Dollar Tree Inc. (DLTR)

Update 5/25/2017: DLTR declined sharply after earnings were published, and I exited a 42.1% of maximum potential profit. In the hour after my exit it rose sharply. Both the decline and the increase remained within the boundaries of my position’s wings.

Shares at exit had declined by 0.1% from when I entered the day before, or a -40% annual rate. The options position produced a +72.6% yield on debit for a +26,496% annual rate.

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DLTR publishes earnings on Thursday before the opening bell.

I shall use the series of monthly options that trade for the last time nine days hence, on June 2.

Implied volatility stands at 34%, which is 3.3 times the VIX, a measure of the volatility of the S&P 500 index.

DLTR’s IV stands in the 58th percentile of its annual range and the 86th percentile of its most recent broad movement.

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NetApp Inc. (NTAP)

Update 5/25/2017: NTAP rose after earnings were published, and I exited at 47.1% of maximum potential profit.

Shares rose by 0.4% over one day, or a +143% annual rate. The options position produced an 89.2% yield on debit for a +32,539% annual rate.

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NTAP publishes earnings on Wednesday after the closing bell.

I shall use the series of monthly options that trade for the last time nine days hence, on June 2.

Implied volatility stands at 36%, which is 3.4 times the VIX, a measure of the volatility of the S&P 500 index.

NTAP’s IV stands in the 53rd percentile of its annual range and the 79th percentile of its most recent broad movement.

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HP Inc. (HPQ)

Update 5/25/2017: HPQ whipsawed after earnings were published, rising and then declining over a 5% range. The price was close to my entry price when I exited, at 44.9% of maximum potential profit.

Shares had risen by 0.8 since I entered the prior day, or a +298% annual rate.The options position produced a +81.5% yield on debit for a +29,762% annual rate.

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HP publishes earnings on Wednesday after the closing bell.

I shall use the series of monthly options that trade for the last time nine days hence, on June 2.

Implied volatility stands at 39%, which is 3.7 times the VIX, a measure of the volatility of the S&P 500 index.

HP’s IV stands in the 91st percentile of its annual range and at the peak of its most recent broad movement.

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Best Buy Co. Inc. (BBY)

Update 5/26/2017: Shares gapped sharply to the upside after earnings were published and I exited for a loss a week before options expiration.

Shares rose by 17.4% over two days, or a +3,176% annual rate. The options position produced a 47.0% loss on debit for a -17,162% annual rate.

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BBY publishes earnings on Thursday before the opening bell.

I shall use the series of monthly options that trade for the last time nine days hence, on June 2.

Implied volatility stands at 45%, which is 4.3 times the VIX, a measure of the volatility of the S&P 500 index.

BBYs IV stands in the 81st percentile of its annual range and the 99th percentile of its most recent broad movement.

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5/24 – 2:50 p.m. New York time

I entered positions in BBY, HPQ, NTAP, DLTR, PVH and MDT. I had expressed doubts last night about whether PVH and MDT would work as trades, but as it turns out, they did. Always my preference, even at the end of an hour and a half of hard trading.

I rejected ANF after a full analysis.

I rejected SIG, without a full analysis, because the $5 interval between strikes causes new much of a loss in granularity, making it difficult if not impossible to set reasonable wings for the iron fly construction.

I placed an exit order on CPB that has not yet been filled. I shall leave it active until the closing bell.

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I sell volatility short. Simple as that.

My job as a trader to to find a stock or fund symbol with high implied volatility on its options, and to sell that volatility at a high price in the hopes of buying it back low price later on.

I do it by selling iron condors — a bull put spread and a bear call spread tied together in a single conceptual structure — usually using the iron fly variant, where the short legs of both spreads have an identical strike price. My profit relies on the premium I receive and on how wide I can reasonably make the wings of each spread.

I often think of it in terms delta, placing the short legs around delta 50 and the long legs around delta 10. (See the table in any of my recent analyses for an example of how I think about it.)

But how high must volatility be before it’s high? And how low is too low?

Important questions without a clear objective answer. Let’s explore some possibilities.

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Lowe’s Companies Inc. (LOW)

Update 5/25/2017: LOW gapped to the downside after earnings were published and then recovered about half of the loss. I exited at 43.9% of maximum potential profit.

