Live: Monday, March 27, 2017


3/27  3:40 p.m. New York time

No exits today. The only trades were the two new positions: KRE and XRT.

3/27 – 1:55 p.m. New York time

I have entered positions on KRE and XRT.

3/27 – 10:15 a.m. New York time

My screening last night of potential trades unrelated to earnings announcements turned up two stocks — YY and ARRS — and two exchange-traded funds — KRE and XRT.

The screening criteria were share price of $20 or above, average volume of 1 million shares per day or higher, and implied volatility in the 40th percentile of the annual range or higher, and no earnings announcement prior to the options expiration on May 19. These are all numbers available through my broker’s systems and so can be easily used for screening.

YY is 3.3 times the VIX, and ARRS, 2.6 times, which are sufficiently high levels to interest me in a trade. However, each is flawed. YY has quite a wide bid/ask spread on its at the money options, and ARRS has low open interest on most of its out-of-the-money strike prices, limiting the strikes I can use to build a trade.

The ETFs have lower implied utility, as is usually the case, but each is sufficiently above the VIX to be worth a closer look, KRE at double the VIX and XRT at 1.6 times the VIX.

I shall analyze both today and possibly enter trades.

3/25 – 9:10 p.m. New York time

I prefer to tie my trades to earnings announcements, sometimes called “binary events”, based on the perception that for shares, the outcome will be good if the price rises or bad if it falls.

My preferred options trading methods allow for more nuanced outcomes that profit if the price falls, rises or stays unchanged, as long as the changes remain within defined boundaries, so the model is more analog than binary

Trades not tied to so-called binary events are also analog using my methods. The difference between the two is solely the level of implied volatility. It rises before earnings are announced and falls afterward.

Since I usually sell options and then buy them back later, that characteristic allows me to sell high and buy low because high volatility increases the premium I receive. It’s an advantage.But I can trade the same way without an earnings announcement and still earn money.

What does this mean in practical terms? My liquidity screens remain the same: I require average volume of 1 million shares a day or higher and open interest of 100 or more for the strike prices I use for my trade.

The difference comes with the implied volatility level. In today’s environment, non-earnings stocks or an exchange-traded funds are unlikely to achieve my required minimum of the 50th percentile or higher of either the one-year range or the most recent broad movement.

The alternative is use the VIX, the implied volatility of the S&P 500, as my standard and look for symbols with IV that is above the VIX. By how much? I don’t know yet. As I search for trades in this post-earnings-season period, I’ll gain better insight into what levels are higher and which might work.

I have no earnings announcements to consider on Monday, and indeed none during the week. All were eliminated because they failed to meet my liquidity standards.

I shall spend the week searching out trades with implied volatility higher than the VIX, along with my usual management of existing positions.

By Tim Bovee, March 25-27, 2017