Trading volatility spikes

Last Wednesday, Janux Therapeutics (JANX) registered one of the market’s largest week-over-week options volatility increases, with its 30-day implied volatility (IV) rising more than 97% to 111.16.

Yesterday, JANX’s volatility was still elevated, landing the biopharma’s ticker on the LiveAction scan for high 30-day IV:

One of the most common reasons for a symbol’s IV to jump is the approach of earnings. With a new earnings season getting underway this week, traders will likely see a steady stream of stocks with surging IV, even if their shares aren’t moving much. The uncertainty surrounding earnings announcements often translates into higher IV—and higher options prices.

In this case, though, JANX’s earnings aren’t expected until early March. But the stock has definitely been on the move recently, falling roughly 25% over the past three trading days:

The drop closed the huge up gap that formed on December 3 when the company announced successful clinical trial results for its prostate-cancer therapy.¹ The stock jumped as much as 77% intraday and edged slightly higher a couple of days later before pulling back.

The bottom half of the chart offers a useful reminder about the relationship between stock prices, options prices, and implied volatility. Notice that IV plummeted immediately after the December clinical trial announcement—a function of one element of uncertainty (the outcome of the clinical trial) being removed from the market.

That reality was immediately reflected in options prices. When JANX rallied to $71.25 on December 3, the January $70 call traded as high as $7.57. But although the stock traded above $70 each of the next two days, the option never traded higher than $6.22. By December 31 it was as low as $0.04, as a falling stock price, time decay, and declining IV took their toll on call premiums. On Monday, it was trading around $0.30.

Are traders now looking at a similar condition on the opposite side of the market? For example, as of Monday, the JANX February $45 put’s last trade (on January 10) was $4.85, its highest level since November. Whether the same dynamic plays out this time—that is, put prices drop significantly over the next few weeks—will depend not only on whether the stock rebounds (or at least stabilizes), but whether IV again turns lower.

While high or rising IV can be thought of as the options market’s way of signaling it expects more volatility, the options market sometimes expects more volatility because a stock is currently volatile—that is, it makes a big and/or surprising move. If that turbulence doesn’t last, IV may drop, deflating options prices.

Market Mover Update. With the second Trump presidential term beginning next week, Morgan Stanley & Co. analysts see important policy changes on the horizon, but they also think that horizon is fairly distant—i.e., implementation is likely to be slow. In the meantime, they say, “the healthy fundamentals of the US economy” should provide tailwinds to US equities and bonds.²

Today’s numbers include (all times ET): NFIB Small Business Optimism Index (6 a.m.), producer price index (8:30 a.m.).

Today’s earnings include: Calavo Growers (CVGW), Karooooo (KARO).

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¹ Barron’s. Janux Therapeutics Stock Soars on Prostate Cancer Drug Trial Results. 12/3/24.
² MorganStanley.com. Market Implications of Trump’s Agenda. 1/8/24.