Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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First, we have a few brief comments about Friday’s trading and some things to consider this week.
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The noticeable weakness in Cloud, Social, Mobile, and Biotech “growth at any price stocks” selling on price to sales multiples was evident last week. When combined with the rush to get through the IPO door before it slams shut, equities could be close to the Stampede Trigger proposed last week in Digest Issue 13 as the continuing rotation causes whipsaw chewing up positions until managers throw in the towel selling everything. Unless pulled due to market weakness there are 13 more IPOs on the schedule this week. CBOE Volatility Index® (VIX) 13.96. So far, VIX seems to be unaware of the mischief created by the declining NASDAQ stocks, but that could quickly change. The VIX Futures premium ended the week at 8.99% after having been above the important 10% level until Friday. |
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Volatility Kings™For those interested in volatility strategies, here is the updated Volatility Kings™ master list.
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Using last quarter’s list those with average daily volume less than 5000 contracts during last week were deleted along with those declining less than ten percentage points from their pre announcement high last quarter. Some examples eliminated this quarter are COH, FFIV, JDSU, and LINE along with a few others. Price shown in column 4 are the closing prices as of Friday April 4, 2014. Next Rpt in column 5 is the next expected reporting date. Check these dates as these are only estimates and the companies routinely change their reporting dates. Time in column 6 is when during the day to expect the report, where B is before the open, A is after close and D is during market hours. Estimate in column 7 is the current consensus earnings estimate per share, also subject to change before the report date. Last Q IV in column 8 is the implied volatility index mean (IVXM) of the puts and calls reached just before the last quarterly report, but may not necessarily be relevant this quarter. Further the near term at-the-money implied volatility could be considerably higher than the index mean. IV Min Ex in column 9 shows the implied volatility low after the last earnings report making it easier to compare the pre-report high to the subsequent low. For some, the implied volatility is still declining so there may still be a lower low. Some examples are BBRY, JCP, JOY and LULU. Events unrelated to earnings reports can also affect implied volatility, such as the recent rotation out of cloud, mobile, social and biotech stocks unrelated to earnings. IV Now in column 10 is the implied volatility index mean, (IVXM) as of Friday April 4, 2014. IV Est/Now in column 11 is the ratio of the estimated implied volatility to the current implied volatility based primarily on the high reached the previous quarter. Those with higher ratios have a potentially greater opportunity to increase going into their next report date and many have already started increasing anticipating the next report. To identify the highs and lows along with other details, make sure to check the volatility charts at either the Basic Options or Advanced Historical Data pages on our website. Comments and Observations The typical pattern is for implied volatility to decline for 4-6 weeks after reporting followed by a subsequent rise for about 3-4 weeks before the next report date, but they vary with each having its own unique pattern. Not surprisingly those with be best ratios are the ones that will be reporting later since they may still be declining since last reporting, such as BlackBerry (BBRY), Joy Global (JOY) and Lululemon (LULU). Those with ratios less than 1 for example, are currently experiencing high-implied volatility for reasons that may be unrelated to their upcoming earnings report. Some Strategy IdeasLong straddles and strangles are two alternatives to consider going into the reporting dates with plans to close them just before the report. However, the estimated implied volatility at the report date is a guideline based upon their most recent reports and may not be relevant in the current quarter. The actual reporting dates and earnings estimates need checking since they vary by the data source and are subject to change by the reporting companies and analysts. Frequently calendar spreads are used for quarterly reporting by selling the near term option with higher implied volatility and buying the same strike price in the deferred month with a lower implied volatility. However, since this position will have short gamma or the rate of change of delta, any large move of the underlying on the report date will result in a loss. Another strategy to consider is call credit spreads since they are advantageous when implied volatility is high going into an earnings report especially when the stock has risen in anticipation and is up against resistance. Option prices continuously change in response to changing expectations. The higher the uncertainty the more valuable the option, implying there is a much wider distribution of possible outcomes. When they become more predictable, the implied volatilities no longer increase dramatically before the reporting dates and the option volume usually declines. As for earnings reports, the range of earnings estimates or the difference between the high and low estimate for the upcoming earnings report reflects uncertainty. Those with high and rising IV going into the report usually have a tendency to show a greater divergence of opinion between the analysts, which seems very logical. Although there are shortcomings, implied volatility is a way to quantify stock price uncertainty. Individual investors relying upon the earnings forecasts and playing the expectations game wondering if they may be too high or too low are disadvantaged when anticipating the direction the stock will move after reporting. However, if the implied volatility has risen enough into the report date it may offer an opportunity for a volatility strategy and not rely upon getting the direction right. In addition, since earnings reports reoccur every quarter there may be more than one opportunity, especially for the ones that have a regular pattern of rising into the report date. For further analysis of the Volatility Kings™ or other stocks in your portfolio, here is how to find our complimentary volatility charts, located on the Basic Options page of our website. From our home page go to Analysis Services in the left column, and then find Basic Options listed seventh from the top. After opening the page enter the symbol where indicated (the default symbol SPX is already entered). Next, scroll down to the Volatility Chart heading located on the right side of the page near the bottom. Click on the small chart image and you will see a new enlarged data table along with the volatility chart for the last year displaying both the implied volatility and the historical volatility of the underlying symbol as well as the options volume. Previous earnings report dates are easy to find by the volume spikes accompanied by implied volatility declines. Since the Volatility Kings™ list constantly changes we can use your help identifying new candidates. If you have any suggestions please let us know. Send them to Support@IVolatility.com
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In next week’s issue, we update all our market indicators and again report on the progress of the S&P 500 Index. |
Finding Previous Issues and Our Reader Response Request |
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All previous issues of the Digest can be found by using the small calendar at the top right of the first page of any Digest Issue. Click on any underlined date to see the selected issue. Another way to find them is the Table of Contents link in the blog section of our website.
As usual, we encourage you to let us know what you think about how we are doing and what you would like to see in future issues. Send us your questions or comments, or if you would like us to look at a specific stock, ETF or futures contract, let us know. Use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com Website. If you would like to receive the Digest by e-mail let us know at Support@IVolatility.com. |
Volatility Kings™ is our list of companies having a tendency to experience increasing option implied volatility as their quarterly reporting dates approach. Increasing implied volatility reflects uncertainty or the width of the possible stock price distribution on the report date. However, the degree of uncertainty for the current report may not be comparable. Indeed, some companies are on the list one quarter and not the next while others seem to remain on our list quarter after quarter. Since the focus is on earnings, others with high-implied volatility due to takeover speculation or FDA announcement events are not included nor are those lacking sufficient liquidity due to low option volume.
S&P 500 Index (
For now, it seems prudent to consider some long VIX April 15 at .68 or May 16 at .85, call options for hedging. Alternatively, since the implied volatility remains in the lower part of the 52-week range, an April 185/182 put spread for .60 or a May 185/180 put spread for 1.21 should provide some portfolio protection just in case Friday’s decline is the start of something more to the downside. In the past, these hedging positions required close monitoring since most declines were limited.
