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Analysis of Volatility Extremes

In today's edition of IVolatility, we want to focus on stocks with extreme readings in their implied volatility relative to their ranges. From of our scans, we have created a candidate list of very high and very low implied volatility stocks. The method used here compared implied volatility to its recent implied volatility range. This comparison was then expressed within a range of 0 to 1 (0= new low, 1= new high). With this information some volatility trading strategies might be designed or some directional plays avoided.

Symbol Stock Rating Meaning
F Ford 1.00 New Implied Volatility High
NWAC Northwest Airlines 1.00 New Implied Volatility High
IFMX Informix 0.93 93% of Implied Volatility Range
K Kellogg Co. 0.88 88% of Implied Volatility Range
ASO Amsouth Bancorp 0.88 88% of Implied Volatility Range
INCX Infocure 0.85 85% of Implied Volatility Range

Readings from above suggest that implied volatility is at very high levels or is currently establishing new highs. Care must be taken in buying options on these stocks. With implied volatility being as high as it is on these stocks, the probability of loss when buying options on one of these increases dramatically. This is due to the that fact that you may get the direction right (increase in your delta) but a collapse of implied volatility (vega) back to more normal levels may more than offset any directional gains that you accumulate on the trade.

Symbol Stock Rating Meaning
MFNX Metromedia Fiber .13 13% of Implied Volatility Range
NITE Knight Trading .12 12% of Implied Volatility Range
ABX Barrick Gold .10 10% of Implied Volatility Range
NBR Nabors Industries .10 10% of Implied Volatility Range
AOL America Online .08 8% of Implied Volatility Range
LU Lucent .07 7% of Implied Volatility Range
CMGI Senlix Corp. .07 7% of Implied Volatility Range
LCOS Lycos .06 6% of Implied Volatility Range
KRB MBNA .05 5% of Implied Volatility Range
AZA Alza Corp .04 4% of Implied Volatility Range
AVP Avon Products .04 4% of Implied Volatility Range
BUD Anheuser Busch .03 3% of Implied Volatility Range
SCMR Sycamore Networks .02 2% of Implied Volatility Range
IDTI Integrated Device .00 New Implied Volatility Low
PVN Providian Financial .00 New Implied Volatility Low

Readings here suggest that implied volatility is at very low levels or is currently establishing new lows. On this side, care must be taken in selling options on these stocks. With implied volatility being as low as it is on these stocks, selling options successfully here is a very unfavorable bet. This is due to the fact that any strong directional move combined with an increase in implied volatility (vega) back to more normal levels, may not allow you to find a suitable hedge to offset your risk in a timely and cost effective manner. In options parlance, the gamma and the vega of your option may be too unmanageable.