Earnings volatility set to kick in as virus worries mount

NEW YORK (Reuters) – 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 last week, as mounting concerns over the spread of the coronavirus on 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,’” he said.

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 this 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 a company’s earnings report is “getting cheaper when it should be getting more expensive,” Amberson said.

HONG KONG WEAKNESS

The risk of further contraction in the Hong Kong economy, which was buffeted by anti-government protests last year, has increased due to the coronavirus epidemic, Financial Secretary Paul Chan on Sunday.

“As it [the economy] enters 2020, it has not shaken off the risk of continued decline, but has encountered the threat of a new coronavirus pneumonia epidemic, which will definitely cause a double blow to the economy,” Chan said in a blog post.