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 bid-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 ETF 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 team will be sharing the current implied volatility of the S&P 500 (SPX) and that of the eligible ETF 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 call options for that underlying security. Let’s have a look at a hypothetical page 7 of our 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: www.iVolatility.com
• 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

Summary

Based on member feedback, the BCI team 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 call options 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 team 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 inflation 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%

Summary:

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])

www.thebluecollarinvestor.com