Shares showed a net decline of 2.2% over two days, or a -401% annual rate. The options position produced a 78.3% yield on debit for a +14,296% annual rate.

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LOW publishes earnings on Wednesday before the opening bell.

I shall use the series of monthly options that trade for the last time 10 days hence, on June 2.

Implied volatility stands at 27%, which is 2.5 times the VIX, a measure of the volatility of the S&P 500 index.

LOW’s IV stands in the 71st percentile of its annual range and the 77th percentile of its most recent broad movement.

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Advance Auto Parts Inc. (AAP)

Update 6/1/2017: AAP’s earnings announcement after two straight gaps to the downside, and after the announcement gently retraced a small portion of the decline. On the chart, it’s appears traders were following Nathan Rothschild’s time-worn dictum, uttered in 1810 during the Napoleonic Wars: Buy on the sound of cannons, sell on the sound of trumpets. The trumpets in this case allowed me to exit at 28.4% of maximum potential profit.

Shares showed a net decline of 4.4% over nine days, or a -178% annual rate. The options position produced a 39.7% yield on debit for a +1,609% annual rate.

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AAP publishes earnings on Wednesday before the opening bell.

I shall use the series of monthly options that trade for the last time 24 days hence, on June 16.

Implied volatility stands at 37%, which is 3.4 times the VIX, a measure of the volatility of the S&P 500 index.

AAP’s IV stands in the 77th percentile of its annual range and the 96th percentile of its most recent broad movement.

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iShares MSCI Brazil Index (EWZ)

Update 6/2/2017: I have exited the second round of my EWZ, wrapping the series. Here are the results for the series as a whole:

Shares rose by 1.0% over 10 days, or a +38% annual rate. The options position produced a 14.9% yield on debit for a +545% annual rate.

I considered rolling forward for yet another around, but implied volatility as dropped below the 50th percentile of both the annual range and the most recent movement. Even so, IV is 3.5 times the VIX, which is a high level.

If conditions improve, I shall return to EWZ, starting a new series.

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Update 5/26/2017: I exited the May 23 position EWZ for a small profit, a week before the options, and re-established the position with adjusted strike prices and a June 16 expiration. In rolling the position forward, I shall treat the entire series as a single trade for the purpose of calculating results.

In the May 23-26 leg, shares rose by 2.98% over three days, or a +363% annual rate. The options position produced a +2.4% yield on debit for a +293% annual rate.

The new position is structured like this:

Premium:	$2.40	Expire OTM
EWZ-iron fly	Strike	Odds	Delta
Long	40.50	94.1%	7
Break-even	37.90
Short	35.50	50.9	53
Puts
Short	35.50	49.0%	47
Break-even	32.90
Long	30.50	88.8%	9

The premium is 48% of the width of the position’s wings.

The risk/reward ratio is 1.1:1.

The stock at the time of entry was priced at $35.60.

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EWZ has sufficiently high implied volatility to warrant consideration as a volatility play.

I shall use the series of weekly options that trade for the last time 10 days hence, on June 2.

Implied volatility stands at 41%, which is 3.8 times the VIX, a measure of the volatility of the S&P 500 index.

EWZ’s IV stands in the 65th percentile of its annual range and the 64th percentile of its most recent broad movement.

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5/23 – 3;20 p.m. New York time

I have entered new position on AAP, EWZ and LOW.

I have exited no positions. I have an exit order in on CPB that appears unlikely to be filled. I shall keep the order active until the closing bell.

I posted an essay exploring the uses of implied volatility and how to judge its level for the purposes of trade selection, appropriately titled Implied Volatility: High or Low?

5/23 – 10 a.m. New York time

In addition, I shall also be looking at rolling forward with another position on EWZ, the one liquid exchange-trade fund with decently high implied volatility.

5/23 – 9:50 a.m. New York time

I shall be posting an analysis of AZO as an earnings play today. Open interest on LOW’s options remains lower than is compatible with my guidelines. Honestly, as earnings season winds down and trades become scarce, I’m tempted to bend the liquidity rules. Final decision: Still pending.

I have placed an exit order at my target price on CPB that has yet to be filled.

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