Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Should Investors Expect Surprises in Financial Sector?


No increase in implied volatility has many thinking there won't be any.

With some very important earnings in the financial sector coming up this week -- JPMorgan Chase (JPM) on Wednesday; Citigroup (C) and Goldman Sachs (GS) on Thursday; Bank of America (BAC) and General Electric (GE) on Friday -- I've been watching implied volatility (IV) in the sector very closely. Much to my surprise, IV hasn't increased ahead of earnings, as is typically the case.

The chart below, courtesy of Livevol, shows six months of price and volatility activity in JPMorgan, with the upper portion of the chart highlighting the last two earnings releases with the blue "E" icon. The bottom half of the chart plots 30-day implied volatility (red line) against 30-day historical volatility (light blue line) during the same period.

Note that just prior to the last two earnings reports, implied volatility rose due to the uncertainty and potential for higher volatility associated with an earnings surprise. This time around, however, the lack of movement in implied volatility, as well as the proximity of the IV level to historical volatility, suggests that investors aren't expecting any surprises at all. In fact, this situation isn't specific to JPMorgan, but is also mirrored at Citigroup, Bank of America, Goldman Sachs, and even quasi-financial General Electric. Not surprisingly, the bank ETFs, such as KBE, and the financial sector ETF, XLF, show a similar pattern.

No matter how the current earnings season unfolds, it's difficult to imagine that there won't be any surprises. Investors who think implied volatility is underestimating the surprise potential for the banks may look to initiate long straddles or long strangles to take advantage of a potential increase in implied volatility -- and hence, options prices.

Click to enlarge

Register For Minyanville's Holiday Festivus '09 Here
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.






Featured Videos