« November 2013 »

IVolatility Trading Digest™

Volume 13, Issue 46
Go Beyond Volume

Go Beyond Volume - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Go Beyond VolumeOn occasion, the financial news media mentions large or increasing options volume to highlight unusual activity in a particular stock. For those trading options, these first alerts can be a useful service, but in order to decide if it warrants trading other data such as the changes in the implied volatility and put/call ratios will help make better informed decisions. For some examples, we fired up our RT Options Scanner and put it to work on Friday's options data. We present the results below right after a brief market review and strategy comment.


Review Notes Clip ArtS&P 500 Index (SPX) 1804.76. The first thing to say is - finally a close above 1800, the target that a good number of strategists including ourselves have been expecting. Although encouraging, before jumping on the breakout bandwagon consider Friday's low volume while keeping in mind it is not wise to trust low volume breakouts. Another concern is the lagging market breadth. While both of these issue could well be resolved this week, professional hedgers remain very long out-of-the money puts as the CBOE S&P 500 Skew Index (SKEW) 133.76 is climbing again after reaching 137.06 on November 18, the day of the last Key Reversal. Interestingly this last Key Reversal lasted exactly three days the same as the October 30 Key Reversal. We suspect there will be more of these short-term pullbacks between now and year end.


It may be useful to think about some alternatives under consideration by hedge fund managers that are up 20%+ for the year. Will they be content to continue hedging their long exposure with futures and options? Alternatively, will they yield to the temptation to lock up their gains and bonuses by selling their longs with big gains and unwinding their hedges going into the last weeks of the year?


RT Options Scanner

As a reminder to those who are looking for trading ideas and may not be familiar with our website, we offer several ideas as a regular feature not requiring subscription access located in the "Rankers and Scanner" section of our home page. First, there is a link to the "Top 200 stocks by volume/open interest" and then the " Top 5 stocks by implied volatility change." By clicking on the second link and you are taken to the Advanced Ranker Sample of the top and bottom 5 stocks in four categories.

In addition, using our RT Options Scanner for a modest subscription fee, we offer the capability to scan our entire options database applying user-defined criteria.

We set up the RT Options Scanner to find specific options in the entire USA database on stocks greater than $10 with more than 3 thousand contracts traded on Friday.

Here are samples from the results in two groups. For the first group, we ranked the results by clicking at the top of column 9, IV % ?, so the options with the greatest implied volatility change would be at listed the top. Here are just the top five shown in IV change order.



The first underlying stock on the list, Dish Network Corp. (DISH) was up 2.11 and the March 55 out-of-the-money call traded almost 12K contracts or 34% of the total options volume of 34,847 contracts while the implied volatility of this contact increased 19.90% from the previous day. The implied volatility index mean of all calls and puts IVXM was 36.12 shown in column 9 confirming the high volume in this contract boosted the implied volatility. RHV in column 10 is the historical volatility of the underlying stock using the range computation method. Based upon the movement of the underlying this option price along with others is currently elevated. Column 11, Call/Put R shows there were almost 5 times as many calls than puts traded. For DISH the high options volume along with the increase in implied volatility confirms Friday's bullish advance on potential merger news from this sector.

Next on the list, Universal Display Corp. (OLED) was down 2.94 as the Jan 37 call traded 3,203 contracts, 17% of the total volume of 18,832 contracts as the implied volatility increased 16.56% to 49.32 while the IVXM was 48.17. For this example, the historical volatility of the stock at 49.29 exceeds the implied volatility as the stock declined 7.7%. Once again, the calls exceeded the puts traded shown by the Call/Put Ratio at 1.61. For OLED a quick glance at a price chart confirms there is not a lot of doubt that the price is likely to continue declining.

This top 5 by changing implied volatility sample shows three stocks that advanced in prices along with two that declined. Since the options market provides a wealth of good data, it makes sense to dig a bit deeper to see what the implied volatility and the call/put (or put/call ratios) say about the options volume before making a trade decision.

For this next group we used the same scan result, but ranked them by the Call/Put Ratios in the last column by simply clicking on the column heading. Here are the top ones in this category.



For Taser International (TASR) calls traded exceeded puts by more than 15 times. The volume for the December 16 call was 4,561 contracts, 67% of the total 6,858 contract volume. While the implied volatility did not advance very much it was higher and exceeded the historical volatility, which is consistent with a stock trending higher.

Of the examples above, Amedisys Inc. (AMED) is probably the most bullish since there are two option series with more than 3K each traded, accounting for 90% of the total volume as the calls exceeded the puts traded by almost 15 times.

The RT Options Scanner provides the capability to examine in detail the entire options market or just segments of particular interest such as the S&P 500 Index stocks, the NASDAQ 100 stocks or perhaps the stocks in your portfolio maintained in My Favorites list by changing the scan criteria.

For those interested in going beyond options volume headlines RT Options Scanner is a cost efficient analytical tool for serious options traders and analysts. You will be surprised by the additional insights to be gained by going beyond option volume headlines and digging a bit deeper into the options data. Since we offer a two-week free trial, give it a go by e-mailing Support@IVolatility.com.


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The S&P 500 Index finally closed above 1800, but the volume was low and the market breadth continues to lag the advance. While we think it will continue into yearend since earnings and the macro environment remain favorable there is a chance profit taking may soon begin so be prepared to see more short-term pullbacks and sector rotation.


Twitter Follow us on twitter for more ideas from our scanners and other developments.


In next week's issue, we will again review all our market indicators.


Finding Previous Issues and Our Reader Response Request

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.

Next week's issue

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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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".