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Today


IVolatility Trading Digest™


Volume 19 Issue 40
Volatility Kings Third Quarter 2019

Volatility Kings Third Quarter 2019 - IVolatility Trading Digest™

Review NotesSince third quarter earnings reporting will be starting soon, 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.

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. Since the focus is on earnings, others with high-implied volatility due to takeover speculation, 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, both weekly and monthly average option volume requirement is set at those with greater than 20K contracts. As a result, some companies are included one quarter but not the next. In addition, when market implied volatility rises 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 others.

The selection process begins at our daily listing of Review Notesfound in the Rankers and Scanners section of our home page about one-half way down the page at the top left. After listing all stocks with volume greater than 20K, using our Advanced Options service, the next step eliminates those with monthly volume less than 20K, along 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.

The implied volatility differential from last quarters’ high to the subsequent after reporting low, needs to be greater than 10%, occurring regularly with some flexibility on the regularly, due to changing market volatility, company or sector specific events.

Volatility Kings™ Third Quarter 3Q 2019

table

Descriptions and details for the column headings in the table above:

Price in column 3, are closing stock prices as of October 4, 2019.

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 current consensus per share earnings estimate according to Earnings Whispers and may 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. Since overall guidance for the third quarter has declined for many cyclical companies, guidance should be especially important again this quarter.

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 October 4, 2019. Depending upon the last report date the implied volatility of those having recently reported may still be declining, such as Micron (MU). In addition, many are currently above their post reporting down trends due to the market decline last Wednesday and will likely decline, assuming S&P 500 Index support holds.

52R displays the current Implied Volatility Index Mean (IVXM) relative to the 52-week range, where .71 is above the midpoint for Snap (SNAP), while near the bottom for Micron (MU) at .11.

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 Cisco Systems (CSCO) at 1.54, but others may improve if market implied volatility declines. Those with lower ratios may already be rising, anticipating the next report such as Xilinx (XLNX) at .85.

Again, this Roku (ROKU) chart from our Advanced Historical Data service illustrates the pattern of regular quarterly changing implied before and after reporting.

table

The previous reporting dates are marked with arrows. Notice how the orange IV Index Mean volatility drops dramatically on the report dates. When the stock also makes a large move the blue 30D HV (Historical Volatility) quickly advances.

Comments and Observations

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. S&P 500 Index IVXM October 4.

table

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, added .24 points or +1.62% last week ending at 15.10% after reaching almost 20% last Wednesday.

"Volatility is a proxy for uncertainty and must be accommodated in measuring investment risk." – Peter L. Bernstein, Against the Gods

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.


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.

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 anticipating 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.

Iron Condors sell both out-of-the-money call and put spreads when implied volatility advances significantly, especially when the stock price trades near the middle of a range. Even if the stock makes a large move, only one side of the position will be threatened.

Hedging Strategy

The caution and hedge images began appearing in the Strategy section of Digest Issue 32 "Option Spreads [Charts]"on August 12, 2019 and have remained in this space ever since. On last Thursday's encouraging reversal along with closing back above resistance from the 50-day MA, it seems reasonable to reduce the hedge position.

Although China trade news should be increasing this week, it still seems prudent to maintain some November 15 out-of-the-money SPDR S&P 500 ETF (SPY) put spreads.

table

Summary

Since earnings reporting will begin soon, use the Volatility Kings™ list as a source for potential volatility strategies, such as Long or Short Calendar Spreads or even Iron Condors if implied volatility appears abnormally high before the report date. The S&P 500 Index reversed last Thursday and closed back above the 50-day Moving Average encouraging the bulls and reducing the need for increased hedges. Although China trade news should increase this week, until the S&P 500 Index closes back above the important upward sloping trendline, continue hedging some long positions.

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

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 a Market Review and indicator update.

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 our website homepage.

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".