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Today


IVolatility Trading Digest™


Volume 22 Issue 3
Volatility Kings Fourth Quarter 2021

Volatility Kings Fourth Quarter 2021

Review Notes
This week fourth quarter earnings reporting gets underway led by the banks, then next week many of the popular widely followed companies will report including two on our Volatility Kings™ list of companies with a regular tendency to experience increasing option implied volatility as their quarterly reporting dates approach.

While market volatility generally influences the implied volatility of individual stocks this quarter sector rotation from growth to value along with rotation out of high P/E and loss making companies lead the action ahead of anticipated interest rate increases. The volatility chart of the S&P 500 Index down below the list doesn't reflect the internal rotation and the battle between the so-called stay- at- home stocks and the reopeners. As a result, fewer stocks show their usual increasing implied volatility ahead of reporting indeed, many have already exceeded implied volatility levels reached before reporting third quarter earnings.

Some companies are on the list one quarter and not the next, others seem to remain quarter after quarter. Those with high-implied volatility due to takeover speculation, vaccine news, FDA announcements or other extraordinary events are excluded along with the ones with low options volume thereby lacking sufficient liquidity.

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 40K 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 Review Notesfound 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 40K don't make the cut along with those priced less than 10, since when prices are too low there are usually not enough option strike prices or liquidity for reasonable option strategies. Sorted by nearest reporting dates, the 4Q list follows.

Volatility Kings™ 4Q 2021

table

Other than two exceptions marked * Tesla (TSLA) and Ford Motor (F) all expericed implied volatility of 70% or more when they reported third quarter earings and many have already exceeded those levels as they approach fourth quater reporting dates. Both experienced increasing implied volatility after reporting third quarter earnings along with Futu (FUTU). Typically implied volatility declines after earrings reports.

Using 70 and above as the cut off reduces the number of condidates while increasing the risk since many earnings estimates are negative as these stocks decline.

Descriptions and details for the column headings.

Price in column 3, are closing stock prices as of January 14, 2022.

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 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.

Last Q IV in column 7 shows elevated Implied Volatility Index Mean (IVXM) of the puts and calls going into 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 14, 2022.

52R in Column 10 displays the current Implied Volatility Index Mean (IVXM) relative to the 52-week range.

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.

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) uses four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option. The 6-month chart shows it closed Friday at 15.94 + .74 from 15.02 on the week ending January 7.

table

Finding stocks that have a regular tendency to experience rising implied volatility ahead of earnings reports 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 included in all IVolLive packages shown 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. When opened just before reporting, when the near term implied volatility is high, the results good or bad come 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.

In the current environment of rotation out of high P/E and loss making companies, Iron Condors that sell both sides out-of-the money, reduce risk compared to long Calendar Spreads with short gamma. Remember to check the price chart and avoid those in steep up or downtrends. Ideally, look for those with high-implied volatility with the stock trading in a well-defined range.

Summary

Our Volatility Kings™ list offers trading ideas to consider, both long and short volatility such as Calendar Spreads, along Iron Condors.

By Jack Walker

Regularly check the Stock Trend Analysis and Best Calendar Spread ideas updated daily in the Ranker and Scanners section on our front page. 

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.

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 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".