Been running some screens on both low IV and High IV underlyings that have option series with more that 5000 contracts of average daily volume. I did not screen for price of underlyings, considering some of the extended moves some stocks have had as well as the idea I will eventually be trading more long naked positions. However, I doubt I would ever by an option on a stock priced under $10.00 per share, or so. I was surprised at the variety of underlyings that showed up under both high and low IV. This suggests there is a high potential to create a consistent, high return strategy. To this end, I will create a model portfolio using a paper trading account for experience in managing such a portfolio and to find out any issues before committing money again. My lists will include IV percentile, absolute IV%, price action characteristics of the underlying, and strategy applied. This should be a fun and practical exercise while I’m on layover in cloudy and rainy Florida.
I ran several screens and found quite a few interesting candidate single names. As usual, almost nothing is free. The cost for low absolute volatility with low IV rank is low options volume with wide option spreads. The cost for high relative absolute volatility with high IV rank is less volatility “Predictability”. Even so, these additional costs can be considered as a part of doing business, as it were. I have further screened by sector, and depending on number of underlyings meeting criteria, I will further screen down to industries for comparison purposes. From there, I will analyze the technical situation of the underlying and try to determine price levels of interest and the best way to structure prospective trades. My next post will consist of a partial list of prospective trades by various criteria.
Created a spreadsheet for low absolute IVs with low IV ranked single name equities that are candidates for option purchases, generally from either side of the market. These candidates are usually good for gamma scalping using longer options that may benefit from volatility expansion fo historical averages. Low volatility rank may also indicate bullish potential, but it can oftentimes be a long wait, assuming that bullish potential is, in fact, ultimately realized. Some consideration was given to IV rank versus HV rank in the selection process. This list is not all inclusive, especially regarding semiconductor stocks. My cut and paste effort from my spreadsheet did not format well here. I’ve cleaned it up a bit, but would rather do some more screening and analysis right now than playing around with it. I will experiment with other formatting methods for future posts. The format for each underlying are as follows: Symbol Sector Industry Category IV percentage 13W IV rank percentage 13W HR - 13W HR is 13 week historical volatility rank. Technical - The term “Compliant” means the underlying’s relative recent reversal predictability. Strategy - Most of my trade ideas are swing trade time frames of typically 2 to 3 days unless otherwise noted. EMN Basic Materials Chemicals Diversified 28.8% 0% 46 Strong, Compliant Wait for reversal signal and buy puts. PPG Basic Materials Chemicals Diversified 25.8% 6% 44 Tight trading range, compliant Buy longer term calls for vega exposure and gamma scalp to offset theta costs. CE Basic Materials Chemicals Diversified 29.6% 16% 59 Tight uptrend, compliant No action IP Basic Materials Forest Products Paper and related 30.1% 11% 78 Uptrend, weak RS, compliant Watch for possible gamma scalping ideas. EBAY Communications Media E-Commerce 31.9% 15% 79 Uptrend, compliant No action HOLX Consumer, non-cyclical Healthcare Products 34.0% 26% 59 Uptrend, smooth, compliant Trade most any signal with long naked options EBC Financial Banks Commercial 25.3% 13% 32 Recent breakout from trading range no action PNC Financial Banks Super regional 29.0% 13% 15 Uptrend, compliant Watch for reversal. Buy puts. CNI Industrial Transportation Rail 21.4% 23% 91 Strong uptrend, inconsistent compliance Impeding reversal signal. Delay RTM entry to compensate inconsistent compliance. APH Industrial Electronics Connectors 26.8% 18% 44 Strong uptrend, compliant Reversal watch; buy puts. ST Industrial Electronics Misc Components 32.4% 29% 93 Strong uptrend, compliant Impending reversal signal, buy puts CGNX industrial Machinery Automation 34.2% 15% 50 Undergoing correction. Mean price 90 to 91. Review further for potential long call continuation trade. ENTG Semiconductors Other information under review Strong LT RS, undergone major correction, non compliant. No RTM strategies. Only trade from long side after corrections. Buy longer term calls or roll shorter term calls. If gamma scalping, consider waiting for larger moves before selling to restore delta neutrality. When buying to restore delta neutrality, use normal perimeters. RMBS Semiconductors Other information under review. Strong uptrend, inconsistent compliance Currently in active reversal area, but due to inconsistent compliance, Use additional time delay or major gap up before buying puts. Paper trades on the above will list entries, targets, and stops.
