Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Then, after a brief market review and strategy comment, we explain how to apply our Advanced Ranker to find many more trading ideas.
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CBOE Volatility Index® (VIX) 12.91 is not reflecting concern about a potential Head & Shoulders Top as both the Implied Volatility Index Mean and the Historical Volatility measures declined last week. Remarkably, VIX is again below 13. In addition, the VIX futures premium ended the week at 18.11% in the upper part of the green range adding confirmation that hedgers are not actively bidding up the futures prices in search of portfolio protection suggesting they think a breakout is more probable than a decline. Reinforcing the breakout thesis, the CBOE S&P 500 Skew Index (SKEW) 124.13 remains below the midpoint of its range, suggesting less out-of-the-money S&P 500 Index puts activity compared to other recent attempts when SPX was close to making new highs. This means expectations for a breakout above the previous high remain elevated. |
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Until negated by a close above the S&P 500 Index (SPX) April 4 high at 1897.28 a Head & Shoulders Top remains possible. Low option prices in implied volatility terms are an opportunity to add inexpensive hedges while waiting to see if serious May and June selling materializes. The risk is limited as the hedges can be unwound if SPX continues higher, remembering the best time to buy fire insurance is when it’s raining. Advanced Ranker ReviewTurning our attention to new opportunities for those who prefer to stay and play in May, we set up the Advanced Ranker. For those who may be unfamiliar with this easy to use tool here is a brief description along with a sample of Friday’s results. The Advanced Ranker is a scanning tool that allows users to specify the universe of stocks, indexes or ETFs to be included. With the capability to search several criteria, opportunities with high-implied volatility or the ones with the greatest implied volatility change are easy to find. Getting Started The Advanced Ranker is located on the left side of the Home Page, under the heading “My Services.”
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The four tabs above described the available scans such as Implied Volatility Index, Historical Volatility, Call/Put IV Index Ratio and Correlation. For this example, we will use the Implied Volatility Index. The first step is to specify the group we want to scan. In the image above, we have it set for – All USA. There are other group selections as well such as:
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Top 200 (Options Volume) |
MSH Stocks |
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There is also one with the title “My Favorites.” Using this selection, users have the ability to specify the stocks to be included in the scan. Examples could be your current portfolio, your watch list, takeover candidates or companies that are reporting next week. Of groups listed above, four require a separate data subscription. They are CAC Stocks, DAX, Stocks, European Stocks and Canadian Stocks. In the next selection box, we specified stocks over $10 primarily due to liquidity and option strike price considerations. Now we set up the ranker for the Implied Volatility Index using the entire USA group. Implied Volatility Index
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The highlighted “Implied Vol” is the first of the five available scan selections. In the second column, “IV Index”, we have chosen Mean, the mean value between the calls and puts. If you prefer, you could choose calls or puts. Normally we start working with the Mean IV Index. Next, for the “IV Term” we selected 30, which is the 30-day calculated implied volatility. When interested in strategies with much longer periods chose another IV Term going all the way out to 180 days as shown above. In column four, “HV Term”, we also specified the Historical Volatility term to be 30-days and once again if we were interested in longer-term strategies we might chose another Historical Volatility term. Next, for “Quantity of stocks to be viewed” in column five, we have indicated 50 in order to get a good selection from this large – All USA group. Finally, in column six, Display stocks accordingly we have chosen “Top ranked only” for the Display option. Now we push the “Show” button to display the results of the scan. Here is a sample of 15 from Friday’s result.
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The first fifteen of the fifty stocks from the scan, sorted by “IV Index Last” are in highlighted column two above. Clicking on the first stock symbol listed VXEEM, for example, links to the Basic Options and Advanced Options sections of IVolatility.com for further details and analysis of this specific ETF. Click the back arrow at the top to return to the scan results. Since at the top of the Basic Options page we quickly see the options volume is zero with only 113 contracts of open interest we move on to the next scan result, NQ with an IV Index of 145.44. This time we see the options volume is 32,072 with open interest of 371,280 contracts, much better. The “IV Index Change” in column three represents the amount change from the previous days IV Index value. In column four, we have the “IV Index % change” from the previous day. Column five, shows the very informative “52 wk Hi/Low range of IV Index.” This is the current IV Index Mean compared to its range for the previous year. For NQ it is currently near the middle of the range. If we wanted to sell implied volatility, we might look down the list for a candidate with higher relative implied volatility, with adequate volume and reasonable liquidity by using “IV Index Hi/Low scaled range”, in column six. For example, the IV Index Hi/Low scaled range for NSR, number six on the list, is 1.00, at the top its 52-week range. From Basic Options we see Friday’s volume was 11,781 contacts with the weekly average of 7,970 and 79,275 contracts open interest. Next, some fundamental work will determine why implied volatility is at the top of its 52-week range and if this makes a good volatility-selling candidate. In column seven, we show the all-important Historical Volatility. For NSR it is 43.20, while the next column displays the IV Index/HV ratio % at 286.73 indicating there is a significant difference between the implied volatility and the historical volatility, a condition usually consistent with event expectations. For NSR, a company providing carrier, enterprise and information services and said to be clearinghouse to the communications industry and Internet service providers around the world, a company with actual earnings, it may be due more to sector weakness and could represent an interesting short volatility opportunity. Selecting the top ranked stocks by volatility would be the scan configuration if we were seeking candidates to research for possible options selling strategies. Alternatively, if we were interested in option buying strategies we would select the “Bottom ranked only” stocks for our scan. Further, we could alter the initial selection if we were more interested in “IV Index Change” or “IV Index % Change.” In fact, we could run the scan on any of the five initial listed alternatives. Then, make sure to check the volatility chart to help forecast volatility during the period of the proposed trade. We offer complimentary volatility charts at Basic Options and then more details are included in our Advanced Historical Data service. This versatile inexpensive tool will save you many hours looking for trading opportunities. Further, since we provide a free two week trial period, give it a go and see how many new ideas you will discover.
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The powerful IVolatility Advanced RankerJust $19.95 per month“Options data with predictive qualities – Nobody does it better!”“The best volatility charts in the business.” |
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IVolatility Mobile is a must-have app for all active option traders.
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In next week’s issue, we will update all our market indicators and report on the progress of the S&P 500 Index. |
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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. |
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With pre-Christian origins, most of Europe along with some other parts of the world celebrates the arrival of spring on May 1. However, for the equity markets May usually marks a time of reflection since stocks have a long history of declining in May or June. Since the month has just begun, it’s a bit too soon to declare the pattern will repeat this year. In the meanwhile, we add our current options and technical analysis perspective to the dilemma.
S&P 500 Index (
