Covid Volatility

  • The bull market party has been going on since roughly 2009 (and who would have predicted that at the very bottom of the financial crisis?) but is obviously getting a little decrepit. Anxiety about the end of festivities is obviously increasing, and in the world of options, that’s great for implied volatility. Evidence? Last week, 491 stocks out of our universe of 500 showed an increase in implied volatility. On average, 30-day implied volatility jumped a healthy 6% for the week.
  • Implied volatility reacts the most to uncertainty and anxiety and is usually the result of new and unexpected information. Take the poster child for Covid indoor fun ‘n games, Peloton (PTON). It leads the pack in implied volatility, trading at a healthy 118%, up 20% for the week. As impressive, its historical volatility increased 48% on the week to 127%. Clearly, the market was just a little surprised at the news of production woes and seeming management incompetence.
  • Strangely, implied doesn’t necessarily jump immediately; sometimes it takes a few days for the new situation to set in. A large increase in historical volatility without a corresponding move in implied is usually a sign of this. As of last Friday, Netflix (NFLX) was a good example of this with a whopping 61.6% increase in 30-day historical, but only a 5.8% increase in 30-day implied.
  • Whereas previous months were dominated by Covid-affected stocks, this week presents a more balanced selection. The market might be looking for a new toy to play with. Covid seems to be fading as a driver of implied volatility – it’s old news and the current market sell off has replaced it. Although Covid-affected stocks continue to trade at relatively high volatilities, they are stable to decreasing. Is this significant? Absent new developments, the effect of Covid is baked into these stocks and it will take a new shock (not necessarily Covid related) for their implied volatilities to break to new highs.

Top 10 Implied Volatility:

Ranking Name (Ticker) Sector Implied Volatility (%) IV Absolute Change (%) Historical Volatility (%) HV Absolute Change (%)
1 Peloton (PTON) Health/Exercise 118.0 20.0 127.0 48.0
2 Enphase (ENPH) Energy 86.3 13.3 53.3 -5.6
3 Moderna (MRNA) Pharm 82.7 14.3 69.1 2.3
4 Penn Nat. Gaming (PENN) Gaming 75.8 11.9 40.2 -16.4
5 Xilinx (XLNX) Semi-Conductors 75.6 2.75 49.0 -9.5
6 Tesla (TSLA) Autos 73.7 9.2 71.7 -3.8
7 ETSY (ETSY) E-Commerce 72.5 12.4 48.0 -0.9
8 Lumen Tech (LUMN) Tele-communications 72.5 30.6 38.7 -1.5
9 Discovery Comm (DISCA) Entertainment 70.6 6.5 82.1 10.2
10 Twitter (TWTR) Social Media 70.0 12.4 38.5 4.9

Volatilities of Note:

Name (Ticker) Sector Implied Volatility (%) IV Absolute Change (%) Historical Volatility (%) HV, Absolute Change (%) Comments
Activision (ATVI) Entertainment 16.4 -28.9 85.9 24.4 Implied down/historical up; merger flurry over
Humana (HUM) Healthcare 34.7 6.1 81.8 2.4 HV > IV by 47.1%
Netflix (NFLX) Entertainment 47.4 5.8 86.8 61.6 HV > IV by 39%
News Corp(NWS) Entertainment 62.6 37.5 25.5 -1.3 37.5% jump in IV, 25.5% in HV
Under Armour(UAA) Apparel 62.9 7.6 26.9 -7.8 26.9% jump in HV
Cerner (CERN) Software 8.7 -12.4 4.4 -37.6 Significant reduction in IV and HV

Methodology: Rankings include 500 of the largest public companies (by market cap) traded on the NYSE, NASDAQ, or CBOE. All changes are measured over the Friday/previous Friday period; all metrics are based on exchange-provided settlement prices. Implied volatilities represent a 30-day expiration and 0.5 delta, calculated using volatility surface methodologies provided by OptionMetrics.

Options involve a high degree of risk and are not suitable for all investors. OptionStrat is not a registered investment advisor. The calculations, information, and opinions on this site are for educational purposes only and do not constitute investment advice. Calculations are estimates and do not account for all market conditions and events.