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Market Measures

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IV | Opportunity & Velocity

Market Measures

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Tony: Thomas, we're back my friend. Market measures, a little bit active on that break just now. You sold some USO down at 18.60, or up at 18.60. You moved it down just a couple pennies to get it filled.
Tom: Because it wasn't getting filled at 69, so I moved it down to 60. I took %50 off of what we bought yesterday. 30 cents.
Tony: Right on a nice medium sized trade too.
Tom: A chunk of change.
Tony: Very nicely done.
Tom: I just should hit myself and say Tom just scalp those please. Stop being a freaking, you know ... Here we sold some SCP.
Tony: Don't reinvent the wheel right?
Tom: Do not reinvent the wheel. Please Mr. Sosnoff we've seen you try to do that before, that doesn't work. Hang on one second Tony before we get into this. Market measure which is...
Tony: A nice one day scalp on USO.
Tom: Yes. We just sold some nasdaq futures at ...
Tony: Nasdaq futures, 42.31.
Tom: Just bought them back at 27 during the last break.
Tony: Beautiful.
Tom: We sold some S&P futures at ...
Tony: 46.25.
Tom: 46.25. I don't think there's a lot in these today so I think you're going to kind of you know ...
Tony: You're just being nimble.
Tom: Just be nimble. Jack be nimble, Jack be quick. Try to buy them at the 44ish and see what happens.
Tony: What makes you decide ... if like you just said if there's not going to be a lot in there. I'm going to get the e-mails that say later what may Tom think if there's not going to be a lot in there. Especially if you're right. If you're wrong then we'll just say you got it wrong which is easy.
Tom: It doesn't seem like there's a lot ... At this point I'm not sure they're done pushing higher.
Tony: Because you watch the way they bounced.
Tom: I don't like the way they're bouncing so easy.
Tony: If they had continued lower you would say, we've got some nice trading going on here today, we might some two sided action.
Tom: I'm a little more nervous about the S&P's. The nasdaq look like they don't have that much in them.
Tony: Certainly the weaker of the 3, 4.
Tom: I've got some offers in above the market around 33 now. It would prove to be a good little in and out experience. All right, let's do this. I got a great, really good market measure today called opportunity and velocity. Before we get into ... Well let me just take you right through it because its a powerful little piece. On the heels of yesterday which, I loved yesterday’s piece. Which essentially we said that 90 ... Wow, filled those 33's.
Tony: 42.33 on the average, we just sold them back out.
Tom: Where essentially we said that 30 ... 96% of the profits...
Tony: 94%.
Tom: 94% of the profits with the respect of being short premium and you're targeting that 50% of max profit happened in the first half of the cycle. When you're targeting the 50%. That was so cool to me because my instincts would tell me something differently, so I'm extremely happy about that. Let's put it that way.
Tony: What would you have said before that study?
Tom: That wouldn't have been my number. It'd be a very small percent. Extending rallies can limit trading opportunities. Extended rallies can limit trading opportunities due to low implied volatility. Markets go up, volatility contracts. Extended rally, blah blah blah. With markets of.... Certain underlyings can be in play for extended periods of time. All right? Let's see what that means. We decided to take a look at a variety of common underlyings and observe ... By common we mean liquid. Observe the percentage of time spent in periods of high implied volatility. Again, the suggestion here is that you've got to be kind of on your game opportunistically. Just like yesterday afternoon, whatever it is. You've got to be on your opportunistic game to take advantage of what's happening in the market that day. So here's what we did. We looked at spider ... We looked at a bunch of different ... ETF, Spiders, IWM, just kind of a who's who of active stocks, expensive stocks and ETF's. We went all the way back to November of 2008. Which is just in the heart of kind of the meltdown. All the way to the present. We recorded the months with at least 1 day where the implied volatility rank was greater than 50. All right? Very interesting here. Let's see. Here's the ETF's and what we're going to look at is months with at least 1 day ... This is going back a little over 6 years. 6 and a half years. This is months where at least one day where the IV rank was plus 50. So in the S&P's 26 out of 75. 34%, you can see the numbers here. All of a sudden you've got this ... 35, A third of the time in the S&P's. A third of the time in the Q's. 40 some odd percent of the time in IWM. Then gold, TLT, it's pretty consistent.
