Mid-week market update: Several readers asked me for comments going into NVIDIA’s earnings report Wednesday night, so I thought I would publish my mid-week update a little earlier than usual.
Bottom line, I have no idea about NVIDIA’s fundamentals. You can study the chart pattern, but event-driven market moves are “roll the dice” moments. Instead of trying to focus on what how stock and the market will move after the earnings report, my inclination is to focus on portfolio risk during these binary events. How is your portfolio positioned relative to your risk budget?
Even though I can offer no insights on market direction, here are some thoughts on risk from the option market.
Estimating risk
Here is a snapshot of NVIDIA’s options that expire this Friday from the CBOE website. The implied volatility (IV column) of at-the-money options is between 1.47 and 1.48. For the uninitiated, you convert from an annual to a daily volatility by dividing the annual implied volatility by the square root of 252, which is roughly the number of trading days in a calendar year. That implies a one-day standard deviation move of 9.3%, which would occur about two-thirds of the time, and a two standard move of 18.6%, which would occur about 95% of the time. That’s quite the range to be rolling the dice on.
In addition to the NVIDIA earnings report Wednesday night, the other major market moving event is the PCE report on Friday morning. We can estimate market expectations of volatility of these events based on option pricing.
Here is the option pricing for SPY options that expire Thursday night, which would be one trading day after the NVIDIA report, and Friday, which would be one trading day after the PCE report. The market is discounting a one-day SPY volatility of 1.0% on Thursday, and volatility declines to 0.9% on Friday. Translated, the market is expecting a decline in volatility of 0.1% after the PCE report compared to the NVIDIA report.
That’s an example of how to risk budget.
Bullish sentiment?
Here’s a sentiment insight from the option market. The accompanying chart compares the 10-minute bars of the S&P 500 on Tuesday (top panel) and the 9-day VIX (bottom panel). From about 2pm onward, the index was flat to slightly down, and so was VXST, which is somewhat unusual as the stock market tends to be inversely correlated to volatility. I interpret this as a slightly bullish sentiment bias going into the NVIDIA earnings report. Keep an eye on how this relationship evolves Wednesday as a way of measuring overall market sentiment.
My inner investor is neutrally positioned at roughly the investment policy stock/bond target mix. My inner trader has stepped to the sidelines ahead of this potential market moving event.
I think what you are trying to say is the 1 standard move of 9.3% is the limit 67% of the time, while the 2 standard deviation move of 18.6 percent is exceeded only 5% of the time.
Of course statistics and small samples like what happens today are not very reliable.
It’s interesting that there was a little plateau just before the pop in May which is here again.
If NVDA flops, what does that do to the AI frenzy? To tech sentiment? Do we get a rotation?
How does one calculate the standard deviation from the given IV? Pardon my ignorance. Thanks.