Why Options Get a Lift During Earnings Season
This period may seem identical to other time frames -- but there's a big difference.
On Monday, Bespoke Investment Group -- which probably has one of the most impressive stock-market databases around (similar to my firm's ODDS Online, one of the most impressive options databases around) -- put together an interesting report and graphic showing how the market has performed during different earnings seasons.
When I glanced at the numbers, I got the impression that if you added them up, it would turn out to be a whole lot of nothing. So I took the average of all the months, and indeed, the average return of the S&P 500 during earnings season was a meager -0.11%.
I then compared that average return to the average monthly return for the market, as they're both about 30 days in duration. Knowing that the S&P 500 is pretty much right where it was in October 2001, I knew that the market's return wouldn't be that much either. Turns out, it's a minuscule -0.02%. So there's really not that much of a difference month-to-month -- at least when you look at the average.
Which begs the question: Why are stocks, and even index options, generally more expensive going into earnings season?
The reason can be explained by looking at how far each period's returns deviate from the average. Hopefully, these graphs will illustrate what I mean.
The first is a histogram of the S&P 500's month-to-month change since October 2001 -- the period in which Bespoke's analysis began. The x-axis is the monthly percent change. The y-axis measures the frequency of the monthly change. For instance, in the 0 to 2% category, the y-axis is 25%. That means for 25% of the months since October 2001, the S&P 500 gained between more than 0% but less than 2%.
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