Bring on the numbers

  • UBNT implied volatility is up despite stock’s recent trading range
  • Stock is up more than 70% on the year
  • Earnings are scheduled for release tomorrow

You probably wouldn’t think that a stock that’s up around 71% on the year would show up on a scan for relatively low volatility, but that was the situation Ubiquiti Networks (UBNT) found itself in recently.

Yesterday the networking tech company showed up on a Power E*TRADE live action scan for stocks with 30-day average historical volatility (HV) less than their 30-day average options implied volatility (IV):

Chart 1: LiveAction Scan, 30-day HV < 30-day IV, 5/7/19. Historical volatility (HV) much lower than implied volatility (IV)

Source: Power E*TRADE

While HV simply measures how much price has moved in the past, IV (which is baked in to an option’s price) is forward looking: It’s the estimate of how much price movement the market expects in the future, and the more traders expect, the higher the IV will be.

The message from the LiveAction scan: UBNT’s recent price action has been less volatile than what the market expects it to be in the near future. And there’s a good reason why.

If Ubiquiti sounds familiar, by the way, it may be because in late March it was part of an article discussing what was at the time the hottest industry (networking equipment) in the hottest sector (tech). Among other things, “Sector gets wired” mentioned that breakout traders may have been watching UBNT because it had been in a relatively tight trading range for a few weeks—a range the following chart shows the stock broke out of two days later:

biquiti Networks (UBNT), 12/27/18–5/8/19. Consolidated before earnings

Source: Power E*TRADE

And that’s the situation the stock finds itself in once again: UBNT has been in a trading range for a little more than two weeks, this time as its IV has been ticking higher.

The answer to the volatility riddle, as you may have guessed, is that UBNT is scheduled to release earnings tomorrow morning. It’s not unheard of for a stock to trade quietly prior to an earnings release, although a two-plus week consolidation may be a little on the long side, especially for a stock that had been roaring to the upside for the better part of four months.

UBNT last released earnings on February 8—an event that kicked off the most bullish portion of its rally this year. And overall, the stock’s post-earnings performance has been—surprise!—bullish volatile: Since 2011, UBNT’s median five-day return after an earnings report is 6.5%, and it’s only been posted a five-day loss three times in the past 16 quarters. But occasionally those losses were large, such as the 23% tumble it took after its February 2017 earnings release.

But here’s something interesting: Overall, the more UBNT rallied from the open to the close on earnings day, the worse its return was after five days; the more it dropped on earnings day, the higher its return was five days later:

●UBNT average return after the five biggest earnings day declines: 4.82%

●UBNT average return after the five biggest earnings day rallies: -18.25%1

Judging by its past performance—and by the volatility surges that often occur after any earnings reports—there’s a good chance UBNT won’t be in its trading range much longer. And traders will have a few things to think about, especially that open-to-close move on earnings day.

Today’s numbers (all times ET): EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: Horizon Pharma (HZNP), Marathon Petroleum (MPC), Wendy's (WEN), Albemarle (ALB), Etsy (ETSY), Evergy (EVRG), Immunomedics (IMMU), Redfin (RDFN), Roku (ROKU), SailPoint (SAIL), Sunrun (RUN), Walt Disney (DIS).


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1 Supporting document available upon request.

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