EQD Research

The Predictive Nature Of VOLQ And Nasdaq-100 Earnings Season

Sep 22, 2021

By Russell Rhoads,
head of research

I previously highlighted the seasonality regarding VOLQ in this space with respect to earnings season. The Nasdaq-100 price behavior is influenced by a handful of large cap stocks and the result is implied volatility, as indicated by VOLQ, is normally elevated during the four months that we often refer to as earnings months. The implied volatility of individual stock options typically increases when an earnings announcement approaches and this type of price action shows up in VOLQ as well. The table below, featured in a previous article, shows that VOLQ tends to be at a premium to VIX more often during the traditional earnings months of January, April, July, and October.

Data Sources: Bloomberg and EQD Calculations

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. There is definitely a seasonal pattern with respect to VOLQ, VIX, and earnings season.

I decided to dig a bit more into how large Nasdaq-100 stocks fared during earnings seasons based on the level of VOLQ. Specifically, I looked at the VOLQ/VIX relationship to indicate when VOLQ was elevated and earnings periods where the relationship was below average during the earnings months. This figure was compared to the number of outlier price reactions to earnings from the stocks that were part of the top ten Nasdaq-100 membership who also reported earnings during the normal earnings months.

For purposes of this study, an outlier move is defined as a stock price change that is greater than the absolute average move over the past eight quarters. Outlier moves were tallied as a total of upside and downside moves and then segmented by the nature of the price change.

Since there are several moving parts, here is a brief summary of the steps taken to see if VOLQ indicates a volatile or less than volatile earnings season –

  • Compared VOLQ and VIX average relationship by month from January 2014 to July 2021 which incorporates 35 earnings seasons
  • Found the top ten components of the Nasdaq-100 during each earnings month
  • Eliminated any of the top ten stocks that did not report on a normal quarterly schedule
  • Earnings stock price reactions from the previous eight quarter are used to determine the biggest gain, biggest loss, and average move higher or lower
  • If the stock price reaction is lower than the average move that is considered a negative earnings event and if the stock price gain is greater than the average move it is considered a positive earnings event
  • Finally, earnings months were categorized as either high VOLQ versus VIX or low VOLQ versus VIX

For example, the table below shows the top ten components of the Nasdaq-100 as of June 30, 2021. Two of the eight (NVDA and ADBE) did not report during the month of July 2021 so they are not included in the analysis.

Data Sources: Bloomberg and EQDerivatives Calculations

The important columns are the Stock Change and 2 Year Average Moves. In this case the only two outlier moves were AMZN dropping 7.56% versus an average move of 3.61% and PYPL which dropped 6.23% versus an average move of 5.72%. In this case, 25% of reporting companies had outlier moves and they were both downside moves.

On average VOLQ is at about a 5% premium to VIX during earnings months. As noted, there are two categories of earnings months, when the average is higher than 5% and when the average is lower than 5%. The chart below shows the average relationship by for each of the 31 earnings months used for this study.

Data Sources: Bloomberg and EQDerivatives Calculations

The final step was to compare these high and low averages to the percent of Nasdaq-100 components that had outlier price reactions to earnings announcements. The table below is the brief summary of this data.

Data Sources: Bloomberg and EQDerivatives Calculations

The results show that when VOLQ is elevated there are more outlier earnings price reactions from the individual stocks than during periods were VOLQ is below the average earnings season premium of 5%. When VOLQ is at a premium to VIX over half of Nasdaq-100 components reported an outlier move in either direction and over 35% of earnings announcements resulted in an outlier move to the downside.

October is just a week away and it will be interesting to see where VOLQ is quoted versus VIX as earnings announcements at the end of the month draw near. Toward the end of the month the market will show how Nadaq-100 components fare relative to their historical earnings price reactions. As we get closer to earnings, I will be keeping an eye on the VOLQ / VIX relationship, what it is predicting for earnings, and if the premium correctly predicted a volatile or calm earnings season.