to the typical NDX earnings season premium relative to VIX.