The following is a list of High IV and high IV rank. My screener is not consistently providing average option volume, requiring me to perform additional tasks, causing this screen to be much smaller IRBT Consumer Cyclical Home Furnishings Appliances 76.5% 81% 100 Tight uptrend, compliant Wait for range expansion to upside before buying iron condor with modest negative delta. RUN Energy Alternate Solar 87.4% 81% 77 Uptrend, compliant, fading RS Buy small size IC with slight negative delta DOCU Technology Software Data Processing 56.3% 73% 16 Uptrend, Compliant Buy IC with slight negative delta. These iron condor trade ideas are shorter term. For longer term iron condors, I would be initiating them at delta neutral or even possibly slightly delta positive to account for their uptrends and fundamental prospects.
Completed a few small trades this week. Of note, HG was a reversion to mean trade based on the 30 minute chart. While HG only consolidated instead of reverting, HG was definitely “In play”, and a in-trend long position was justified after the 2-3 narrow range consolidation bars for a high probability, high reward to risk, trade. I closed my AAPL bull spread in calls after disappointing performance on Friday. I am now bearish on US equities on a swing trade time frame. Little doubt equity futures indexes will rise Sunday night, unless armageddon has begun in earnest. Grin. Some curbs on equities market enthusiasm may be due to Janet Yellen acting a little hawkish. The “Janet Yellen” acting hawkish? The GME saga has raised some legislative eyebrows. Major US companies have mentioned their support and investment in Bitcoin, while Janet issued a non-specific statement regarding vulnerability of cryptocurrencies to malfeasance. There seems to be an inevitable showdown between brewing between the US Government, its regulators, and the financial industry over cryptocurrencies. Our government has to be feeling uncomfortable with companies beginning to divest the US dollar. Interest rates are continuing to rise, increasing costs for servicing debt, an increasingly important concern for those with high debt loads. Investor excitement over SPACs is another cause for concern on several levels, but that subject is deserving of its own post. MSTR increased their zero coupon, convertible bond offering by 50%, with proceeds going to buy Bitcoin. There is talk of Bitcoin ETFs being offered, eventually maximizing cryptocurrency investment saturation to the public. The financial industry is successfully implementing feedback mechanisms that should support cryptocurrencies for the next few years as distribution to the public is completed. The potential of widespread public participation in cryptocurrencies is high, especially should leverage becomes available, perhaps in the form of leveraged ETFs and options. If current trends persist, cryptocurrencies are likely to become significant competitor to, or for, traditional monetary assets. Personally, I will treat Cryptocurrencies and its derivatives as a trading vehicle, especially if I can both use leverage with defined risk, instead of a store of value. Left unchecked, speculation in cryptocurrencies will likely create systemic financial and economic risk resulting in a unprecedented transfer of wealth between the sophisticated versus the unsophisticated either during a change in economic cycle or causing a change in economic cycle. Lack of risk aversion among greater numbers of investors combined with the power of social media along with the seemingly increased polarized behavior of our culture, will likely require trading model adjustments and increased importance of defined risk strategies. MSTR and RIOT are prominent, active, leverageable equity plays on the fortunes of cryptocurrencies. In addition, the performance of these stocks might be useable as a sentiment indicator.
