« February 2013 »

IVolatility Trading Digest™

Volume 13, Issue 6
Beyond Top 5

January Barometer 2013 - IVolatility Trading Digest

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

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Beyond Top 5Those who are familiar with our website know we regularly display the Top 5 stocks in four categories in the Rankers & Scanners section on our home page. While the results from our Advanced Ranker tool are usually good enough for several trade ideas, sometimes there may be better opportunities hidden beyond the Top 5.

Since it has been quite awhile since we last looked at the Advanced Ranker, we will review it again in this issue. Then we have some additions to our Volatility Kings master list followed by a momentum trade idea for Valero Energy Corp. (VLO) in the refinery sector.

Advanced Ranker Review

Because we are still in the active earnings reporting period understandably, most the Top 5 ranker results are companies scheduled to report earnings in the next week or two. In fact, since there are several that qualify as Volatility Kings we added them to list shown below.

By expanding the search results beyond the Top 5, we think there could be other ideas worth considering. For those not familiar with it here is a review of the set up.


The Advanced Ranker is a scanning tool allowing the user to specify the universe of stocks, indexes or ETFs to be included in the scan. It provides the capability to search several criteria and quickly find results such as opportunities with high-implied volatility or the ones with the greatest implied volatility change.

Getting Started

After signing up with Support@IVolatility.com for free two week trial, you will find the Advanced Ranker located on the left side of the home page, under the heading "My Services."

The four tabs at top of the first page determine the search category, Implied Volatility Index, Historical Volatility, Call/Put Index Ratio or Correlation. They will all produce many ideas in each category worth considering.

For this example, we will use the Implied Volatility Index as shown below.



The first step is to specify the group we want to include in the scan. In the image above, we have it set for –All USA. The selections can be more specific such as:

Top 200 (Options Volume)
Top 200 (Options Open Interest)
DJIA Stocks
SP 500 Stocks
OEX Stocks
CAC Stocks
DAX Stocks
European Stocks
Canadian Stocks
SOX Stocks
All Equities
My Favorites
MSH Stocks
OSX Stocks
All US Indexes

The one with the title "My Favorites" gives users the ability to specify the stocks to be included in the scan. Examples could be your current portfolio, your watch list, takeover candidates or companies that are reporting next week. Of groups listed above, four require a separate data subscription. They are CAC Stocks, DAX, Stocks, European Stocks and Canadian Stocks.

In the next selection box, we have specified stocks over 10 (greater than $10) primarily due to liquidity and option strike price limitations.

Next, we set up the ranker for the Implied Volatility Index.

Implied Volatility Index



Highlighted with the green dot, "Implied Vola" is the first of the five available choices. In the second column, "IV Index," we have chosen Mean, or the mean value between the calls and puts. If you prefer, you could choose just calls or puts. Normally we start working with the Mean IV Index. Next, for the "IV Term" we have selected 30, which is the 30-day calculated implied volatility. When interested in strategies with much longer periods we would chose another IV Term going all the way out to 180 days as shown above.

In column four, "HV Term," we also specified the Historical Volatility term to be 30-days and once again if we were interested in longer-term strategies we might chose another Historical Volatility term. Remember Historical Volatility measures the actual movement of the underlying stock, index or ETF.

Next, for "Quantity of stocks to be viewed" in column five, we have indicated 50 in order to get a good selection from this large -- All USA group.

Finally, in column six, Display stocks accordingly we have chosen "Top ranked only" for the Display option.

Now we push the "Show" button to display the results. Here are Fridays' top 20 results from the 50 list ranked in descending implied volatility order.

Implied Volatility Index Ranker Results



Columns 3 "IV Index Change" and 8 "IV Index/HV, %" are of particular interest.

While most are due to report earnings in the next two weeks, including Volatility Kings, HLF and JCP there some other interesting ones such as CALL, BTH, BONT and VVUS all with IV/HV ratios in excess of 100% shown in column 8.

Make sure to check the options volume for liquidity at either Basic Options or Advanced Options, since some may not be reflecting actual activity, such as VXEEM. This is easily done by clicking on the symbol listed in column one. Although the IV/HV ratios are in excess of 100% there is insufficient volume for CALL, BTH, and BONT, but VVUS looks good.

Column 5 has the very informative "52 wk Hi/Low range of IV Index." This is the current IV Index Mean compared to its range for the previous year. For example, VVUS is currently in the lower part of its range. It is helpful to see where it is relative to the previous year. If we were looking to sell the high-implied volatility, we might decide to wait until we see that it has started to decline after reaching its 52-week high. There are several in this category, but most are soon reporting earnings, so this is the most important current consideration.

Next column 6 "IV Index Hi/Low scaled range," gives an indication as to the current relative location of the IV Index in the 52-week range. VVUS at .13 and SRPT at .19 are near the bottom of their ranges while both QLIK and EXAS are at the top of their respective ranges with values of 1.00.

