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Help for Free Stock Option Rankings |
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The Optionetics Platinum section of the
platinum.optionetics.com web site allows users to view many different rankings of
stock options. There are free option rankings on the Optionetics Platinum
login page and user configurable option rankings on the pay site for
Optionetics Platinum subscribers. Subscriber stock option rankings can be placed
in online ranking lists that are accessible anytime the user is logged into
the Optionetics Platinum site. Nine ranking lists are available for subscriber usage.
Each evening, the Optionetics Platinum site constructs free option rankings once the end-of-day option
data is available online. Four of the precomputed option rankings are based on implied volatility. Two are
based on statistical (historical) volatility :
1. Expensive and Cheap are based on a percentile bin IV ranking.
2. Breakout Hi and Low are based on a Bollinger IV ranking.
3. Explosive is based on the highest 6 day SV ( Statistical Volatility) / 100 day SV ranking.
4. Quiet is based on the lowest 6 day SV / 100 day SV ranking.
The rankings initially screen all stocks using these criteria:
- The close stock price must be greater than 12.5.
- There must be enough IV data to support the rank
request. These 6 month free rankings will not
include stocks that only have 5 months of IV data.
In this discussion, we will explain how these rankings are obtained and
how they might be used.
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At-The-Money Implied Volatility (IV)
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Implied Volatility (IV) is the amount by which
the stock is expected to fluctuate over a 1-year period and is expressed as a
percentage. IV is computed directly from the option price, days to
expiration, strike price and current stock closing price using the
Bjerksund Stensland American option model equation. Each stock has different series of options with
different expiration months and different strike prices. Each expiration
month, strike price, put and call all cause each associated option to have a
different IV. The skew charts, viewable in Create An Option Table, show all
the different IVs in a graphical format.
The Optionetics Platinum site assigns a single overall IV
number to a stock, so that stocks can be compared against each other for
ranking purposes. The Optionetics Platinum site allows subscribers to pick different
methods for computing a stock's overall IV assignment. The different methods
are selectable in Create A Rank List. The free site rankings use only
one method for overall IV assignment.
The overall stock IV assignment methods can be
can be found at the bottom left of the Create A Rank List web page on the Optionetics Platinum
site. They are
7-149 days
7-30 days
31-60 days
61-90 days
>90 days
short term
long term
The free Optionetics Platinum Login rankings only
use the 7-149 day IV assignment method.
7-149 days means to find all stock options series that expire between 7 and 150 calendar days
and use them to compute the stock's overall IV.
The site computes a 2nd order polynomial weighted least
squares "skew" fit to both calls and puts of the same expiration
and then takes the bias term of the polynomial curve fit as the
IV value. The weights emphasize at the money strikes
to make the curve fit best around the money.
The bias term is where the first derivative of the polynomial is zero,
ie, the minimum of the "smile" skew curve fit. This IV is usually very close
to, but not exactly equal, where the stock close price intersects the skew curve fit.
Throughout the site the stocks's overall IV is labled as the ATM IV.
For example, if the stock closes at 72 5/16 and we have strikes at 65 70 75 80 85, we
form a curve fit to all the option IVs (puts and calls) around the strikes near the
close. The curve fit has as inputs the strikes and has as outputs the IVs.
We then find the constant of the curve fit and that is output as the ATM IV for the stock
for that series.
If there is more than one series, the different ATM IVs of each series are
equally weighted together to find the mean value.
Below are two examples of skew charts
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Figure 1 NASDAQ AUG00 Call and Put Skew Chart
Figure 2 Microsoft OCT00 Call and Put Skew Chart
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The top skew chart is the 7/21/00 AUG00 NASDAQ skew chart available free
on the Optionetics Platinum Futures site http://platinum.optionetics.com/oafutures.html.
The Optionetics Platinum site forms a quadratic fit to the futures data and the chart
shows that an excellent fit is possible.
The NASDAQ close was at 3939. The minimum IV is 62.1% for the call
and 38.4% for the put.
The second skew chart is the
7/21/00 OCT00 Microsoft skew chart.
The Optionetics Platinum site fits stock option IV
data with a quadratic fit.
The minimum values are 39.6% for the call and 37.5% for the put.
The Bjerksund Stensland American "model" of the option is
used for the quadratic fit for the stock option data.
Returning to the 7-149 days IV, we take all the options series ATM IVs
(from the skew fits) expiring between 7 and 150 days and average them together to form
the stock's overall IV number. Similarly, the 7-30 day overall IV
number averages the minimum IVs that expire between
7 and 30 days. The overall IV
number is computed similarly for the other
IV methods except for short term and long term.
Short Term means that if there
are no 7-30 day options, then use the 31-60 day number to find the IV.
