Volatility tipoff

  • CRWD and ULTA both had high IV relative to HV yesterday morning
  • IV above HV can sometimes mean traders expect a near-term price move
  • Be wary of looming earnings reports

Stocks make news when they make big moves, but experienced short-term traders know it’s a good idea to keep tabs on names away from the headlines, because “quiet” markets are sometimes fertile ground for momentum moves.

Yesterday morning, for example, CrowdStrike (CRWD) and Ulta Beauty both appeared on the LiveAction scan for symbols with 30-day historical volatility (HV) less than their 30-day options implied volatility (IV)—a signal that there may have been a possible disconnect between how much these stocks had actually been moving (HV) and how much traders expected them to move in the future (IV). In this case, the higher IV readings could have meant options traders were anticipating these stocks would move more in the near future than they had in the recent past.

Not that either stock has been just sitting on its hands lately. Tech security company CrowdStrike—one of last year’s hot IPOs—topped out above $100 in August, then tumbled 56% to a record low of $46.44 in August. After a couple of months of meandering, CRWD found some traction early in 2020, and yesterday made a four-month high that extended its year-to-date (YTD) gain to around 34%:

Chart 1: CrowdStrike (CRWD), 7/15/19–2/19/20. CrowdStrike (CRWD) price chart. Climbed off lows.

Source: Power E*TRADE

But the chart also shows that CRWD’s climb over the past month or so has been a grind-it-out affair. Daily gains have been relatively consistent, but modest—which is one reason why options traders may be looking for more price momentum to develop in coming weeks.

Retail beauty chain Ulta (ULTA) has taken a similar path in recent months. After taking a huge hit last August on an earnings miss, the stock consolidated before turning higher in late November after testing its September lows. As of yesterday it was up more than 34% from that low after a series of stutter-step up moves—short, high-energy upswings followed by lengthier trading ranges or pullbacks. The stock has recently been consolidating a little below its February 12 high of $304.65, so its high IV relative to HV may suggest options traders are anticipating a possible momentum move out of that range:

Chart 2: Ulta Beauty (ULTA), 4/26/19–2/19/20. Ulta Beauty (ULTA) price chart. Stair-stepped higher.

Source: Power E*TRADE

One thing traders need to keep in mind when comparing HV and IV is that IV will almost always get inflated when known catalysts are on the near-term horizon—like earnings, which can rock a stock under the best of circumstances. The market pumps up IV (which inflates option premiums) because of the uncertainty surrounding earnings—it’s no coincidence that most of the stocks on yesterday’s LiveAction scan were scheduled to report their numbers in the next seven days.

In contrast, CrowdStrike and Ulta don’t release earnings until March 6 and 13, respectively—which may mean the market sees the potential for a resurgence in price momentum before their numbers come out. And the fact that both stocks, although recently on the upswing, are still well off their highs could mean bulls see more potential (and perhaps less risk) in these types of names than in others that are already trading at or near records.

Market Mover Update: You know what goes well with an apple? Chips, apparently. Apple’s (AAPL) rebound yesterday after Tuesday’s coronavirus-warning retreat was accompanied by a 2%-plus rally in the PHLX Semiconductor Index (SOX).

Despite the stock market’s Wednesday rebound, April gold futures continued to rally, tagging $1,614.40. Meanwhile, March WTI crude oil (CLH0) surged more than 2.5% to a nearly three-week high of $53.48/barrel.

Today’s numbers (all times ET): Leading Economic Indicators (10 a.m.), EIA Natural Gas Report (10:30 a.m.), EIA Petroleum Status Report (11 a.m.).

Today’s earnings include: American Electric Power Company (AEP), Norwegian Cruise Line (NCLH), Pilgrim's Pride (PPC), Dropbox (DBX), Fastly (FSLY), ViacomCBS (VIACA).


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