Options forecast vs. stock forecast

  • ZM options volatility 89% higher than its price volatility
  • Stock in relatively tight price channel since mid-August
  • Shares hit lowest point since January 2020 on Tuesday

After a while, traders learn that most things in the markets are relative. A stock’s price or volatility may be very high in the context of the past month, but extremely low compared to the past two years.

That “relativity” can be especially important for options traders. For example, the following chart of Zoom Video Communications (ZM) has a few interesting components, including a sharp sell-off after its August earnings release, a 30-month low ($70.44, on Tuesday), and the stock’s confinement to a fairly narrow, down-trending price channel over the past couple of months:

Chart 1: Zoom Video Communications (ZM), 6/3/22–10/12/22. Zoom Video Communications (ZM) price chart. Stock volatility declined over past two months.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

Even though ZM fell an additional 12% after that big earnings drop—a fairly significant move—its price action within the channel has been much less volatile compared to what it was in the two-and-a-half months that preceded it, as indicated by the decline in its 30-day historical volatility (HV). Meanwhile, its 30-day implied volatility (IV) has remained elevated—yesterday it was nearly twice as high as its HV.

Because HV simply shows how much the stock has moved in the past (in this case, 30 days), while IV is an estimate of how much it may move in the future, the implication is that the options market expects ZM to be significantly more volatile over the next month than it has been over the past month. And that’s why ZM appeared on the following LiveAction scan yesterday:

Chart 2: LiveAction scan: 30-day HV < 30-day IV, 10/12/22. Unusual options activity. Options market expects higher volatility over next 30 days.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

While first acknowledging that the options market’s volatility forecast could be wrong, here are a few reasons why IV may be so much higher than HV:

1. It’s more about HV than IV. IV is “high” mostly relative to HV. As the first chart shows, ZM’s IV is higher than it was a month ago, but not as high as it was in June or early July. In other words, it’s not so much that IV soared so much as it is that HV fell so dramatically.
2. Early earnings effect. Zoom is currently scheduled to release earnings on November 22. While that’s nearly six weeks away, IV often rises (or doesn’t decline much) in the final weeks leading up to an earnings announcement.
3. Seasonal volatility. After a bearish September and shaky start to October for stocks (including a retreat to year-to-date lows), volatility levels are elevated across the market.

Some implications for traders:

1. As noted, IV above HV can signal the options market expects a stock to make a move—although it’s not a prediction about which direction prices may take.
2. High IV means options may be overpriced, which means long, non-directional spreads like straddles and strangles—strategies with the potential to profit regardless of market direction—may be relatively expensive.

Of course, the second point suggests selling potentially overpriced options may be attractive to some traders, with the caveat that doing so is essentially an argument that IV is more likely to fall in the near future than rise—contrary to what IV is “saying.”

Market Mover Update: Knight–Swift Transportation (KNX) appeared on the LiveAction scan for unusual put options volume for a third day, with another 2,300 of the January $45 puts trading by midday on Wednesday (see “Truckload of options”).

Today’s numbers include (all times ET): Consumer Price Index, CPI (8:30 a.m.), Weekly Jobless Claims (8:30 a.m.), EIA Natural Gas Report (10:30 a.m.), EIA Petroleum Status Report (11 a.m.).

Today’s earnings include: Walgreens (WBA), Blackrock (BLK), Fastenal (FAST), Delta Airlines (DAL).


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