A Look At Fourth Quarter, 2020

With fourth quarter earnings reporting already underway, the time has come once again to update our Volatility Kings list of companies that have a regular tendency to experience increasing option implied volatility as their quarterly reporting dates approach.

Since implied volatility of the entire market spiked up in the middle of March last year and has been steadily declining ever since, the usual increasing implied volatility of individual stocks before earnings appears insignificant, making their regular quarterly patterns harder to visualize. 

The degree of uncertainty for upcoming reports may not be comparable to previous quarters. While some companies are on the list one quarter and not the next, others seem to remain on our list quarter after quarter. Focused on earnings, others with high-implied volatility due to takeover speculation, vaccine news, FDA announcements, or other extraordinary events, are excluded, along with those lacking sufficient liquidity due to low option volume described below.

In order to focus on those with the greatest options volume and best liquidity, the weekly option volume requirement is set at those with a weekly average of greater than 35 thousand contracts. The objective is to find those stocks with sufficient options liquidity and therefore reasonable bid/ask spreads to use for various multiple leg strategies, such as Calendar Spreads, Butterflies, Iron Condors, Straddles, and more.  

The selection process begins at our daily listing of top 200 stocks by volume/open interest found in the Rankers and Scanners section of our home page. Individual stocks with options volume less than 35 thousand are excluded along with those with prices less than 10, as when prices are too low there are usually not enough option strike prices or liquidity for attractive option strategies.

This quarter, the selection became more subjective as those on the list meeting the minimum volume criterion expanded significantly due to new IPOs, SPACs, rotation into value along with smaller capitalized stocks, and greatly increased speculative call volume.   

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Disclaimer: IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter ...

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