Ivolatility

[cuegis 683]

How serendipitous.

I just received this email alert from Ivolatility.com.

Aside from being interesting because it is the same trade that we are looking at here, and also follows our pre earnings calendar logic...it is about the route that they took to get to it.

We find our way there because we already have pre earnings names on our radar. Then we evaluate whether they are worth doing, based on RV values, and liquidity, among other things.

But, their scanner tools might be another good tool to have in our toolbox, to be able to view things from another angle.

Maybe some things would turn up that we might have missed.

This is what they said about BABA.....

"Calendar Spreads As historical also called realized volatility declines long calendar spreads become more attractive since there are fewer large moves, although the premiums are also somewhat lower. Following that thought, we fired up our RT Spread Scanner. This scanner saves time by quickly finding spreads using defined inputs for 14 different strategies from straddles and strangles to naked puts and everything in-between.

Among the many possible variables, two are most important. Begin by setting the Strategy to Long Calendar Spread. Then at the Stocks tab set the field labeled "Stock Universe" to "Top 200 Options by Open Interest" or "Top 200 Options by Volume." This insures the results will have sufficient options volume and reasonable bid/ask spreads for multiple leg strategies. Otherwise the results could look attractive but impracticable to implement. Next at the Options Tab set the IV difference > 4. There are many other combinations available, but this one quickly discovered one of our Volatility Kings™ listed in Digest Issue 28 "Volatility Kings 2Q 2018," scheduled to report earnings on August 23. Alibaba Group Holding Ltd. ADR (BABA) 180.01 declined .83 points or -.46% for the week after making a reversal Friday adding 2.82 points or +1.59%. With a current Historical Volatility of 26.05 and 24.17 using the Parkinson's range method, the Implied Volatility Index Mean is 37.19 at .71 of the 52-week range. The implied volatility/historical volatility ratio using the range method is 1.54, so option prices are moderately high relative to the recent movement of the stock. Friday’s option volume was 306,536 contracts with the 30-day average of 310,890 contracts with reasonable bid/ask spreads. The volatility chart shows the rising implied volatility anticipating the earnings report. The price chart below doesn't clearly show Friday's reversal.

 

 

 

Since the price reversal suggests it may continue higher into the report an out-of- the- money call calendar was selected from the several alternatives discovered by the scanner.

Using the ask price for the buy and mid for the sell the call spread debit would be 1.20 with some implied volatility edge.

Since the scanner assumes the ask price for the buy leg and bid for the sell leg the debit would be 1.25; this is the debit used for the Greeks above, and Simulator results below, that are included with the scanner results.

Since this is a short term trade the Time Steps on the horizontal axis were set at 5 days and the price changes set at 5% increments on the Underlying vertical axis. If the assumption that Friday's reversal is correct and the stock advances into the earnings report, the potential results are shown in the last three green rows. However, the implied volatility of the short near term option will likely continue rising until the report date. There is always some risk. As with all long calendar spreads with negative gamma shown above, large moves of the underlying will cause a loss. One measure of this risk is to compare the implied volatility of the at-the-money options to the range historical volatility. Currently the implied volatility of the August 24 at-the-money 180 calls are 44.63 with the range historical volatility of 24.17 for a ratio of 1.85. In the past ratios much over 2.00 have been fairly reliable indicators that the large move risk has increased. Since there is still more time before the report date the implied volatility could increase more and indeed before some previous reports the 30- day IV Index Mean has exceeded 40 as shown in the volatility chart above. Other strategies that could fit the situation include a short out-of-the money put spread with the assumption the near short put could be assigned if the stock declines after reporting however, the loss could be limited using a put spread. Monday’s option prices will be somewhat different due to the time decay over the weekend and any price change. The RT Spread Scanner with 14 possible strategies and numerous possible scan combinations increases profit making opportunities while defining risk. Start improving your win/loss ratio and bottom line using this unique and powerful tool. A two week free trial along with detailed instructions are included. Start no"   Ironically, I just received this alert from CML viz Trade Machine, which is pointing out a backtest that is saying the same thing, about the upward directional bias, in the 7 days period leading up to earnings in BABA... This was the other dimension of iVolatility calendar spread. For me, I will probably just keep this trade "pure" and do it at the money. Maybe do a few at a higher strike because I do respect both of these sources. http://www.cmlviz.com/research.php?number=12262&cml_article_id=20180812_combining-technicals-with-the-one-week-pre-earnings-momentum-in-alibaba-group-holding-limited