(Bloomberg) -- Keep a bias toward long volatility on U.S. stocks before their earnings reports, JPMorgan Chase & Co. says.
The options market is expecting earnings-related volatility to be roughly in line with the historical average, but a larger-than-normal risk premium is justified by “the important and idiosyncratic tax reform data point accompanying companies’ earnings reports,” JPMorgan strategists Shawn Quigg, Marko Kolanovic and Bram Kaplan wrote in a report Tuesday.
The Cboe Volatility Index, or VIX, just completed two weeks of gains along with the S&P 500 Index, a phenomenon that hadn’t been seen over a similar stretch since August 2016.
The tax cuts have been a major focus in both U.S. earnings reports and forecasts in the current season, including at big banks and companies like UnitedHealth Group Inc. and Johnson & Johnson. The pending changes have made profit comparisons with Wall Street estimates more difficult, which could boost volatility in the stocks as well.
About 12 percent of the market capitalization of Russell 1000 Index companies reports earnings Wednesday through Friday, JPMorgan estimates.
The JPMorgan strategists “would advise a general bias toward being long volatility on single names into reporting,” they said.
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