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Implied Volatility And Our Premium Exchange-Traded Funds (ETF) Report

Our study of option trading basics and stock option strategies involves an analysis of implied volatility. This is the market’s forecast of the underlying security’s volatility as implied by the option’s price in the market place. Frequently, the mid-point of the -ask spread, called the mark, is used. In this article, I am highlighting a new feature we have added to our Premium ETF (exchange-traded funds) Report involving implied volatility stats.

Reason for adding this additional information

Based on member feedback, which is so important to us, it has come to our attention that some members have made the assumption that the ETFs in our reports are all low-risk securities with low implied volatility (IV). This conclusion was based on the fact that BCI is a low-risk approach to covered call writing and investing in general and furthermore ETFs are for those who are even more conservative in nature. A point well-taken. Our screening process involves selecting securities that are out-performing the S&P 500 over the past 3 months, have a relative strength rating (price performance compared to overall market) above 60, have adequate trading volume and option liquidity in the form of open interest (OI) over 100 contracts for near-the-money strikes. Although most of the ETFs presented in our reports are of low implied volatility, some are not. As we have done throughout the years, when we can enhance the products we provide to our members we take action.

 Information provided on page 7 of the report

Our BCI will be sharing the current implied volatility of the S&P 500 (SPX) and that of the eligible candidates. This will allow our members to compare the expected movement of a particular security to that of the overall market. We are using the average IV for the for that underlying security. Let’s have a look at a hypothetical page 7 of our Premium Report:

Covered call writing and The Blue Cololar Investor Premium ETF Report

Exchange-traded funds and implied volatility

Features of the report:

  • The current IV of SPX is 14.23
  • ETFs like XBI and UNG have IVs triple and quadruple that of SPX
  • ETFs like TIP and TLT had IVs 1/2 to 1/3 that of SPX
  • ETFs like DIA have similar IVs to that of SPX
  • The resource we use is:
  • High IV ETFs are expected to be riskier securities with higher call premiums
  • Low IV ETFs are expected to be safer securities with lower call premiums
  • Selections can be made based on personal risk-tolerance and overall market assessment


Based on member feedback, the BCI has added another feature to our premium ETF Report. Page 7 of the reports will now show the current implied volatility based on the average of for all eligible ETFs and a comparison stat with that of the S&P 500 (SPX). This will allow our members to select the appropriate securities for their personal risk tolerance and overall market assessment.


Next live seminars:

We are currently in Orlando at The World Money Show and looking forward to our next live seminar @ The New York Stock Traders Expo at the Marriott Marquis Hotel in New York City. I will be making 2 presentations at this event:

  • Monday February 17th 1:30 – 2:30 (Trading Masters Symposium)
  • Tuesday, February 18th 10:30 – 11:15 (free seminar)


My and I will also be taking a booth at this event (first time…suggested by many of our members) so we can have an opportunity to meet and speak to as many BCIers as possible. Look for booth 5410 in the middle of the 5th floor.

Market tone:

Despite the market volatility this week and a down start to the new year, the Fed unanimously voted to continue to decrease its bond-buying program. Here are this week’s mixed economic reports:

  • The Fed announced that it would decrease its bond-buying purchases to $65 billion in February, down from the $75 billion in January and the $85 billion from October, 2012. The Fed stated the economy was strong enough to tolerate this reduction
  • The Fed also voted to keep short-term interest rates near zero “well past” the unemployment rate dipping below 6.5% as long as remains below 2%
  • Sales on new single-family homes dropped by 7% in December due to rising interest rates, but still 4.5% higher than December, 2012
  • The Conference Board’s index of consumer confidence rose to 80.7 in January above the 78.1 expected. This was the second straight monthly increase and the highest reading since August, 2013
  • 4th quarter GDP came in at an annualized 3.2%. Consumer spending and foreign trade were the main reasons for the growth
  • Durable goods orders decreased by 4.3% in December, the second decline in 3 months
  • Personal income was flat in December but spending rose o.4%
  • The savings rate dropped to 3.9% in December but still higher than pre-recession levels

For the week, the S&P 500 fell by 0.4%


IBD: Market in correction

BCI: Cautiously bullish selling an equal number of in-the-money and out-of-the-money strikes

To a much better February than January,

Alan ([email protected])


About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

6 Responses to “Implied Volatility And Our Premium Exchange-Traded Funds (ETF) Report”

  1. Alan Ellman February 1, 2014 8:23 am

    My World Money Show seminar:

    Thanks to our BCI members for attending my presentation last night (Tom, thanks for taking the pictures). It was my pleasure meeting you in person. Hope to meet many more of you in NY in February.


    • Richard Bishop February 2, 2014 6:52 pm

      I appreciate your thoughts on IV but if you follow TOS as a trading platform or you would find that the IV percentile is one of the most important things to know about trading options. TOS has the IV percentile readily available and there is a way through Tastytrade to put that number on your charts. Tastytrade has done studies showing the importance of trading only high IV percentile stocks and ETFs.
      Thanks for your weekly videos and discussions. (You and I met in Milwaukee in 2013 at the AAII meeting and you had lunch at our table).

      • Alan Ellman February 2, 2014 9:00 pm

        Hi Richard,

        Good t hear from you and I hope to see you later this year when i return to Milwaukee for 2 presentations. There are many ways to trade options in general and the same holds true for covered
        call writing, a strategy most appealing to conservsative investors. My motivation for including this information in our ETF reports was because a few of our members prefer low IV securities. Others prefer high IV securities. One size does not fit all. I’m happy to provde the information and each investor can make a decision based on his overall market assessment and personal risk tolerance.


  2. Steve Z February 2, 2014 12:21 pm

    Alan, sounds like a good addition to the reports.

    Per your article, there may be an additional point to be made regarding IV. For an ETF (or an individual stock), its normal IV can be high or low relative to other ETFs as you’ve pointed out. However, it can also be high or low relative to its own normal range.

    Because IV may be more “mean reverting” than price, knowing where an ETF’s IV is relative to its normal range is probably as actionable and maybe even more actionable than knowing where it is relative to other ETFs. Food for thought.


    • Alan Ellman February 4, 2014 7:07 pm


      Thanks for weighing in on this…a point worth considering.


  3. Barry B February 2, 2014 6:18 pm

    Premium Members:

    This week’s Weekly Stock Screen And Watch List has been revised and uploaded to The Blue Collar Investor premium member site and is available in the “Reports” section. The ETF entries on page 1 have been corrected. Look for the report dated 01-31-14-REVA.


    Barry and the BCI Team