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Today


IVolatility Trading Digest™


Volume 20 Issue 29
Volatility Kings Second Quarter 2020

Volatility Kings Second Quarter 2020- IVolatility Trading Digest™

Review Notes

With second quarter earnings reporting well underway, the time has come to update our Volatility Kings™ list of companies that have a regular tendency to experience increasing option implied volatility as their quarterly reporting dates approach.

Since implied volatility of the entire market spiked up in the middle of March and has been steadily declining ever since, usual increasing implied volatility of individual stocks before earnings appear insignificant and even hard to detect for some.

The degree of uncertainty for upcoming reports may not be comparable to previous quarters. While some companies are on the list one quarter and not the next, others seem to remain on our list quarter after quarter. Focused on earnings, others with high-implied volatility due to takeover speculation, vaccine news, FDA announcements or other extraordinary events, are excluded, along with those lacking sufficient liquidity due to low option volume described below.

In order to focus on those with the best options volume and liquidity, the weekly option volume requirement is set at those with greater than 35K contracts, up from 20K previously, since with many new IPOs and heightened uncertainty due to the Covid-19 pandemic, option volume increased significantly in many stocks. In addition, when market implied volatility remains elevated more companies will meet the volume threshold. The objective is to find those stocks with sufficient options liquidity and therefore reasonable bid/ask spreads to use for various multiple leg strategies, such as Calendar Spreads, Butterflies, Iron Condors, Straddles and more.

The selection process begins at our daily listing of found in the Rankers and Scanners section of Review Notesour home page about one-half way down the page, at the top left. Individual stocks with options volume less than 35K are excluded along with those with prices less than 10, since when prices are too low there are usually not enough option strike prices or liquidity for attractive option strategies.

Volatility Kings™ 2Q 2020

table

To explain, descriptions and details for the column headings in the table above follow.

Price in column 3, are closing stock prices as of July 17, 2020.

When in column 4, shows the next expected earnings report date. They require checking often as these are only estimates and companies often change the dates. Time in column 5, shows the time during the day to expect the report, where B is before the open, A is after close.

Est. or Estimate in column 6 represents the higher of the current consensus or "whisper" per share earnings estimate according to Earnings Whispers and may change before the report date. In addition, stock prices move on forward guidance as much, or perhaps more than on reported revenues and earnings especially this quarter as earnings estimates were drastically reduced at the end of the first quarter as the global economy shut down due to Covid-19. Now with lowered estimates watch all the fanfare when the reports come in better than expected.

Last Q IV in column 7 shows the Implied Volatility Index Mean (IVXM) of the puts and calls reached just before the last quarterly report, but may not necessarily be as relevant this quarter.

IV Min Ex in column 8 shows the Implied Volatility Index Mean (IVXM) low after the last earnings report, making it easier to compare the pre-report high to the subsequent after reporting low.

IV Now in column 9 is the Implied Volatility Index Mean, (IVXM) as of July 17, 2020. Depending upon the last report date the implied volatility of those having recently reported may still be declining, such as Micron Technologies (MU), Netflix (NFLX) and Zoom Video (ZM).

52R displays the current Implied Volatility Index Mean (IVXM) relative to the 52-week range, where .69 is above the midpoint for Amazon (AMZN) while most others are closer to the bottom after they spiked up in mid-March.

IV Est/Now in column 11 (yellow highlight), shows 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 such as Micron Technologies (MU), Netflix (NFLX) and Zoon Video (ZM).

Typically implied volatility declines for 4-6 weeks after the reporting date followed by a subsequent rise for about 3-4 weeks before the next report, but vary with each having their own somewhat unique pattern.

In addition, market implied volatility plays a role. The S&P 500 Index implied volatility, measured by our IVolatility Implied Volatility Index Mean (IVXM) using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, declined 1.53 points or -6.88% last week ending at 20.71% after peaking at 77.15% on March 16.

Now closer to the long-term mean implied volatility may remain somewhat elevated due to uncertainty caused by the global pandemic and dislocations in some sectors, such as hospitality and retail. The charts of individual stocks showing a dramatic spike in March followed by a drifting decline back toward their means are very similar

table

To help identify implied volatility highs, lows, and estimate where they may go, along with other details, make sure to check the volatility charts at either our complimentary Basic Options or our more detailed Historical Data Charts on our website.


Big Data? In options, we are Big Data!
For a comprehensive review and reminder, check this out
Options: Observations of a Proprietary Trader  


Earnings Strategy Ideas

Long Calendar Spreads buy deferred month options with lower implied volatility and sell near term options with higher implied volatility with the same strike prices. However, since this position has short gamma or the rate of change of delta, any large move of the underlying stock on the reporting date will result in a loss. However, when opened just before reporting, when the near term implied volatility is high, the results are known quickly.

Short Calendar Spreads take a different approach by buying near term options and selling deferred options before the implied volatility of the front month begins to advance in anticipation of the next report date. The deferred short option implied volatility is less likely to advance while the implied volatility of near term increases going into the earnings date. Then close the position near the top of the implied volatility just before the earning date. The risk of a harmful stock price gap diminishes by closing the spread before the earnings report release. However, timing is more important since the position will be open longer and with long gamma. Examples to consider for this approach are Micron Technologies (MU), Netflix (NFLX) and Zoon Video (ZM).

Summary

Based upon the implied volatility of the S&P 500 Index option prices have declined significantly since spiking up in the middle of March. Although second quarter earnings reporting is already underway many widely followed favorites will report this week and next. For volatility traders and strategists, our Volatility Kings™ list suggests two alternative Calendar Spread volatility strategies to consider.

Actionable Options™


We now offer daily trading ideas from our RT Options Scanner before the close in the IVolatility News section of our home page based upon active calls and puts with increasing implied volatility and volume.


“The best volatility charts in the business.”

Next week will include our regular Market Review including progress of both at S&P 500 Index as it attempts to push above resistance and the Invesco QQQ ETF showing signs of pulling back from recent highs.

Finding Previous Issues and Our Reader Response Request

PreviousIssues

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 source is the Table of Contents link found in the lower right side of the IVolatility Trading Digest section on the home page of our website.

 

CommentAs always, 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 at Support@IVolatility.com or use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com website. To receive the Digest by e-mail let us know at Support@IVolatility.com

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

To add comments or to ask questions please click here (or use the blog "COMMENTS" link at the very bottom of the blog page).

 

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IVolatility Trading DigestTM Disclaimer
IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter constitutes a recommendation to buy or sell any security. Before entering a position check to see how prices compare to those used in the digest, as the prices are likely to change on the next trading day. Our personnel or independent contractors may own positions and/or trade in the securities mentioned. We are not compensated in any way for publishing information about companies in the digest. Make sure to due your fundamental and technical analysis homework along with a realistic evaluation of position size before considering a commitment.

Our purpose is to offer some ideas that will help you make money using IVolatility. We will also use some other tools that are easily available with an Internet connection. Not a lot of complicated math formulas but good trade management. In addition to Volatility we use fundamental and technical analysis tools to increase the probability of success and reduce risk. We prepare a written trade plan defining why the trade is being made, what we call the "DR" (determining rationale) and the Stop/unwind, called the "SU".