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Today


IVolatility Trading Digest™


Volume 21 Issue 3
Volatility Kings Fourth Quarter 2020

Volatility Kings Fourth Quarter 2020 - IVolatility Trading Digest™

Review Notes

With fourth quarter earnings reporting already underway, the time has come once again to updateupdate our Volatility Kings™ list of companies that have a regular tendency to experience increasing option implied volatility as their quarterly reporting dates approach.

Since implied volatility of the entire market spiked up in the middle of March last year and has been steadily declining ever since, usual increasing implied volatility of individual stocks before earnings appear insignificant making their regular quarterly patterns harder to visualize. 

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. Focused on earnings, others with high-implied volatility due to takeover speculation, vaccine news, 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 greatest options volume and best liquidity, the weekly option volume requirement is set at those with a weekly average of greater than 35K contracts. 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 more.   

The selection process begins at our daily listing of Review Notes found in the Rankers and Scanners section of our home page about one-half way down the page, at the top left. Individual stocks with options volume less than 35K are excluded along with those 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.
This quarter the selection task became more subjective as those on the list meeting the minimum volume criterion expanded significantly due to new IPOs, SPACs, rotation into value along with smaller capitalized stocks along with greatly increased speculative call volume.    

Volatility Kings™ 4Q 2020

table

Descriptions and details for the column headings.         

Price in column 3, are closing stock prices as of January 15, 2021.

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 higher of the current consensus or "whisper" per share earnings estimate according to Earnings Whispers and may change before the report date. In addition, stock prices move on revenue and forward guidance as much, or perhaps more than on reported earnings. The earnings game lowers estimates in advance and then cheers when they beat the lowered estimates all in an effort to boost stock prices.

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 post reporting low. 

IV Now in column 9 is the Implied Volatility Index Mean, (IVXM) as of January 15, 2121. Depending upon the last report date the implied volatility of those having recently reported may still be declining, such as Bed Bath & Beyond (BBBY) has just reported on January 7.  

52R displays the current Implied Volatility Index Mean (IVXM) relative to the 52-week range, where .83 is above the midpoint for Baidu (BIDU) and Game Stop (GME) at.70. Most of the others remain closer to the bottom compared to mid-March when they all spiked up.   

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 Amazon (AMZN) at 1.37 and NIO (NIO) at 1.50.

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. 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, increased 1.91 points or           +11.28%  last week, ending at 18.84 up from 16.93 week ending January 8.

 

table

By finding stocks that have a regular tendency to experience rising implied volatility ahead of earnings reports, such as Netflix (NFLX) or Workhorse (WKHS) offers opportunities to gain meaningful edge both as implied volatility declines after reporting and then advances again before the next report date.   

To help identify implied volatility highs, lows, and estimate 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 Historical Data Charts on our website.

Earnings Strategy Ideas

As a nomenclature reminder, spreads executed with a debit are referred to as long positions, while those with a credit are short positions.

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. However, when opened just before reporting, when the near term implied volatility is high, the results good or bad are known quickly. 

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 in anticipation of 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. However, timing is more important since the position will be open longer, with long gamma and market risk.

Some other volatility strategies:

✔ Covered Calls - sell out-of-the-money calls against long stock.  
✔ Sell Puts - cash covered out-of the-money puts or put spreads with defined risk.
✔ Iron Condors - sell both sides out-of-the money. An out of the money call spread and an out-of the money put spread with the implied volatility near the52-week high like Game Stop (GME) or Baidu (BIDU), but remember to check the price chart and avoid those in downtrends . Ideally, look for those with high implied volatility with the stock in a well-defined range.

Summary

While market implied volatility of  S&P 500 Index increased somewhat last week back and assuming ~ 20% represents the current mean as in regression to the mean, option indicators confirm bullish sentiment at all time highs according some analysts. Earnings reporting already underway really begins to accelerate this week with lowered easy to beat estimates for many widely followed stocks. Our Volatility Kings™ list offers ideas to consider, both long and short volatility Calendar Spreads, along with others.

By Jack Walker

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's Digest will include our regular Market Review including a long overdue crude oil 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 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

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.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.

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