An options strategy that bets on individual stocks logging larger-than-expected moves after corporate results was winning big this earnings season but is among many that has been derailed by this week’s volatility spike.
The strategy involves buying options straddles - which combine a put and a call options purchase - on shares of a company ahead of its earnings report. Data from ORATS showed the strategy worked especially well in the two weeks prior to this one, when post-earnings stock moves tended to be larger than what was priced in the options.
But a burst of dizzying stock turbulence earlier this week caused the prices of the options to rise, making it more difficult for traders to realize a profit. It was one several strategies - including short volatility and dispersion trading strategies - that thrived in calm markets but were thrown off-kilter when U.S. economic worries and the unwinding of a global yen-funded carry trades shook stocks this week.
“The rule of thumb is that earnings straddles are more profitable when the volatility is low,” ORATS founder Matt Amberson said. “When there are more macro events ... then the earnings move tends to be less than is expected by the market straddles. A good example is this earnings season.”
For the first week of earnings, shares of companies that reported results, on average, swung 21% more than that implied by options, making buying options straddles a winner 56% of the time, the data showed.
For the subsequent two weeks, the stocks of reporting companies moved 62% and 33% more than what options straddles had priced, delivering win rates of 62% and 58%, respectively.
This week, however, stock swings for reporting companies came in at only 86% of the move priced in options straddles, dragging down the win rate for the strategy to 50%, the lowest for any week this earnings season, ORATS data as of Wednesday showed.
Nasdaq is proposing amendments to its rules pertaining to penny stocks to put a faster, more stringent delisting process in place for non-compliant companies, according to a filing posted on the exchange operator’s website on Thursday.
Nasdaq requires companies listed on its exchanges to maintain a closing price above $1. Companies that fail to meet this criterion for 30 consecutive trading days are deemed to be non-compliant with the listing standards and are given 180 days to regain compliance.
If the company’s stock price doesn’t climb above $1 after 180 trading days, it can request a second 180-day compliance window.
At the end of the second compliance period, companies whose stock remains under $1 currently have the option of appealing to Nasdaq’s hearings panel, which puts the delisting process on pause until a hearing.
However, the proposed changes could speed up the process of delisting non-compliant companies.
If the amendments go through, Nasdaq will suspend companies from trading on its exchanges if their share price has been below $1 on the completion of 360 trading days, effectively doing away with the option to appeal.
It also seeks to immediately send a delisting determination to any company whose share price has fallen below $1, if it has effected a reverse stock split within the prior one-year period.
Some companies, usually those in financial distress or experiencing prolonged operational downturns, have been observed to engage in a pattern of repeated stock splits, according to the filing, made on Tuesday.
“Nasdaq believes that such behavior is often indicative of deep financial or operational distress within such companies rendering them inappropriate for trading on Nasdaq for investor protection reasons,” the exchange operator said in the filing.
Companies often carry out reverse stock splits to boost the stock’s price by reducing the number of outstanding shares.
Nasdaq declined to comment in response to a request from Reuters.
The two proposed changes to Nasdaq’s listing standards are subject to approval by the U.S. Securities and Exchange Commission.
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