Implied Volatility around Earnings Announcements

Introduction

There is a common belief that option implied volatility, which is high before earnings announcements, quickly dissipates after the event. So sell options before the event to profit from the fall in IV. We decided to put this theory to test by observing at-the-money IVs 5-days before earnings announcements and their subsequent behavior.

It is not what you expect.

ATM IVs

Here are the at-the-money implied vols 5-days before and the day after announcements:

atm iv announcement

In our study, IV falls only 44% of the time. So the blanket statement fails. IV dissipation is not guaranteed. There are a lot of other things that affect IV and earnings alone is not sufficient to predict the outcome.

However, if the IV was more the 50, then IV dissipates 70% of the time. However, these odds could be similar to those without earnings announcements as well (all things equal.) So further research is required.

Conclusion

Don’t go around selling options thinking that IV will dissipate after earnings announcements. Know your odds.

Opening Bell 02.07.2015

Your world at 9am

world.2015-07-02

Equities

Major
DAX(DEU) +2.15%
CAC(FRA) +1.94%
UKX(GBR) +1.34%
NKY(JPN) +1.16%
SPX(USA) +0.69%
MINTs
JCI(IDN) +0.62%
INMEX(MEX) -0.17%
NGSEINDX(NGA) -1.77%
XU030(TUR) -0.98%
BRICS
IBOV(BRA) -0.61%
SHCOMP(CHN) -0.76%
NIFTY(IND) +1.01%
INDEXCF(RUS) -0.90%
TOP40(ZAF) +0.37%

Commodities

Energy
WTI Crude Oil +0.11%
Heating Oil +0.52%
RBOB Gasoline +0.48%
Natural Gas +0.93%
Brent Crude Oil +0.39%
Ethanol +0.00%
Metals
Copper +0.15%
Silver 5000oz +0.00%
Gold 100oz -0.22%
Palladium +0.13%
Platinum -0.59%

Currencies

USDEUR:-0.17% USDJPY:+0.13%

MINTs
USDIDR(IDN) +0.08%
USDMXN(MEX) -0.00%
USDNGN(NGA) +0.13%
USDTRY(TUR) +0.02%
BRICS
USDBRL(BRA) +1.49%
USDCNY(CHN) +0.05%
USDINR(IND) +0.05%
USDRUB(RUS) -0.12%
USDZAR(ZAF) -0.00%
Agricultural
Cattle +0.00%
Cocoa +0.00%
Coffee (Arabica) -3.52%
Feeder Cattle +0.00%
Soybean Meal -0.22%
Soybeans -0.67%
Sugar #11 -0.48%
Wheat +0.64%
Orange Juice +0.09%
Coffee (Robusta) +0.00%
Corn +0.42%
Cotton +0.00%
Lean Hogs +0.00%
Lumber +0.00%
White Sugar +0.00%

Credit Indices

Index Change
Markit CDX EM +0.24%
Markit CDX NA HY -0.15%
Markit CDX NA IG -1.96%
Markit iTraxx Asia ex-Japan IG -0.70%
Markit iTraxx Australia -1.77%
Markit iTraxx Europe -1.46%
Markit iTraxx Europe Crossover -6.32%
Markit iTraxx Japan -2.42%
Markit iTraxx SovX Western Europe +0.27%
Markit LCDX (Loan CDS) +0.00%
Markit MCDX (Municipal CDS) +0.70%
Greece: nobody knows nothin’

Must reads

The National Optical Fibre Network is flailing amid right-of-way hurdles. What about broadband? But what about the farmers? Idea of India. (FE)

Domestic passenger vehicle sales lose momentum. However, Tata Motor’s sales momentum continued as the company reported the highest growth of 30 per cent among the PV makers. (Hindu) TATAMOTORS 435.35 -9.15 (-2.06%) MARUTI 3,989.00 -42.70 (-1.06%)

China discovers the pitfalls of fad based investing. “The country is promoting ‘internet plus’ so I bought some internet-themed stocks. Their results looked good. But then came a few days of limit-down. Now I’m stuck.” Sounds familiar to those “Make in India” themed portfolios, doesn’t it? (FT)

Most big-data projects: garbage in, garbage out. Not only do most of them actually not have Big Data in terms of data complexity or volume, but most of them actually have Crappy Data, and it’s probably hurting their business. (Techcrunch)

Engineers in Australia have created a fully working house-building machine that can create the brick framework of a property in just two days, working about 20 times faster than a human bricklayer. (Gizmag)

Good luck!

Options Daily 02.07.2015

Summary: Jul NIFTY 8700 calls added 649,175 contracts while 8400 calls shed 149,675. On the Put side of the equation, the 8000 strike added 1,040,025 while the 7900’s shed 213,475.

Our trend model indicates a LONG on the NIFTY and LONG on the BANKNIFTY.

JUL NIFTY OI

JUL NIFTY OI chart

JUL BANKNIFTY OI

JUL BANKNIFTY OI chart

JUL NIFTY Volatility

JUL NIFTY Volatility chart

JUL BANKNIFTY Volatility

JUL BANKNIFTY Volatility chart
Dotted lines indicated actual underlying volatility. Solid lines are IVs.

