Oil and gold stocks could be ripe for post-earnings volatility
Earnings season is heating up, with a handful of big-cap companies reporting this week. Against this backdrop, we decided to hunt for potential short-term options-buying opportunities ahead of earnings. Popping up on the list were several oil stocks, including BP Plc (ADR) (NYSE:BP) and blue-chip energy titan Chevron Corporation (NYSE:CVX), as well as several names in the precious metals/mining sector, such as Barrick Gold Corporation (USA) (NYSE:ABX) and Cliffs Natural Resources Inc (NYSE:CLF), all of which report earnings this week.
In simple terms, we searched for stocks that have a potential volatility catalyst on the horizon (earnings), boast near-term option premiums at a relative bargain, and have been more volatile than option traders expected in the past. More specifically, Schaeffer's Senior Quantitative Analyst Rocky White used the following criteria: earnings scheduled -- some perhaps tentatively -- between July 26 and Aug. 20 (when front-month options expire); a Schaeffer's Volatility Index (SVI) no higher than 10% above an annual low, which indicates historically attractive near-term volatility expectations; and a Schaeffer's Volatility Scorecard (SVS) of 75 or higher, which suggests the stock has tended to make outsized moves on the charts during the past year, relative to what the options market has priced in. Below are the results, sorted by sector:
As you can see, nine of the 25 stocks above fall under the "Oil" or "Oil Service" umbrellas. Meanwhile, seven stocks are from the "Precious Metals" or "Metals Non Ferrous" groups. (And these two big-cap tech stocks should also be on volatility watchers' radar.)
Beginning with BP, the company is slated to unveil its second-quarter report tomorrow morning. The shares are down 2.9% at $34.82 today, as crude stocks dip with oil prices. Still, BP has advanced nearly 29% since hitting a five-year low of $27.01 in February.
The stock has moved higher in the session after earnings in each of the past seven quarters, and has averaged a one-day post-earnings swing of 2.5%, going back eight quarters. The stock's SVS stands at 92, and its SVI of 23.8% is higher than just 7.2% of the past year's worth of readings -- an attractive set-up, from a near-term option buyer's perspective.
CVX will report earnings before the open on Friday, July 29. The stock was last seen down 2.6% at $102.97, among the worst Dow stocks today. However, CVX has added more than 27% in the past six months, rallying atop its 10-week moving average, and just touched an annual high of $107.58 on July 14. On the options front, Chevron sports an SVI in just the third percentile of its annual range, and an elevated SVS of 81.
While CVX's earnings reactions aren't as stellar as BP's -- the stock has moved lower in five of the past eight post-earnings sessions -- the equity's sentiment backdrop could swing in favor of contrarian bulls. Short interest represents nearly a week's worth of buying demand, at CVX's average pace of trading. In addition, put buying during the past two weeks hit an annual high, per the stock's 10-day put/call volume ratio of 4.65 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Should the company exceed earnings expectations later this week, a short squeeze or an exodus of option bears could add fuel to CVX's fire.
ABX went from a 20-plus-year low of $5.91 to a three-year high of $23.47 in under 10 months, nearly quadrupling from mid-September to early July. The stock has taken a breather of late, as gold futures cool off, but remains more than 167% higher year-to-date. ABX was last seen 3.8% lower at $19.76.
Ahead of earnings -- due after the close on Wednesday, July 27 -- ABX's near-term options look like a relative deal; the stock's SVI is higher than just 2.6% of all other readings from the past 12 months, and its SVS is lofty at 94. Historically, the stock has moved higher in the session after earnings in each of the past six quarters. yet Wall Street remains skeptical. Eleven out of 14 analysts maintain tepid "hold" or worse ratings, and the equity's Schaeffer's put/call open interest ratio (SOIR) of 1.07 is in the 87th percentile of its annual range, indicating near-term traders are more put-heavy than usual. Another earnings beat could translate into tailwinds for ABX, as the bears finally capitulate.
Finally, CLF has more than quintupled in 2016, touching an annual high of $7.58 earlier this month, but was last seen 1.3% lower at $7.06. In fact, the equity has outperformed the broader S&P 500 Index (SPX) by nearly 107 percentage points during the past 40 sessions. Meanwhile, the stock's SVS is at 93, hinting at bigger-than-expected moves during the past year (compared to what the options market priced in), while its SVI is in just the third percentile of its annual range.
The firm is set to report earnings before the open on Thursday, July 28, and the stock rallied more than 25% in the session after its last earnings report. On average, CLF has endured a one-day post-earnings price swing of 8.1%. On the sentiment side, nearly 39% of CLF's float remains dedicated to short interest, and would take about a week to buy back, at the stock's average pace of trading.
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