Timing volatility

Longtime traders are accustomed to seeing options implied volatility (IV) drop significantly after earnings announcements, simply because the uncertainty that drove it higher in the first place has been removed. It’s part of the natural rhythm of the markets.

That basic dynamic can play out in different ways, though. For example, on Monday morning, medical diagnostics company Natera (NTRA) had one of the bigger week-over-week IV declines:

That contraction, which dropped IV to its lowest level since February, and well below its historical volatility (HV), happened just after it tagged a three-month high (orange, chart bottom):

Many traders likely associate sharp IV increases with sell-offs in the underlying stock—with good reason. A negative surprise that triggers a sell-off often introduces uncertainty into a stock’s outlook. In this case, though, it accompanied NTRA’s 19% earnings rally to a new all-time high on November 13. Meanwhile, the drop in IV occurred as the stock pulled back more than 9% from that high over the next two days.

It’s a good reminder that while “volatility” is often used as shorthand for “sell-off,” they’re not interchangeable. In terms of HV, at least, a big up move represents just as much volatility as the same move to the downside. And as we’ve seen here, IV can drop even if HV is surging. In this case, the message may be, “the stock’s volatility may be high now, but it may not be in the relatively near future.”

Right or wrong, traders are often focused on the timing of a certain price move. But since high and/or rising IV can inflate options prices, and low and/or falling IV can deflate them, there are real-world implications about when it’s a good time buy options vs. sell them.

Market Mover Update: Nvidia (NVDA) is scheduled to announce its Q3 numbers tomorrow, and it started off the week in sync with its recent pre-earnings pattern, falling more than 1% on Monday.

As Juniper Networks (JNPR) searched for direction on Monday after Friday’s 5% sell-off, the symbol appeared at the top of the LiveAction scan for unusual call options volume. The big trade: 1,700 contracts in the December $39 calls. Monday’s open interest (OI) was 5,600 contracts, so today should indicate whether traders were opening new positions (higher OI) or closing existing ones (lower OI).

While mergers and acquisitions (M&A) may not have increased this year as much as much as expected, Morgan Stanley & Co. strategists still think 2024 will mark the start of a “significant, multiyear” rebound in dealmaking.¹

Today’s numbers include (all times ET): Housing Starts and Building Permits (8:30 a.m.).

Today’s earnings include: Lowe's (LOW), Medtronic (MDT), Walmart (WMT), Keysight (KEYS), Powell Industries (POWL).

Click here to log on to your account or learn more about E*TRADE's trading platforms, or follow the Company on Twitter, @ETRADE, for useful trading and investing insights.

¹ MorganStanley.com. The Beginning of an M&A Boom? 11/14/24.