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Intraday Options Scanner: looking for Spreads

This newsletter gives one particular example of using the new features of our Intraday Options Scanner to scan for profitable trading opportunities. We'll consider an example of a Long Calendar Spread strategy. You can find a complete list of the new features in our previous newsletter available online.

Filters to use

Intraday Scanner is basically a single-option scanner, so scanning for spreads could look like a hard task. But recently added features make this not harder than a single contract scan. Indeed, the main factor to enter a Calendar Spread is considerable excess in implied volatility in the leg sold, compared to the one purchased. The other factors are "quiet" stock sentiment (we'll address this in the end of this newsletter) and sufficient liquidity for both legs. We'll use difference between 1 month and 6 month (intraday) IV Index as a proxy for the difference between legs' volatilities, and bid/ask size as a measure of liquidity. The picture below shows the filters we are going to use:

Fig. 1. Filters used for Long Calendar Spread scan.

As you can see, the main criteria we set is that 1 month IV Index is greater than the 6 month reading, by at least 10 % absolute. We set expiry range from September to April 2005 to get both contracts, the sold and bought legs in the same resultset. Moneyness of -10% to 10% and bid/ask size greater than 500 contracts make sure that we deal with fairly liquid options.
The results of this search (as of 08/16/2004, about 12:30 PM EST) are displayed below:

Fig. 2. Results of search as in Fig.1. Only most relevant fields are shown.

Two spreading opportunities are immediately seen:

Sell BSX Nov 04 30 Call @ $5.10 / Buy BSX Feb 05 35 Call @ $3.50
Sell MRVL Sep 04 20 Call @ $2.00 / Buy MRVL Feb 05 20 Call @ $3.60

Both trades would provide the difference between sold and bought IV to be greater than 10 %, so that satisfies our main criterion (btw, Monitor view can be configured to show you bid IV and ask IV separately � thus taking into account bid/ask price spread). The spread on BOSTON SCIENTIFIC CORP (BSX:NYSE) is a diagonal credit spread with a bearish flavor (bought strike is higher than sold one). At the same time, the trade on MARVELL TECHNOLOGY GROUP LTD (MRVL:NASDAQ) is a "true" debit calendar spread. We'll return to the question on sentiment for these stocks a bit later, after we have a look at stocks, where only a long-term leg candidate is found. For this, we'll just manually add more strikes to the Monitor tab, using the controls at the top of this tab (see Fig. 3.)

Fig. 3. Manual options adding to Monitor tab.

We've selected CARDINAL HEALTH INC (CAH:NYSE), CAREER EDUCATION CORP (CECO:NASDAQ) and NETWORK APPLIANCE CORPORATION (NTAP:NASDAQ) for further investigation and added a couple of near-ATM strikes to look for attractive diagonal spread opportunity.
Removing options with either insufficient skew in IV, or too poor size of bid or ask quote, yields the following possible trades (see Fig. 4.):

Fig. 4. More spreads found.

Sell CAH Sep 04 40 Call @ $4.10 / Buy CAH Jan 05 45 Call @ $3.60
Sell CECO Sep 04 30 Call @ $3.60 / Buy CECO Jan 05 30 Call @ $6.00
Sell NTAP Sep 04 15 Call @ $2.65 / Buy NTAP Jan 05 17.5 Call @ $2.40

We have two credit diagonal bearish spreads (CAH, NTAP) and one debit calendar trade (CECO) here.

Stock sentiment factor

Now, the other important factor for entering the calendar spread is a quiet stock sentiment - if you expect that stock will make violent movements, long calendar trade will be generally at a loss. We are going to use our Stock Sentiment service to check what is expected for each of our candidates (Fig. 5.):

Fig. 5. Stock sentiment for NTAP:NASDAQ.

It is seen that the sentiment for NTAP is quiet ("Hold" recommendation prevails, no definite trend), so probably this is a good candidate for a long calendar spread. Though, as our selected trade on NTAP is slightly bearish (15 / 17.5 strikes), it would be good for this stock to have a bit more "bearish outlook".
Let's check other stocks and summarize their sentiment in the table below:

Stock / Sentiment Buy Sell Hold Interpretation
BSX:NYSE 2 4 4 ??
MRVL:NASDAQ 1 5 3 bearish, not volatile
CAH:NYSE 0 3 6 quiet, bearish flavor
CECO:NASDAQ 0 4 4 bearish, not volatile
NTAP:NASDAQ 1 1 6 Quiet

Tab. 1. Stock sentiment for the selected stocks.

According to this table, CAH:NYSE sentiment can be classified as "quiet, but with bearish flavor" and MRVL:NASDAQ, CECO:NASDAQ - "bearish, but not that volatile". We derive this based on number of Buy/Sell/Hold recommendations, see one of our previous newsletters for more details. Two question marks accompany BSX:NYSE - the sentiment is slightly bearish, but, at the same time, the count of "Hold" recommendations is comparable with that of Buy/Sell (and when you have too many Buy/Sell recommendations, compared with Hold, this is a sign of "volatile" stock, a sentiment we wish to avoid here). So, briefly, all the trades "will do" by a stock sentiment factor, except probably BSX. Trades on CAH and CECO look the most attractive from our viewpoint, and then NTAP and MRVL.

Is it that convenient?

As you've seen, it is rather easy to "adapt" Intraday Options Scanner for complex tasks, like spread scanning, but it takes some time. The good news is that Intraday Spread Scanner service is on its way in development, which will take into account IV skew, stock sentiment, and much more factors like risk / reward, probability of profit and others. So stay online - you would not want to miss the announcement of this service!