š NVIDIAās Low-Volume Risk Gap Ahead of Earnings
Ahead of NVIDIAās earnings, what is truly worth watching is not only the range of volatility implied by options, but also the fact that participation in spot trading has simultaneously fallen to an unusually low level. Excluding the shortened Christmas and New Year trading week at the end of 2014, last weekās weekly trading volume was the lowest since the company went public. This means that less capital is willing to trade ahead of earnings, making the marketās capacity to absorb buy and sell orders even more worthy of observation.
The options market is currently pricing in a post-earnings single-day move of approximately Ā±6.1%. The first-day close after each of the past eight earnings reports did not move outside this range, indicating that this price is not detached from historical experience. However, the reactions to the most recent four earnings reports were all declines, and six of the past eight were declines. Directional weakness and whether the options range is reasonable are two different matters.
Low implied volatility does not mean low risk. It only reflects options tradersā pricing of the magnitude of moves; it does not guarantee that the spot market will have sufficient capital to absorb a move in either direction after earnings. If earnings and guidance fail to change the recent pattern of weak reactions, price adjustments in a low-volume environment may become more concentrated; conversely, if the results are sufficient to attract buying interest again, the range priced by options remains a direct yardstick for observing whether the actual reaction is unusual.
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