If there are no 31-60 day options
then use the 61-90 day number. Likewise, Long Term means to start at
the "greater than 90 day" options to find the IV
and work backwards if there are no such options.
"Short-term" and "Long-term" are
always guaranteed to have a useable IV number.
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Statistical Volatility (SV)
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Statistical volatility is a historical indication of the amount
of stock price difference variation that has occurred in the past.
You can simply look back at past stock price
values and see the variation in price as a function of time.
The Optionetics Platinum stock options site has several rankings based on the statistical volatility (SV.) The free rankers show the Explosive and Quiet rankings.
The Explosive ranking is found by computing the 6 day statistical (historical)
volatility (SV) and the 100 day SV, dividing these two numbers then
ranking the stocks by the highest value. SV is a measure of the up and
down motion variation of the actual stock price that has occurred in the recent past.
The Explosive ranking pinpoints stocks that were quiet but have recently
"exploded" in stock price changes. These changes can be up or down or sideways.
These stocks are candidates for straddles, calls and puts.
The top six stocks in the Optionetics Platinum Explosive
ranking for 4/10/02 are shown below.
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Figure 3 Optionetics Platinum Explosive SV Ranking for 4/10/02
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The value under 6 Day SV is the volatility of the stock price over the
last 6 days. The value under 100 Day SV is the usual value for the stocks
past volatility. The ranking formed by dividing these two numbers
shows stocks that are making major stock price moves now.
The Quiet ranking finds the top stocks where the 6 day SV / 100 day SV
have the smallest values over all stocks ranked. These stocks are candidates
for sideways trades like Calendar Spreads and Butterflies.
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Expensive and Cheap Ranker
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The Expensive and Cheap ranking of IVs are not the highest
high IV or the lowest low IV. A high IV simply means the option is very
expensive. The Expensive and Cheap IV ranking uses a historical perspective to rank IVs.
A time frame in the past is chosen. The stock and futures Optionetics Platinum sites use
the last 12 months. In Platinum > Create A Rank List, the lower left allows Optionetics Platinum
subscribers choices of
6 months (default in Create A Rank List)
1 year and
1.5 years.
The highest high and lowest low ATM IV is found over the time frame of
interest.
The Expensive and Cheap Rankers have the IVs between
the highest high and lowest low IVs broken up into 20 equally numbered
categories. If there are 100 day's of ATM IVs in the time period of interest
then each category has 100/20= 5 entries. The five highest IV's are placed in
category 20. The next 5 highest IVs are placed in category 19 and so on. A
category assignment from 1 to 20 of today's ATM IV is ranked against other
stock's ATM IV category numbers to form the percentile ranking. If a group of
stocks are tied, with the same category number, then the tie is broken using
the stock's total option volume. Stocks with high option volume are placed
ahead of stocks with low option volume.
This bin ranking approach is insensistive to bad data points that
can skew rankings.
The top six stocks in the free Optionetics Platinum Expensive ranking for 7/21/00 are shown below.
Figure 4 Optionetics Platinum Expensive IV Ranking for 7/21/00
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In this case Intermedia
Communications, In (ICIX) is ranked highest even though ICIX's current ATM IV
(110%) is not close to ICIX's highest IV over the last one year (133%). LXK,
the High/Low ranker winner, is at number 13 in the percentile ranker. What happened
is that the ATM IV for ICIX and LXK both fell within the 20th category and
ICIX is ranker higher in total option volume than LXK. ICIX is an example of
how one very high IV does not have as much of an effect on what
"historical high" means using categories for IV rankings.
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Ranker: Bollinger - Breakout Hi and Low
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Bollinger Band rankings are based on a computational approach described by John Bollinger. The use of Bollinger bands in this search is NOT based on Stock Bollinger Bands , which widens if the stocks have lots of movement up and down and tightens if the stock price is flat, moving sideways.
The Bollinger Band search that is used here is based on implied volatility (IV). ATM IV Bollinger Bands, which is what we have on Platinum, get wide if the ATM IV of the stock's options have lots of movement up and down. If the ATM IV is flat and moving sideways then the options IVs are stable and not having IV fluctuations and the IV Bollinger Bands widths are small.
Hence the stock price can be moving all over the place but if the option's prices are keeping the AMT IV the same then the ATM IV BB widths are small. And vice versa. The ATM IV can be very high historically but if it is high and stable in time then its ATM IV BB width can be small. However, usually the opposite is true. The ATM IV BB widths grow large as the ATM IV goes to new heights and moves from the mean which the ATM IV often does quickly.
The ATM IV Bollinger Band is created by computing today's xx day moving average of the ATM IV (the mean), computing today's xx day standard deviation of the ATM IV (the 1 standard deviation), then determining the IV Bollinger band value + 2 standard deviations above the mean and -2 standard deviations below the mean. You select the days value of xx on the web page. The IV in the Bollinger Band ranker is using the 7-149 day expiration period only and is not affected by your expiration selection.
