« November 2008 »

IVolatility Trading Digest™

Volume 8, Issue 44
IVX Monitor

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).

In this issue we continue our recent theme of high volatility trading opportunities by taking a look at the New IVX Monitor located in the Options Data Analysis section just below the IVolatility Trading Digest Blog section on our Home page. The Monitor, with last Friday’s data shown above, provides easy access to current readings of intraday implied volatility for US equity and futures markets. There are a total of 26 implied volatility readings with graphs on many important equity indexes and futures all of which can be seen by using the slide bar. In addition to the current Implied Volatility Index it shows the daily change and the high and low readings for the past year.

In the section below we list all of the underlying securities along with our long term estimate of their potential decline. Then we offer some suggestions for a few short options positions in the event the market fails to hold at the current levels. First our market review.

Market Review

S&P 500 Index (SPX) 873.29. At the end of the week the SPX was 57.70 points lower again last week for another 6.2% decline. Our previously identified small double bottom has now been negated by last Thursday’s low at 818.69. It now looks like the best we can expect is a trading range between 819 on the low side to 1000 on the upside and we do not dismiss the possibility that it will take out 818.69 and continue lower.

S&P 500 Index IVX 63. The Implied Volatility Index Mean added 47.02 last week for an increase of 34%. We would expect it to return to the previous October 27th high of 76.67 if the S&P 500 takes out last Thursday’s low at 818.69 and then continues lower.

US Dollar Index (DX) 86.37. Last week we noted the US Dollar Index appeared to be making classical continuation consolidation pattern and last Tuesday it broke out to the upside with a one- day gain of 1.163 points closing at 87.08. We now have a potential double top at 88 that may create some resistance.

TED Spread 2.10. The TED spread shown on Bloomberg rose .09 last week from 2.01the prior week. We think it needs to continue lower returning to the 1.40 - 1.45 range before we begin to see more positive sentiment for the banking sector.

NYSE McClellan Summation Index. Our market breadth indicator stalled last week and then declined once again with a loss of 40.51. Our indicator is now reading -1.174.77 and its return to the downside is not encouraging from a bullish perspective.


The failure of the S&P 500 Index to continue above 1000 and its subsequent decline to a new low has changed the sentiment once again. We now think the best we can hope for in the near term is a trading range as we mentioned above. The US Dollar Index and the Japanese yen continue to show strength from the deleveraging of long commodity and emerging market positions. While there is a possibility that there may be some positive developments at the G-20 meeting over the weekend we think it is prudent to add additional short positions in the retail and financial sectors to complement our crude oil bear put spreads.

IVX Monitor

Our IVX is similar to the CBOE VIX for the S&P 500 Index, but the calculations are somewhat different. We use four at- the- money options for each expiration period and then apply a proprietary weighting technique that includes the Delta and Vega of each option. It is then normalized for multiple periods and shown in three tables, one for the calls, a second for the puts and the third for the mean average between the calls and puts. This is our IVX Mean that we often use for our standard measure of implied volatility. In addition to the standard 30 day period the tables also include the implied volatility measures for multiple time periods including 60, 90, 120, 150, and 180 days. In addition, for each period we include a Hi/Low indicator, defined as the current price minus the low divided by the high-low range. Since the result will be between 0 and 1 it provides a quick estimate of the current implied volatility in relation to the extremes. For example, 0 would mean a new low has been reached while 1 means a new high has been reached. Then we provide the high and low data along with the dates of each and also include the implied volatility in relation to the historical volatility for each period. A graph showing the “Historical Volatility and IV Index vs Price” completes the standard page found at the Implied Volatility Index tab on theAdvanced Historical Data page. Additional details about the calculation methods and a comparison to the VIX can be found at this IV Index link.

The table below shows all of the current underlying symbols displayed in the IVX Monitor with their IVX Mean, Long Term Estimate (LT Estimate) and their Ratio Above the Long Term Estimate. The long- term estimate is a simple visual approximation for the future implied volatility based upon the concept of “mean reversion" or the tendency to return to a mean or average value after reaching extremes without an estimate with respect to time. From experience we know that volatility will often remain in a new range after reaching extremes and we are expecting to see higher ranges for the near future. Nevertheless the ratio gives us a guide as to the relative option valuations with respect to their long- term estimates. In the case of the large US equity indexes they are just above two times higher than their long- term estimates as shown below.

By using the IVX Monitor on our Home page you can quickly get the important intraday implied volatility updates and then when you need more specific details you will find them at our Advanced Historical Data page.

IVOLopps ™

More Bear Put Spreads

In this continuing uncertain environment we think it is prudent to add some bear put spreads to our current list.

