« October 2015 »

IVolatility Trading Digest™

Volume 15 Issue 40
Volatility Kings 3Q 2015

Volatility Kings 3Q 2015 - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Volatility KingsVolatility Kings™ is our list of companies having a tendency to experience increasing option implied volatility as their quarterly reporting dates approach. Increasing implied volatility reflects uncertainty or the width of the possible stock price distribution on the report date. However, the degree of uncertainty for the current report may not be comparable. Indeed, some companies are on the list one quarter and not the next while others seem to remain on our list quarter after quarter. Since the focus is on earnings, others with high implied volatility due to takeover speculation or FDA announcements do not appear along with those lacking sufficient liquidity due to low option volume.

We begin with brief updates for the S&P 500 Index and VIX futures premium.


Review NotesS&P 500 Index (SPX) 1951.36 advanced 20.02 or +1.04% for the week including Friday’s unusual reversal gain of 27.54 points after the nonfarm payroll report. After retesting the August 25 low last Tuesday and turning higher forming a potential double bottom pattern the upward momentum Friday seems to suggest the recent decline may be ending. However, until reaching the rising wedge minimum downside measuring objective down near 1800 as shown last week in Digest Issue 39 "Flash Crash Ready & SPDR S&P 500 [Chart]" the current advance may only be another retracement and selling opportunity as it advances back toward 2000. Then another successful retest of the August 25 low, should it occur, would suggest the formation of a trading range, while a further advance above 2000 would add support for the double bottom interpretation.

CBOE Volatility Index® (VIX) 20.94, based on real-time prices of options on the S&P 500® Index, constructed to reflect investors' consensus view of future (30-day) expected stock market volatility, declined 2.68 for the week including -1.61 Friday.

The table below shows the VIX cash compared to the next two futures contracts as well as our calculation of Larry McMillan’s day-weighted average between the first and second months.




While the premium remained slightly negative should the SPX advance further it will turn positive and in the past when the premiums turned positive, it offered a buying opportunity suggesting the pullback was complete however, since the long-term uptrend ended August 20 it may no longer be a reliable buying signal.

26 Volatility Kings™




In a continuing effort to keep the list size manageable and focused upon the ones with good option liquidity, those with one week and one month average option volume less than 20,000 contracts were deleted from last quarter’s list, although volume may increase for some as their earnings dates approach. The initial scan begins with the Top 200 by options volume, found at the top right of the Rankers and Scanners section of our home page. Those with a current price under 5 were also eliminated since there are not usually enough strike prices or liquidity for spreads or other strategies, with the possible exception of short puts that come with assignment risk.

In addition, since the objective is to find regular volatility opportunities only those with IV differentials from last quarters’ earnings announcement high to the subsequent low that are greater than 10% are included. While the objective is to identify the ones that increase regularly, called “permanent residents,” newly added ones due to unusual temporary sector conditions such as oil & gas or biotechnology, called “temporary visitors,” may not appear in subsequent quarters.

Price in column 3, are closing stock prices as of Friday October 2, 2015.

Next Rpt in column 4 is the next expected reporting date. Check on them often as these are only estimates and companies routinely change their reporting dates. Time in column 5 is the time during the day to expect the report, where B is before the open, A is after close.

Estimate in column 6 is the current consensus earnings estimate per share, also subject to change before the report date. Some may also have higher or lower “whisper” estimates.

Last Q IV in column 7 is the implied volatility index mean (IVXM) of the puts and calls reached just before the last quarterly report, but may not necessarily be relevant this quarter. Further the near term at-the-money implied volatility could be considerably higher than the index mean shown above.

IV Min Ex in column 8 shows the implied volatility low after the last earnings report making it easier to compare the pre-report high to the subsequent low. For some, depending upon the last report date, the implied volatility may still be declining.

Events unrelated to earnings reports can also affect implied volatility, such as changing S&P 500 Index implied volatility as reflected by the VIX that has been higher than average since August 25.

IV Now in column 9 is the implied volatility index mean, (IVXM) as of Friday October 2, 2015.

IV Est/Now in column 10 is 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 and many have already started increasing anticipating the next report. However, since the August 25 flash crash, most are elevated due to increased market volatility that may remain high for this quarter but they are still most likely to increase as their report dates approach.

To help identify implied volatility highs, lows, and forecast 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 Advanced Historical Data pages on our website.

Comments and Observations

The typical pattern is for implied volatility to decline for 4-6 weeks after the reporting date followed by a subsequent rise for about 3-4 weeks before the next report date, but they vary with each having its own unique pattern.

Those with ratios less than 1 are currently experiencing high-implied volatility for reasons that may be unrelated to their upcoming earnings report such as the elevated market volatility since August 25. For example, CAT just reduced guidance and SPLS is attempting to merge with its competitor.


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Some Strategy Ideas

Frequently calendar spreads, also called time spreads are used for quarterly reporting by selling the near term option with higher implied volatility and buying the same strike price in the deferred month with a lower implied volatility. However, since this position will have short gamma or the rate of change of delta, any large move of the underlying stock on the report date will result in a loss.

The alternative approach, distinguished by the expiration date of the short option relative to the earnings report date has quite different characteristics.

When the short option expires before the report date, the short option implied volatility is less likely to advance while the implied volatility of the deferred long option, expiring after the report is more likely to advance into the earnings report. In addition, the risk of a harmful stock price gap diminishes by closing the spread before the earnings report release. This strategy depends on closing the position one or two days before the short option expires and is thus, truly a time spread designed to capture time decay of the short front option relative to the long option while any implied volatility advance of the deferred option is a bonus.

Option prices continuously change in response to changing expectations. The higher the uncertainty the more valuable the option, implying there is a much wider distribution of possible outcomes. When they become more predictable, the implied volatilities no longer increase dramatically before the reporting dates, option volume usually declines and they disappear from the Volatility Kings™.

Individual investors relying upon the earnings forecasts and playing the expectations game wondering if they may be too high or too low are disadvantaged when anticipating the direction the stock will move after reporting. However, if the implied volatility has risen enough into the report date it may offer an opportunity for a volatility strategy and not rely upon getting the direction right. In addition, since earnings reports reoccur every quarter there may be more than one opportunity, especially for the ones that have a regular pattern of rising into the report dates.

For further analysis of the Volatility Kings™ or other stocks and ETFs in your portfolio, here is how to find our complimentary volatility charts, located on the Basic Options page of our website.

From our home page go to Analysis Services in the left column, then find Basic Options listed near the top. After opening the page enter the symbol where indicated (the default symbol SPX is already entered). Next, scroll down to the Volatility Chart heading located on the right side of the page near the bottom. Click on the small chart image and you will see a new enlarged data table along with the volatility chart for the last year displaying both the implied volatility and the historical volatility of the underlying symbol as well as the options volume. Previous earnings report dates are easy to find by the volume spikes accompanied by implied volatility declines as well as sudden changes in historical volatility.

Since the Volatility Kings™ list constantly changes we can use help identifying new candidates. If you have any suggestions please let us know. Send them to Support@IVolatility.com


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After the nonfarm payroll report Friday the S&P 500 Index made an unexpected upward reversal after retesting the August 25 low last Tuesday and then turning higher forming a potential double bottom pattern and the upward momentum Friday seems to suggest the recent decline may be ending. However, the rising wedge minimum downside-measuring objective down near 1800 still remains possible, but for now the considerable upward moment could take it back up toward 2000 where selling may occur again.


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


Next week’s issue will feature a complete market review including updates for the current "Foremost Five."


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 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.

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 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



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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".