During periods of high implied volatility movement the bands expand, and during periods of low implied volatility movement the bands shrink. Bollinger Bands are more often used with stock prices instead of with option ATM IVs, and the standard deviations (SD) are stock price SD and not ATM IV SD.
As with the normal use of Bollinger Band, when a stock price crosses a Bollinger Band, the crossing is an indication the stock price may be breaking out in that direction. Within the use offered here in Platinum, an implied volatility that is near the high Bollinger band is breaking out from a period of relative low volatility to one of higher volatility. This breakout is an indication that these options may represent future selling opportunities as there is renewed interest in these options. An implied volatility that is near the low Bollinger band and is breaking out from a period of relative high volatility to one of lower volatility is an indication these options may represent future buying opportunities.
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Figure 5 Optionetics Platinum Bollinger IV Ranking for 7/21/00
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The values under "High" are today' s 20 day 2 standard deviation value above the
20 day mean. The values under "Low" are today's 20 day 2 standard deviation value below the
20 day mean. The "Current" value column is today's ATM IV. The highest Bollinger Ranked stock
(CERUS Corp.) has the most IV breakout from the 20 day standard deviation value and represents
options with potential buying opportunities.
The Bollinger web page
column marked "Current" is today's ATM IV value. The Bollinger web
page column marked "Chg" is the percent change in today's ATM IV
value versus the prior trading day's ATM IV value. Optionetics Platinum subscribers can change
the 20 days default value to any length of days desired in the Create A Rank
List pay site web page for Bollinger Band rankings. The choice of option
expiration method also affects the "Current" IV value and subsequently the
Bollinger Band ranking.
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Stock option rankings
can be used to decide how to trade an option. The basic strategy is to be a
net seller of historically high IV stock options (ex: covered calls) and a
net buyer of historically low IV stock options (ex; buy straddles). The
reason is because IV has a strong tendency to return to the mean. The graph
below is the 2-year ATM IV plot of MSFT (Microsoft Corp.).
Figure 6 Microsoft Two Year ATM IV Chart
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The mean IV appears to be near 40%. Between
February and April of 2000, MSFT IV had climbed to above 55% but has since
reverted back to the mean. During the April 2000 period, the Expensive
ranker rated MSFT as having a historical high ranking. The Explosive ranker,
however, did not rank MSFT as having a historical high IV because the April
IVs did not come close to the two high IV spikes in late June of 99 The above
MSFT chart shows why we consider the Expensive/Percentile ranker to be a better
indication of historically high IV.
The Optionetics Platinum pay site allows a user to save stock
rankings found in Create A Rank List and use these saved rankings in Create A
Search. A user can choose a trading strategy in the Create A Search strategy
matrix that matches the ranking criteria (such as high historical IV) and
search for potentially profitable trades that take advantage of the IV
conditions. For more information about Create A Rank List and Create A
Search, click Online Help Manual on the Optionetics Platinum Login page and go to
Chapter 4.
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Call Top % Inc finds the option call prices that had the
largest 1 day increase and ranks the options according to the percent increase.
Call Bot % Dec finds the option call prices that had the
largest 1 day decrease and ranks the options according to the percent decrease.
Put Top % Inc finds the option put prices that had the
largest 1 day increase and ranks the options according to the percent increase.
Put Bot % Dec finds the option put prices that had the
largest 1 day decrease and ranks the options according to the percent decrease.
Highest Volume finds the options that had the largest
1 day total trading volume and ranks the options according to the volume.
Highest Open finds the options that had the largest
1 day total Open Interest and ranks the options according to the Option Interest.
In the above rankings, if you click on a stock or option symbol shown,
you will be taken to the option trade or trade finder for that stock or option.
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- Stock options trading has large potential rewards, but also large
potential risk. You must be aware of the risks and be willing to accept
them in order to invest in the stock options markets. Do not trade
with money you cannot afford to lose. This is neither an offer to buy/sell
or recommend a particular stock option.
- Hypothetical or simulated performance results have certain inherent
limitations. Unlike an actual performance record, simulated results do not
represent actual trading. Also, since the trades have not been actually
executed, the results may have under or over compensated for the impact, if
any, of certain market factors, such as lack of liquidity. Simulated
trading programs in general are also subject to the fact that they are
designed with hindsight. No representation is being made that any
account will or is likely to achieve profits or losses similar to those
shown.
- Optionsanalysis Inc. and Optionetics, Inc., including
employees, consultants and editors ("Publisher") cannot and do not warrant the
accuracy, completeness, or fitness for purpose of the information,
stock symbols, option symbols, stock data and option data contained in this Publication.
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