Trading strategy for new highs and lows of Implied Vol
In today's edition of our volatility comment we want to highlight and focus on implied volatility plays. We have culled from all of our scans a candidate list of very high and very low implied volatility stocks in which volatility trading strategies might be designed.
The following are making or are very near implied volatility highs.
|AUD||Automatic Data Processing||1.00||New Implied Volatility High|
|RDRT||Read-Rite||1.00||New Implied Volatility High|
|KSS||Kohls Corp.||0.90||90% of high level|
|CCE||Coca-Cola Enterprises||0.89||89% of high level|
|HD||Home Depot||0.81||81% of high level|
The following are making or are very near implied volatility lows
|Q||Qwest Communications||0.09||Within 9% of lows|
|HON||Honeywell||0.08||Within 8% of lows|
|UTX||United Technologies||0.04||Within 4% of lows|
|AVP||Avon Products||0.02||Within 2% of lows|
|TMC||The Times Mirror Co.||0.02||Within 2% of lows|
|DNB||Dun & Bradstreet Corp.||0.01||Within 2% of lows|
|LLTC||Linear Technology||0.00||New Implied Volatility Low|
|WMB||Williams Companies||0.00||New Implied Volatility Low|
|BEAM||Summit Technology||0.00||New Implied Volatility Low|
|BPA||BP Amoco PLC||0.00||New Implied Volatility Low|
|TWA||Trans World Airlines||0.00||New Implied Volatility Low|
|MGM||Metro-Goldwyn-Mayer||0.00||New Implied Volatility Low|
When implied volatility is very high there are several selling strategies that can be initiated. Some of these strategies include selling ratio spreads, selling straddles or strangles and delta neutral option selling. All of those strategies try and take advantage of the time decay of an option, as well as, a fall in implied volatility towards more normal or average volatility levels. The key to these types of strategies being successful is making sure that both implied and historical volatility are falling. Thus it is good to run an additional scan of the historical volatilities of the stocks to see if the 30, 20, and 10-day historical volatilities have peaked and are starting to fall. From a money management and risk reduction standpoint, sometimes it is safer and more comfortable to wait for the downturn than it is to sell merely because an option is making a new high and you are trying to call the top.
Conversely, when implied volatility is very near or is making new lows as seen by some of the companies on the bottom list, you may want to do the opposite and purchase some option spreads, straddles or strangles. Again, it is wise to run an additional scan to identify, which stock's historical volatility levels may have bottomed and are starting to turn up. This way it is safer and more comfortable seeing the market bottom before initiating these long volatility type strategies. The reason for this is that sometimes you as an individual can call the bottom for volatility or the market but it may take everyone else longer to recognize this same fact and the market to subsequently rise. In the interim, you may be left holding a position that loses slowly due to time decay. In options trading, when you are long an option you want movement to happen as soon as possible, which is totally the opposite of what you want to see happen when you are short an option. When you are short an option you want as little movement as possible. Also remember that when buying volatility to give yourself some additional time for the underlying factors to work their way through. Therefore, go out an extra expiration time period and play it safe. Back to All News articles