Macro Update June 2015

US TREASURIES VS. GILT SPREAD

The spread between 10yr US Treasuries and Indian Gilts remained within a tight range this month.

ust-ind-10yr-spread.2011-01-18

Long-term bond yields continued their ascent:

ust-yield-curve.2015-06-01

INSTITUTIONAL INVESTMENTS

FIIs came back to the debt market but took money out of equities…

fii-investments.2014-01-01.2015-06-30

… while DIIs gulped down debt as well.

dii-investments.2014-01-01.2015-06-30

Oil

Oil futures remained flat.

wti-brent.2011-01-18

Gold

If all the uncertainties cannot move gold up, I am not sure what will.

gold.usd

Copper

After a brief period of enthusiasm, it looks like copper has given up on industrial growth again.

copper.usd

Dollar Index

Looks like the dollar index (DXY) has found a range.

Outlook

Although the Indian markets have shrugged off Grexit for now, nobody really knows the extent to which the contagion can spread. It’s basically a known unknown at this point.

With the monsoon expected to be normal and earnings to begin in earnest only by the end of July, the first couple of weeks of July is going to be driven by optimism.

Quarterly Recap: April-June 2015

world.2015-03-31.2015-06-30

Equities

Major
DAX(DEU) -8.53%
CAC(FRA) -4.84%
UKX(GBR) -3.72%
NKY(JPN) +5.69%
SPX(USA) -0.77%
MINTs
JCI(IDN) -10.94%
INMEX(MEX) +2.75%
NGSEINDX(NGA) +5.37%
XU030(TUR) +1.37%
BRICS
IBOV(BRA) +3.41%
SHCOMP(CHN) +13.26%
NIFTY(IND) -0.71%
INDEXCF(RUS) +1.74%
TOP40(ZAF) +0.27%

Commodities

Energy
Heating Oil +9.46%
Natural Gas +6.38%
Ethanol +8.99%
WTI Crude Oil +22.10%
Brent Crude Oil +13.69%
RBOB Gasoline +14.29%
Metals
Copper -4.73%
Gold 100oz -0.74%
Platinum -4.72%
Palladium -6.21%
Silver 5000oz -6.02%

Currencies

USDEUR:-3.59% USDJPY:+2.18%

MINTs
USDIDR(IDN) +1.84%
USDMXN(MEX) +3.22%
USDNGN(NGA) -0.14%
USDTRY(TUR) +3.21%
BRICS
USDBRL(BRA) -3.60%
USDCNY(CHN) +0.03%
USDINR(IND) +1.85%
USDRUB(RUS) -4.47%
USDZAR(ZAF) +0.08%
Agricultural
Coffee (Robusta) +11.08%
Soybeans +7.68%
Cattle -8.30%
Cocoa +12.52%
Coffee (Arabica) -1.39%
Corn +9.44%
Feeder Cattle -1.47%
Lean Hogs +22.31%
Lumber +3.67%
White Sugar +3.99%
Cotton +6.00%
Soybean Meal +9.66%
Sugar #11 +4.00%
Wheat +17.70%
Orange Juice -7.16%

Credit Indices

Index Change
Markit CDX EM +3.41%
Markit CDX NA HY -1.55%
Markit CDX NA IG +3.77%
Markit iTraxx Asia ex-Japan IG +9.21%
Markit iTraxx Australia +11.15%
Markit iTraxx Europe +16.41%
Markit iTraxx Europe Crossover +27.41%
Markit iTraxx Japan +4.29%
Markit iTraxx SovX Western Europe +0.46%
Markit LCDX (Loan CDS) -0.19%
Markit MCDX (Municipal CDS) +5.20%
European markets got shellacked and global markets went from obsessing over Fed rate hikes to Grexit. We had our own monsoon scare and bond market turmoil even though the RBI is on an easing path…

Index Returns

index.performance.2015-03-31.2015-06-30

Market Cap Decile Performance

Decile Mkt. Cap. Adv/Decl
1 (micro) +4.17% 68/64
2 +9.23% 69/62
3 +6.79% 73/58
4 +5.28% 71/61
5 +2.42% 62/69
6 +0.91% 61/70
7 -1.04% 57/75
8 -1.14% 60/71
9 -5.65% 59/72
10 (mega) -0.60% 58/74
Large-caps held steady…

Top Winners and Losers

BAJAJ-AUTO +26.05%
GLENMARK +26.46%
BRITANNIA +28.00%
CANBK -24.46%
TECHM -24.12%
SRTRANSFIN -23.41%
Looks like Bajaj Auto finally turned the corner…

ETF Performance

CPSEETF +3.18%
BANKBEES +1.65%
JUNIORBEES +1.51%
GOLDBEES +0.87%
NIFTYBEES -0.83%
INFRABEES -2.69%
PSUBNKBEES -4.35%
PSU Banks were the most despised asset class…

Yield Curve

yieldCurve.2015-03-31.2015-06-30

Bond Indices

Sub Index Change in YTM Total Return(%)
GSEC TB -0.36 +2.06%
GSEC SUB 1-3 +0.07 +1.73%
GSEC SUB 3-8 +0.07 +0.10%
GSEC SUB 8 +0.39 -1.09%
Yields went up…

Interbank lending rates

mibor.30days.2015-06-30

Investment Theme Performance

Equity Mutual Funds

Bond Mutual Funds