Earn­ings volatil­ity to kick in as coro­n­avirus wor­ries mount

The Daily Star (Lebanon) - - BUSINESS - By April Joyner

NEW YORK: Con­cerns over the out­break of coro­n­avirus from China have largely over­shad­owed cor­po­rate re­sults, but the back half of the earn­ings sea­son could hold greater sway over the per­for­mance of in­di­vid­ual stocks.

Earn­ings-re­lated stock moves have been smaller this sea­son in com­par­i­son with the av­er­age over the past 12 quar­ters, ac­cord­ing to data from op­tions re­search com­pany ORATS.

The muted moves re­flect a broader trend of sub­dued volatil­ity that had lim­ited price fluc­tu­a­tions in a range of as­sets over the last sev­eral months. Some of that calm was dis­rupted this week, as mount­ing con­cerns over the spread of the coro­n­avirus Fri­day dealt the bench­mark S&P 500 stock in­dex its big­gest daily per­cent­age loss since Oc­to­ber.

The damp­ened earn­ings-re­lated moves have ben­e­fited op­tions sell­ers, who profit when the change in share price is smaller than ex­pected.

Yet bet­ting that earn­ings-re­lated moves will re­main sub­dued could soon be­come more costly.

Op­tions traders have priced in more volatil­ity for broader ex­change-traded funds. Im­plied volatil­ity on the SPDR S&P 500 ETF Trust, which shows ex­pec­ta­tions for fu­ture stock swings, has climbed since mid-Jan­uary, ac­cord­ing to data from Trade Alert. That rise co­in­cides with mount­ing con­cerns over the po­ten­tial eco­nomic im­pact of the coro­n­avirus out­break.

“The op­tions mar­ket is re­flect­ing this new risk, this coro­n­avirus risk,” said Ophir Got­tlieb, chief ex­ec­u­tive of Cap­i­tal Mar­ket Lab­o­ra­to­ries in Los An­ge­les.

More­over, risks from the virus out­break are be­gin­ning to spill over into earn­ings com­men­tary. Com­pa­nies such as Star­bucks Corp., Levi Strauss & Co. and Oreos-maker Mon­delez In­ter­na­tional Inc. have warned of a fi­nan­cial hit from the out­break. As such re­marks pile up, they could also bump up volatil­ity among shares of cer­tain com­pa­nies, Got­tlieb said. “Some CEOs are openly say­ing, ‘Hey, things are go­ing to be a lit­tle harder.’”

At the same time, the fourth and fifth weeks of the six-week earn­ings sea­son have usu­ally reaped the great­est re­wards for traders buy­ing op­tions in an­tic­i­pa­tion of out­sized stock moves, ac­cord­ing to ORATS data. Earn­ings-re­lated moves tend to be greater in those weeks in part be­cause smaller com­pa­nies, whose stocks are of­ten more volatile, tend to re­port later in the sea­son, said Matt Am­ber­son, founder of ORATS, in Portsmouth, New Hamp­shire.

Op­tions for sev­eral S&P 500 com­pa­nies re­port­ing next week – in­clud­ing Chipo­tle Mex­i­can Grill Inc., Twit­ter Inc. and Coty Inc. – show a gap of sev­eral per­cent­age points be­tween in­vestors’ ex­pec­ta­tions for share moves and past share per­for­mance af­ter quar­terly re­ports.

It ap­pears that the cost of buy­ing op­tions on in­di­vid­ual stocks ahead of the earn­ings re­port is “get­ting cheaper when it should be get­ting more ex­pen­sive,” Am­ber­son said.

Risks from the virus out­break are be­gin­ning to spill over into earn­ings com­men­tary.

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