Just before earnings season, a spark from across the sea
Tankers are being targeted at a pace of one per day
Attacks on tankers in the Strait of Hormuz are increasing.
On October 1st, the Kuwaiti-flagged supertanker ‘Kazimah 3’ was hit and caught fire, and on the 4th, the Liberian-flagged tanker ‘Lipsi’ sustained damage to its engine room.
According to British maritime authorities, since October 2nd, there has been ‘at least one attack per day’ in the Strait of Hormuz or the Gulf of Aden. (Source: Al Jazeera)
It is reported that the number of attacks since the beginning of October has already reached half of the total for the entire month of September.
Crude oil to $105, VIX also creeping up
North Sea Brent crude oil rose from $100.20 on October 7th to a temporary high of $105.47 on the morning of the 8th (Japan time).
Then, on October 9th, it hit $105.91.
In addition to the attacks, approximately 25% of crude oil production in the Gulf of Mexico has been halted due to a hurricane.
The stock market’s fear index, the VIX, has also risen from 15.08 on October 7th to 15.72 (intraday value).
After hitting a record high on the 6th, the S&P 500 saw a small decline to 7,801.77 on the 7th.
And starting next week, the full-scale earnings season begins.
‘Is it okay to head into earnings like this?’
Today, I want to prepare to turn that anxiety into a strategy.
The ‘price tags’ I am watching
From here on are my own observations.
1. Crude oil is surging, but the VIX is still in the 15 range
Even though crude oil is up more than 4% in a single day, the VIX is still in the 15 range.
The cost of insurance for stocks is still cheap.
Just like the bond fear index MOVE that I discussed in my previous article, there is a ‘temperature gap’ here as well.
Rising crude oil prices push up inflation, push up interest rates, and push down stock price tags.
It seems to me that the stock market has not yet seriously priced in that chain reaction.
2. Earnings season is a time when IV naturally rises
Before earnings, it is a time when the IV of individual stocks tends to rise.
When you add the factor of high crude oil prices to that, the price tags become even higher.
In particular, airlines with high fuel costs and energy companies that benefit from crude oil will inevitably be asked about the ‘impact of crude oil’ during their earnings calls.
The three strategies I am considering
Strategy 1: Prepare ‘cheap insurance’ for stock indices
As long as the VIX is below 20, it is a time when the price tags for SPY and QQQ puts are relatively cheap.
To keep costs down, use a ‘put spread’ by selling lower puts in combination.
I am considering this with an expiration date that spans the earnings season as insurance to protect my holdings.
Strategy 2: Be careful of high price tags for ‘stocks that benefit’ from crude oil
Major oil companies and energy ETFs (XLE) will benefit from the tailwind of rising crude oil prices.
However, since many people are already buying, call premiums are likely to be expensive.
Rather than buying calls outright, I would use a ‘call spread’—selling a higher-strike call to offset the cost—to recoup some of that high premium.
Don’t forget that if news of a ceasefire breaks, both crude oil prices and IV could drop sharply.
Strategy 3: For stocks that ‘lose’ on crude oil, the ‘outlook’ matters more than earnings figures
For airlines, fuel costs hit profits directly.
Delta Air Lines is scheduled to announce earnings on October 9 (US time).
The company has projected that fuel costs for the July-September quarter will be about 40% higher than the previous year, and market profit forecasts have been cut by about 10% over the past month.
How they discuss their fuel cost outlook here will be a key factor in determining the ‘price tag’ for airline stocks as a whole.
Since an IV crush will also occur after earnings, I will wait for the premiums to drop after the announcement before making any moves, rather than betting big before the results.
Summary
There are three points I am watching.
• Will Brent crude exceed $110?: If attacks continue and the US takes military action, there is potential for further gains (there are reports of US preparations, but these have not been confirmed).
• Will the VIX exceed 20?: This is a sign that the stock market is seriously beginning to price in the rise in crude oil.
• October 14 CPI: If the rise in crude oil shows up in inflation, interest rates will rise, and caution toward the FOMC (October 28) will intensify.
Scenario 1: Attacks intensify further
Crude oil may exceed $110, and the VIX may exceed 20.
The stock index puts I prepared while they were cheap will come into play.
Energy stocks will rise, but since IV will also be high, I will shift to the side of locking in profits with call spreads.
Scenario 2: Calm returns due to a ceasefire or recovery in transport
It is also reported that crude oil exports from the Gulf are returning to pre-war levels.
If tensions ease, crude oil will fall, and the IV of energy stocks will shrink all at once.
Conversely, airline and consumer-related stocks are likely to see a rebound.
Today’s Homework
Try dividing your current stock holdings into three categories: ‘stocks that benefit from high crude oil,’ ‘stocks that lose from high crude oil,’ and ‘stocks that are unaffected.’
If you have many stocks that lose, consider insurance.
If you have many stocks that benefit, consider how to protect your profits.
Just doing that will change how you approach the earnings season.
Also for reference~
Stocks are at record highs, but the ‘fear index for bonds’ is at a warning level. How to read the warning signs first signaled by the MOVE index
Disclaimer
This article represents the author’s personal views and analysis and does not recommend the buying or selling of any specific stocks or financial products. Option trading is a high-risk activity that can result in losses exceeding the initial principal. Please make investment decisions at your own risk.