Then column 7 shows the all-important Historical Volatility. This represents the current annualized rate of change for the stock. For VVUS it is 53.17, while SRPT is 59.27.

The last column, "IV Index/HV, %," shows the relationship between the IV Index and the Historical Volatility. For VVUS the value is 142.46% or the IV Mean Index value is almost 1.42 times higher than the current Historical Volatility of the stock. The highest value for this screen is EXAS with 314.58 or more than 3 times higher than the Historical Volatility. By comparison, the Historical Volatilities for CZR at 120.32 and RPRX at SHLD at 161.74 are actually higher than their IV Mean Index values as indicated by their respective ratios of 83.23 and 47.08. This means these stocks have recently been moving faster than their Implied Volatilities.

Selecting the Top ranked stocks by volatility would be the scan configuration if we were seeking candidates to research for possible options selling strategies. Alternatively, if we were interested in option buying strategies we would select the "Bottom ranked only" stocks. Further, we could alter the initial selection if we were more interested in "IV Index Change" or "IV Index % Change." In fact, we could run the scan on any of the five initial listed criteria.

If we are considering a trade that has a high IV/HV ratio like EXAS above we will need to do some fundamental research in an effort to determine why the options prices, as reflected by the implied volatility are so high. Since most are about to report earnings we have a good idea. For EXAS the scheduled 4Q report date is February 21. When all of this information is collected, the next step is to select an options strategy from several alternatives and prepare the trade plan.


More Volatility Kings

Friday's Top 5 included three that qualify for our Volatility Kings master list with increasing implied volatility going into their reporting dates. All scheduled to report earnings within the next two weeks so it may be too late for increasing implied volatility strategies before the report dates, but they may be good for declining implied volatility trades after reporting.




Here is an idea in the momentum category also based upon expected earnings although the next report is not due until the end of April.

Valero Energy Corporation (VLO) 46.13.

After gapping higher on the January 29 earnings report of 1.82 per share it continues higher without any resistance before 50 where it traded for about six months in early 2008. With all the news about increasing domestic shale oil production gasoline and product prices should be declining, but the opposite is occurring. Some analysts claim the issue is a lack of transportation for the crude oil from the Midwest to gulf coast refineries. Others say the issue is not transportation infrastructure, but refining capacity. If so, the excess supply of light crude oil will not be refined into gasoline due to insufficient refining capacity. This means the light crude oil prices should decline creating better margins for those companies with the capacity to process light crude oil. With 7 gulf coast refineries, including 3 with light crude oil capacity VLO could be one of the major beneficiaries, assuming retail pieces remain high.

If this is the reason the stock price gapped higher on the last earnings report, then it should continue higher. Usually after breaking out above previous resistance, stocks will retest the breakout area, but so far, there is no suggestion of a pull back as it continues higher. Those with strict discipline will want to wait for the expected pull back before entering a new trade. Another approach is to enter one-half of the position size now and the second half after the expected pull back if it occurs.

Since we want to allow sufficient time for the increasing crude oil production to result in excess supply and for the expected price pull back, we suggest using June options. However, after checking the one-year volatility chart we see the current implied volatility at 30 is below the normal range of 35-40 so we need to avoid strategies that are short more options than long in order to reduce the implied volatility risk. Therefore, we can use a call spread or even consider a ratio backspread, which consists of more long (purchased) options than short (sold) options where all options expire at the same time. This means long two OTM options with smaller deltas and short one ATM option with a larger delta.

Our suggestion is the simpler call spread alternative. First, here are the option statistics.

The current Historical Volatility is 41.24 and 26.59 using the Parkinson's range method, with an Implied Volatility Index Mean of 30.20 up from 29.67 last week. The IV/HV ratio is .73 and 1.14, using the range method to calculate the HV. The put-call ratio is very bullish at .10 with Friday's volume at 295,183 contracts traded compared to the 5-day average volume of 86,090.



While there is no volatility edge, we have mostly offset the volatility and time decay risk. By selecting a 7-point wide spread, we have one that costs only 26% while increasing our profit potential. If the uptrend continues, as expected it should reach the upper short strike price. Use a close back below 40 (just above the 39 gap) as the SU (stop/unwind). Since we consider this gap to be a breakaway, we do not expect it will decline to 39 and fill the gap.

The suggestion above uses the closing middle price between the Friday bid and ask. Monday, the option prices will be somewhat different due to the time decay over the weekend and any price change.


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Since the major indexes continue trending higher with implied volatility near the low end of the range long positions hedged against increasing future volatility should be considered in order to participate in the uptrend while minimizing volatility risk.


IVolatility.com Bookstore In addition to the vast number of articles and other information on our web site, take a browse through our bookstore for more reference information and material.


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


In next week's issue, we will update our market indicators and report on the progress of the current uptrend.


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".