Next week I’m going to focus on short term iron condors. I will be structuring these Iron condors to have a slight directional bias by selling near the money and selling further out of the money options for the side I’m anticipating the market to move. My hard stops will be the midpoints of each vertical spread. I will look to take profits or a small loss upon a underlying price touch of the further out of the money short option strike or the midpoint of the vertical spread opposite to my directional outlook, respectively. I have fairly well defined rules for entries, targets, and stops for various directional trading strategies, but have been feeling a bit lost in how to best structure defined risk option trades. I will be structuring iron condors according to chart support resistance levels of the underlying and expected volatility. Versus out of the money directional butterflies, this iron condor structure will see theta become more of an overall contributor of profits as seen by a tighter theta to delta ratio, at the cost of gamma/convexity, of course. My probability of profit will increase at the cost of maximum potential returns. In practice, my directional butterflies rarely saw a body touch, so I’m not really giving up much as far as potential returns. Part of this may be bad trading, but the other part is a changed outlook resulting in earlier trade closure than initially anticipated. Another factor to consider with iron condors versus directional butterflies is lower leverage, but my utilization of account equity has been very low, making this a current non consideration. For certain trade ideas, directional butterflies will still be used, as well as naked long options on trade ideas of short term price range expansion. As far as order execution strategy is concerned, I will always fight for each tick of price improvement, especially since the net delta of the iron condor will be low. However, unhedged legging in to an iron condor can be too expensive for a tick. While working orders, I may maintain near equivalent desired delta exposure in the underlying, and close out that exposure when my Iron condor order is filled. I will post some live trade ideas as time during my workday allows. For next week, I will be looking at the following ideas: Reversion to mean ideas - AUD, BRR, ZN, HG(Need to consider limit up risk) like seen on LB, ECH, CSX, FB, and DE. Trend continuation ideas - CL, MXP, GC, SI, AAPL, V, MA, and FDX. Some of the above trade ideas are seemingly mutually exclusive with one another. Asset class relationships seem to be changing, perhaps related to the increasingly upward push in interest rates and, or increasing anticipation of Federal Reserve policy changes. Investor demand of carrying charge, long term storable commodities, such as gold and silver, may be, or will be affected by rising interest rates. I wonder how much precious metal demand is being affected by current strong cryptocurrency demand? If, or when, the SHTF, the direct physical possession of metal will likely trump cryptocurrencies, as one needs a computer they don’t fully have control over, software they don’t own, and internet access, which is subject to its own issues for maintaining cryptocurrency holdings. In other words, government intervention into cryptocurrencies is easier than many would like to believe. However, we likely have years to go before the preceding scenario, if ever, takes hold. ES volatility is at or near levels that may reward long vega option strategies. Historically, though, relatively low volatilities can remain in place for a long time. However, very active retail participation and potential unwinding of hedges related to options market making may suggest this market is not ready for a nap. Perhaps even when Summer rolls around.
No trades so far this week. Too busy at work. Do have a couple of longer term trade ideas, though. The following trade ideas are based on my personal, top of mind, observations and are not a thorough analysis of an particular company or industry. Therefore, no one should make an investment decision based solely on what I write here. QCOM - In the game of Chess, there is a concept known as the “Space left behind”, where an opponent’s move, especially in the middle game or later, will often leave weaknesses near the squares previously controlled by that piece. Sometimes it is worthwhile to take advantage of that space left behind. While 5G’s rollout has received a lot of press, the fact 3G is being phased out creates forced upgrades for communication products soon to be obsolete. Qualcomm is a long established leader in trucking communication equipment and electronic logging devices, among other things, of course. As a result, QCOM’s products interface well with trucking company’s computer systems, creating a barrier to entry against competitors. Throughout 2021, 3G will be phased out, requiring new hardware purchases by carriers that use the older system. 4G and higher offers considerable performance improvements, reducing driver time and aggravation with compliance requirements. However, as Apple, Microsoft, and perhaps others, move towards vertical integration of their hardware components, companies such as QCOM, will see less demand for certain product lines. As such, I see QCOM more as a intermediate term play rather than a “Buy and forget” type of stock. As far as Qualcomm expanding into value add products in the consumer space, I don’t see them as being successful, assuming they even try in earnest, for several reasons related to certain products in the company’s past. PLUG - Plug Power is involved in hydrogen fuel cells, notably used in Walmart and Amazon forklifts. Fueling time for a fuel cell forklift is about 3 minutes for 3 hours of use versus batteries that require 6 plus hours of charging for a shift’s worth of use. The fuel cell itself produces no pollutants and less forklifts are needed for a multi-shift operation. However, the production of hydrogen does have a carbon footprint, among other issues. Hydrogen gas in concentrations of 4% to 75% in air is explosively flammable. In addition, in confined spaces, Hydrogen can be an asphyxiation hazard, thus system refueling takes place outside, well away from buildings, increasing capital investment required. Distribution center sized warehouses can more easily justify this cost versus smaller warehouses. There are several interesting ideas that come out of PLUG’s relationship with WMT and AMZN. PLUG has an established customer base with a significant number of installations that allows them to get extensive practical, real world experience with hydrogen fuel cell technology. Hydrogen fuel cell technology has applications in general transportation and Walmart, along with Sam’s Club, has fueling infrastructure in place that could potentially lend itself to large scale hydrogen refueling for cars, local distribution trucks, and even eventually Walmart’s regional fleet of semi-trucks. A key driver for mass adoption of hydrogen fuel cell technology is a low cost and environmentally friendly acquisition of hydrogen. Perhaps utilization of extremophile chemosynthesis, maybe with a touch of genetic engineering, will allow us to extract hydrogen relatively cheaply from waste or low utility materials on a massive scale. The creative application of new technologies, including material science, will continue to create paradigm shifting products and investment opportunities in the years ahead.