Sears Holdings Corporation (SHLD) 38.27 is a broad-line retailer in the United States and Canada. The company operates three businesses: Kmart, Sears Domestic, and Sears Canada. Recently we have made several SHLD bear put spread suggestions. Our last was in IVolatility Trading Digest™ Volume 8, Issue 41, Brothers Grimm, dated October 27, 2008 when SHLD was 47.67.

Once again SHLD came to our attention because of its number two position in the IVolatility.com Ranker for “Top 5 stocks based on IV Index Mean vs 30D HV,” a regular feature on our Home page. With an Implied Volatility Index Mean of 142.46 and a current Historical Volatility of 97.71 it has a positive volatility spread with an IVIndex/HV ratio of 1.46.

SHLD has broken the next lower support area at 50 and is again gaining momentum to the downside. The most recent retail sales reports are providing further justification for this short thesis. With a current Historical Volatility of 98 consider this bear put spread idea.

The above indicated debit is based upon Friday’s middle closing prices between the bid and ask. The debit on Monday should be 1.68 if the stock price remains unchanged. Use the position net delta shown above to adjust for any price change. For example, if SHLD is trading Monday one point lower then spread should be trading about 1.78, or about .10 higher.

Harley-Davidson, Inc. (HOG) 15.35, is the American motorcycle king and is given credit for being a well managed company that continues to face the challenge of declining discretionary consumer sales.

We last suggested a bear put spread on HOG about a year ago when it was 32.67 higher at 48.02. In the meanwhile the retail environment has deteriorated further. With a current Historical Volatility of 114 consider this suggestion.

The above indicated debit is based upon Friday’s middle closing prices between the bid and ask. The debit on Monday should be 1.52 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .26 for each point change in the stock price.

American Express Company (AXP) 19.99. AXP is a payments and travel company providing charge and credit payment card products, and travel-related services worldwide. AXP converted itself into a bank so as to qualify for TARP funds and the shares have lost a quarter of their value since the Fed approval came through last Monday night, not a particularly good sign. In addition is has the distinction of being number 5 on this week’s “Top 5 stocks based on IV Index Mean vs 30D HV” list.

With a current Historical Volatility of 109 here is another bear put suggestion to consider.

The above indicated debit is based upon Friday’s middle closing prices between the bid and ask. The debit Monday should be 1.81 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .22 for each point change in the stock price.

Capital One Financial Corp. (COF) 31.19. COF provides various financial products and services to consumers and small businesses. While it has access to bank deposits it has substantial credit card and auto loan assets that may become the next financial crisis. With a current Historical Volatility of 119 here is another financial to consider.

The above indicated debit is based upon Friday’s middle closing prices between the bid and ask. The debit Monday should be 1.76 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .15 for each point change in the stock price.

Previous Issues and 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. 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 for us to take a look at a specific stock or ETF just let us know. Use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com Website. If you would like to receive the Digest by e-mail let us know at Support@IVolatility.com.


In the sears example, can you explain how was the high IV / HV ratio used as part of the trade selection criteria. I can see buying a put bear spread since you had a directional view on the underlier where it will go down.

How was IV/HV ratio used in coming to the decision of this trade.

Please explain.


Posted by kalki on November 17, 2008 at 04:43 PM EST

In the sears example, how did we use the high IV/HV ratio as part of the criteria to make a bear spread trade.

I can see that you are price bearish so you put a bear spread but where did we use the high IV/HV ratio information?

Please explain.


Posted by kalki on November 17, 2008 at 05:09 PM EST


Thanks for the excellent question about the IV/HV ratio and how it can be used. As you may know were offer the Top 5 on our Home site as a regular feature in the Rankers and Scanners section. The high IV/HV ratio is the first alert that something unusual is happening as the options prices are being bid to abnormal levels. From there a little more investigation will usually provide the answer as to the likely direction. With our Advanced Historical Data service you can look for some additional clues. In addition, the IV/HV ratio we offer six more criteria in multiple time frames in graphs for further consideration. The three that are probably most useful are Stock Volume, Options Volume and Open Interest and Options Put Volume/Call Volume (put/call ratio). For example, when the stock volume is rising and the put call ratio is high and rising it usually means that put buyers are bidding the put options higher in price and they are primarily responsible for the high IV/HV ratio. On the other hand, if the put/call ratio is low and declining then the call buyers a bidding the call options higher. This is usually enough information to make a judgement as to the most likely short-term direction for the stock. We are not on the floor of the exchange and can’t get a feel for the order flow, but we can see the equivalent of the order flow in the numbers that are reported. This additional information offered by the options markets is one of the better reasons for traders to understand options.


Posted by Jacktrader ( on November 17, 2008 at 06:53 PM EST

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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".