It’s always interesting when a stock moves in opposition to a market wave that has subsumed pretty much every name on the board — especially when that name reports earnings tomorrow.
MasterCard Incorporated (NYSE: MA) is down more than 3% on a day when the market is rallying about 2%, and most of the other big losers are of the inverse ETF or VIX variety. Will no one ever use a credit card again if AT&T Inc. (NYSE: T) lets you pay for items on a smartphone? That’s apparently weighing on the stock today.
If this is a pre-earnings smart money move, they have some serious indifference to the options.
Here is the chart of MA’s 30-day implied volatility (the options volatility) versus its 20-day historical volatility (the volatility of MA itself) over the past three months.
And here is the 10-day historical volatility for the same time period.
What stands out here? Well, options actually trade lower in volatility terms than the stock itself on the 20 day. Now that historical (HV) does include a big down day on July 16, but that has left the calculation of the 10-day HV, and even there MA options are, at worst, in line with stock volatility, which is very odd with news pending.
In general, we see option bid-ups ahead of news. You know implied volatility will drop after the announcement, so the question to ask is how much the stock would have to gap in order to offset the inevitable decline in options premiums.
If you believe that volatility bid-up overprices, you can net sell options; if you believe it’s too light, you can net buy.
I tend to prefer net shorting options that get bid up ahead of news and betting against the big move. If I have a directional opinion, say up, I would short puts or put spreads. If I have no directional opinion but believe volatility has too much juice in it, I’ll short strangles (out-of-the-money calls and puts) or iron condors (shorting out-of-the-money put and call spreads). What I rarely do is net buy options ahead of earnings.
So I plan to take a complete pass on MA earnings (I am short longer-dated out-of-the-money put spreads that are not related to earnings) and this looks like one of the cheaper options boards around.
Follow Adam Warner on Twitter @agwarner.
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