Been extremely busy at work. Was able to shoot a few trades off, however. Of note, was a bull spread in VXX on ideas that volatility is too low relative to daily ranges and because of the “Loose” price action seen on Thursday. Was planning to hold this trade over the weekend, but NQ came on stronger than expected today. Ranges were seemingly too wide to call it a consolidation day in a new downtrend. Recent support levels seemed fairly resilient to several selloffs. Some of last week’s reversion to mean ideas took a fair amount of heat before finally seeing prices revert. Overall, I think most iron condor ideas would have worked nicely. I definitely will be looking to put on some iron condors next week. Fundamentally, from an economic standpoint, conditions are quite bullish. From a financial standpoint, concerns may abound for some, but as long as our economy is growing, our debt hangover may not be felt for quite some time. Event risk of various kinds may increase if the US chooses an overall more aggressive foreign policy towards non-allies. The market is in a downtrend on a short term timescale, and I will be looking to fade rallys that seem to have lost its upward momentum. Since I consider current volatility too low relative to recent ranges, I will look to buy naked puts. I may look to buy another VXX bull spread. If I had more time available for trading, I would definitely be looking at gamma scalping.
Based on the posts of the big boys here in ET, they seem quite confident in being short volatility. They have presented a well reasoned argument and reward to risk for the short side is not favorable for my swing trade time frame. However, reward to risk risk is quite favorable for being long. I expect the next rally to be broader that previous rallies, with new highs relatively quickly seeming inevitable. As such, I’m thinking of taking a “Fire at will” approach to buying single name flys and iron condors. Should I end up with multiple positions and the market turns against these positions, I’ll hedge some my exposure using VXX and or OTM ES ‘flys in puts with a 2-3-1 structure to create more favorable weighting of IV across the strikes of the ‘fly.
Been extremely busy at work, but making the most money ever by far. If I were to ever learn short term trading... Last week, I made a solid directional call on equities only to muff it up with a hedge. In other words, made a good call, the market moved decisively in my direction, and I lost money! In my partial defense, I literally was only able to take quick, infrequent peeks at the market and made my decisions within seconds of a particular peek. I became bearish on equities because bids on NQ were decidedly less robust than in past “Long term trend resumption rallies”. Thinking the market would be surprised and there would be some unwinding of short volatility positions, I decided to buy a bull spread in VXX. Long story short, my position underperformed the decline in ES by huge 4 to 6 ATRs, in my quick estimation. Big money seems to be very willing to short vola at these levels. Someone’s model is weighted towards long term historical data, I suppose. Then I hedged, intending to protect against a short term adverse move, but became too busy to check developments. Lessons learned: 1. Don’t fight the professionals on volatility. 2. Place “Fantasy” limit orders on VXX, because one could very well get filled a very short lived and favorable price spikes. 3. Never hedge a defined risk trade with a hedge that actually creates net undefined risk. Duh. Duh? Duh! Due to my “Gig” within a gig, my job outlook is very favorable, regardless of typical economic cycles, in spite of being in a cyclical industry. As such, My career will take precedence over trading. Although eventually, I intend to get into commercial lending, and should I ever reach marketable trading performance, portfolio management, using client’s funds from the contacts I will have made with the commercial lending space. Cut your wood once, warm yourself twice. If I ever learn to trade, that is.