Don’t Fear Volatility; Ride It For Profits
For investment analysts, corporate earnings season is like the World Series, the Super Bowl and the Oscars all wrapped into one. Every day, before the opening bell and after, quarterly earnings results hit the wires and stocks spike up and down.
I’ve lived through many years of earnings seasons and what’s interesting is how the suspense generated by each season never wanes. Quarterly earnings season is prime time for “catalysts” and serves as a great hunting ground for stock pickers.
You can always count on unexpected twists and turns from public companies. Stock volatility is usually at its highest level now, which is a boon for options traders.
Stocks certainly have experienced a volatile week so far, as first-quarter 2021 earnings continue to roll in and the Colonial Pipeline outage drags on. Investors are fretting about energy supply disruptions from the cyberattack against the energy pipeline that carries fuel from Texas to the East Coast. They’re also increasingly worried about inflation.
On Tuesday, the Dow Jones Industrial Average plunged 473.66 points (-1.36%), the S&P 500 fell 36.33 points (-0.87%), and the tech-heavy NASDAQ slipped 12.43 (-0.09%). The NASDAQ underwent a wild roller-coaster ride before clawing back most of its losses, after shedding 2.2% at its low for the trading day. The CBOE Volatility Index (VIX), aka “fear gauge,” jumped more than 11%. In pre-market futures contracts Wednesday, the three U.S stock indices were trading in the red.
Options are among the best tools to capitalize on volatility. Options offer ways to capture short-term moves in a stock while limiting your downside risk. I especially like the fact that options let you make money regardless of the market’s direction.
Smart investors prefer to make money in both bull and bear markets, and during all the swings in between. Below, I’ll steer you toward a proven trading method that capitalizes on volatility. First, let’s look at the latest earnings report cards.
Corporate earnings performance so far bodes well for potential stock gains this year. As of May 10, the blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings per share (EPS) growth rate for the S&P 500 for the first quarter of 2021 is 49.4% (see chart).
If 49.4% turns out to be the actual growth rate for Q1 2021, it will represent the highest year-over-year EPS growth rate posted by the S&P 500 since Q1 2010, when it came in at 55.4%.
More S&P 500 companies are beating EPS estimates for the first quarter than average, and beating EPS estimates by a wider margin than average.
The blended year-over-year revenue growth rate for Q1 2021 is 10.0%, which is above the 5-year average revenue growth rate of 3.9%.
Put volatility to work…
As I noted above, the VIX has been climbing higher lately as news headlines spook investors. But volatility can be your friend.
By tracking a basket of options based on the S&P 500 index, the VIX measures the implied volatility of the S&P 500 over the subsequent 30-day period. VIX readings are suggestive of the percentage range of returns the S&P 500 probably experienced over the short term.
Traders watch the VIX for signs of complacency during the market’s bullish periods and signs of extreme anxiety during bearish periods.
As corporate earnings come in strong, the bull market probably has further to run. But if you’re looking for investment moves that turn volatility to profitable advantage, consider the trading methodology of my colleague Robert Rapier, chief investment strategist of our new trading service, Rapier’s Income Accelerator.
I closely work with Robert on his other service, Utility Forecaster, so I know firsthand that Robert’s trades are income-generating machines.
As the mastermind of Rapier’s Income Accelerator, Robert has devised a new, safe way to quickly generate cash on demand, regardless of the market’s gyrations. Click here for details.