« April 2018 »

IVolatility Trading Digest™

Volume 18 Issue 14
Volatility Kings 1Q 2018

Volatility Kings 1Q 2018 - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Review NotesWith the end of the first quarter the time has come to start anticipating earnings reports including an update of our Volatility Kings ™ list of companies that have a regular tendency to experience increasing option implied volatility as their quarterly reporting dates approach. First a few brief comments about the progress of the S&P 500 Index and the Rising Wedge minimum downside objective.

Review NotesS&P 500 Index (SPX) 2604.47 declined 36.40 points or -1.38% last week moving back into the downward channel Friday, after breaking above it Thursday, increasing the probability of reaching the minimum objective and testing the February 9 low at 2532.69.



Upon testing the previous low look for reversal signs. Although the day-weighted VIX Futures Premium remains negative at -7.05 vs. -2.05 week ending March 29 other futures and options indicators suggest less hedging against a lower market. For example, VIX Futures Open Interest at 391K was down from 629K week ending February 9 and VIX Futures Options Open Interest at 8M was down from 14M week ending February 9.

In addition, CBOE S&P 500 Skew Index (SKEW) that measures purchases of out-of-the-money S&P 500 Index puts requiring a very large downside move to profit from long put positions, closed the week at 122.39 compared to 147.35 for the week ending March 16. Now near the bottom of its recent range, it indicates diminished expectations for an extreme down move.

However, should the previous low around 2530 fail to hold, hedgers will get busy again anticipating a test of the next support down at 2400.

As for the Volatility Kings ™ the degree of uncertainty for upcoming reports may not be comparable to previous quarters. 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 described below.

IvolatilityWe begin getting down into the weeds by selecting a group of individual stocks all with prices greater than 5, since when prices are too low there are usually not enough option strike prices or liquidity. In order to focus on those with the best options volume and liquidity, both the weekly and month average volume requirement is greater than 20K contracts. This may result in inclusion one quarter but not the next. However, 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 and others.

Volatility Kings™ 1Q 2018


The volume search begins at the "Top 200 stocks by volume / open interest" link on the left side of the “Rankers and Scanner” section about two-thirds of the way down our home page where we feature a complimentary ranker sample of the top 200 stocks and ETFs by Options volume and Options open interest displaying weekly averages.

Then the Implied Volatility differential from last quarters’ earnings announcement high to the subsequent after reporting low needs to be greater than 10%, occurring regularly with some flexibility on the regularly occurring requirement as it may vary due to market volatility.

For the data table above, descriptions and details for the column headings follow.

Price in column 3, are closing stock prices as of April 6, 2018.

Next Rpt in column 4 is the next expected earnings report date. They require checking often as these are only estimates and companies routinely change the 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.

Est or 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 "whisper" estimates. In addition, stock prices move on forward guidance as much, or perhaps more than on reported revenues and earnings.

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.

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 low.

IV Now in column 9 is the Implied Volatility Index Mean, (IVXM) as of April 6, 2018. The implied volatility of some, depending upon the last report date, may still be declining from their recent report such as Micron (MU), and Oracle (ORCL).

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 those with lower ratios may have already started increasing anticipating the next report such as Advanced Micro (AMD) and Amazon (AMZN).

As in previous quarters the charts below use Netflix (NFLX) to illustrate the pattern of advancing implied volatility before the expected April 16 report date.


On reporting dates marked with arrows, the orange IV Index Mean implied volatility drops. When the stock makes a large move the the blue 30D HV (Historical Volatility) advances as shown for the July report on the top chart. This quarter the pattern is unusual since the stock price decline has boosted the implied volatility independent of the upcoming quarterly report. Should the S&P 500 Index soon turn higher the implied volatility decline after reporting will be extraordinary.

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, but vary with each having its own somewhat unique pattern.

Events unrelated to earnings reports such as the current correction can also affect implied volatility. The S&P 500 Index implied volatility, measured by our IVolatility Implied Volatility Index Mean, or IVXM, at 18.20 vs. 16.89 week ending March 29 and 31.81 on February 5, uses four at-the-money options for each expiration period along with our proprietary technique including the delta and vega of each option. Here are the IVXM and price charts for SPX.


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.

Here is how to find "The best volatility charts in the business."

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. For example, those with IV/HV ratios greater than 2.00 using the range method for historical volatility imply large moves. With many indexes and stocks moving 1% or more in recent days short gamma long calendar spreads are troubled.

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 Volatility Kings™ while others take their place.

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 the "reliable" ones that have a regular pattern of rising into the report dates such as Netflix (NFLX).

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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.

Next week will feature a more detailed market review along some hedging suggestions in the event they become necessary.

Finding Previous Issues and Our Reader Response Request

PreviousIssuesAll 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




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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".