Consulting volatility

01/22/21
  • KFY hits pause after 63% rally
  • Consolidation formed at long-term resistance level
  • Volatility patterns suggest certain options may have an edge

Traders who saw Korn Ferry (KFY) pop up on the LiveAction scan for biggest one-week declines in implied volatility (IV) early Thursday morning may not have been surprised by its price chart, which showed the stock had been consolidating for a little more than a week after a 63% rally between  October 30 and January 12:

Chart 1: Korn Ferry (KFY), 10/28/20–1/21/21. Korn Ferry (KFY) price chart. Pausing after rally.

Source: Power E*TRADE


Since declining IV means the options market is expecting less volatility in a stock, it makes sense that this signal would appear, if only briefly, as prices entered a holding pattern after an energetic rally.

A couple of weeks into that rally, global consulting firm KFY crushed its headline earnings numbers on November 23 ($0.54 vs. $0.05 estimated, and revenues of $435.4 million vs. $376.14 million). But the company also noted it wouldn’t offer any specific revenue or earnings guidance for Q3 2021 as the pandemic continued to “cloud the near-term predictability” of its business.1 Nonetheless, the stock banged out nearly half of its October–January rally after this announcement.

But to turn the IV-price action relationship on its head, some stock traders—especially those familiar with KFY’s longer-term price history—may have anticipated the recent consolidation and IV decrease. A weekly chart shows the stock’s rally stalled when prices reached the long-term resistance level defined by the late-2018 and 2019 swing highs around $50:

Chart 2: Korn Ferry (KFY), 7/24/17–1/21/21 (weekly). Korn Ferry (KFY) price chart. Reached long-term resistance.

Source: Power E*TRADE


So far, KFY has bumped its head on this ceiling for a little more than a week—precisely what many traders would expect to happen, even if they see the potential for longer-term upside.

But that raises an important point for potential options buyers. Despite yesterday’s alert of an IV drop, the following chart shows that only the February options had lower-than-average IV, while the March options had exceptionally high IV (KFY is currently scheduled to release earnings in the first half of that month):

Chart 3: KFY options volatility. Implied volatility vs. 30-day average. March options potentially pricey.

Source: Power E*TRADE


Since higher IV typically inflates options premiums—regardless of other factors—March contracts may be pricey relative to other expirations.

Yes, options can sometimes give traders more flexibility, but it comes with the cost of factoring in the effects of volatility as well as price direction.

Market Mover Update: Editas (EDIT) added to its recent sell-off, tumbling more than 12% intraday yesterday, dropping shares back into the range of their December consolidation (see “Double helix, double top”).

Today’s numbers (all times ET): PMI Composite Flash (9:45 a.m.), Existing Home Sales (10 a.m.), EIA Petroleum Status Report (11 a.m.).

Today’s earnings include: Ally Financial (ALLY), Kansas City Southern (KSU), New Oriental Education & Technology (EDU), Schlumberger (SLB).

Today’s IPO: Patria Investments (PAX).

 

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1 StreetInsider.com. Korn Ferry (KFY) Tops Q2 EPS by 49c. 11/23/20.

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