Tony: Pretty consistent.
Tom: You're talking about a third ... between 30% of the time and 40% of the time.
Tony: A third, right you average that out and it's probably pretty close to a third of the time.
Tom: Just over. Now let's look at opportunity and velocity. The ticker's on the left hand side of the page. Here's different stocks, months with at least 1 day where the IV rank was plus 50. Again you're looking at very similar to the same numbers, except in some of the equities a little bit higher. Google's a little bit lower but everything else a little bit higher. You're probably talking about mid-40's. Essentially we're saying there's at least one opportunity. There's at least one opportunity every month for something to do almost everywhere. Before the fear sets in ... There's always stuff to do is I guess the point here.
Tony: Right, and we've always said that.
Tom: Of all the underlyings, months with at least 1 day where the IV rank exceeded 50. I know that's pushing it on our side a little bit.
Tony: Sure, by saying the one day I'm going to look at it at 50%.
Tom: That's right and everything else. 40% of the time there is at least 1 day with an IV rank over 50 using all the most liquid underlyings. Which means when you spread that out over a number of months ... There's always something to do is our point. The fear was if I limit myself to this I'm not going to end up with enough things to do. I can't create enough occurrences. I can't do this or that. So what we did here is just say hey you know what? There's enough occurrences. 40% of the time, of all underlyings that we looked at which is all of the most liquid underlyings. There is at least 1 day with IV rank over 50, 40% of the time. That means there's always something to do basically. With 75 months in the study we observed only 9 months.
Tony: Just to be fair, that's using a hard stop of 50% also. 48 or 49, you're not counting.
Tom: With 75 months in the study we only only observed 9 months where none of these underlyings had implied volatility rank over 50. I think we got those out of the way the last three years. This means that 88% of these months had at least one of these underlyings in play with high IV rank. The average number of underlyings in play per month was 6 out of 15. All right.
Now you're getting down to some really interesting stuff. 6 out of 15, 40% of the time somethings in play. It sets reasonable expectations for you.
Tony: Sure.
Tom: You see this little rally here? In the S&P's?
Tony: Yeah S&P's up 21 and change.
Tom: I know.
Tony: Nobody would have said this at 3:30 central standard time yesterday. Nobody.
Tom: I said it last night.
Tony: All right, except you. Yes.
Tom: Thank you.
Tony: You have it on tape saying I'm just saying traditional media.
Tom: Not because I thought it was going to be a giant.
Tony: You looked at it as an opportunity. Which is what you should be doing.
Tom: That's right.
Tony: Sure.
Tom: That's right. By the way, just hang on one quick little second because ... If you're looking at CL Tony which is...
Tony: It's actually up 2 dollars and 13 cents now.
Tom: Yes it is. Hang on one second because I have just this one small order.
Tony: USO Trading 18.92.
Tom: Filled.
Tony: Now you've got trading at 18.92.
Tom: Filled.
Tony: So you're out of all of your USO?
Tom: Just the ones I bought yesterday.
Tony: Your scalp. You're out of your scalp. You burned it down at 18.29 and sold it at an average price probably of around ...
Tom: 75
Tony: 18.75.
Tom: Beautiful.
I didn't think that was going to happen that way.
Tony: Nice. On a nice medium sized trade, nice work.
Tom: Average number of these underlyings in play per month, 6 out of 15. You've got 40% of the time and the average is 6 in play. This just puts some ideas around what you're thinking how much opportunities out there. This is over a long period of time. I think since we had 3 years of abnormal downside with very little volatility. I think you're going to see multiple years that numbers going to be much, much higher. So we normalize.
Next we wanted to analyze IV contraction and expansion from a few of these ETFs in order to get a sense of the velocity of IV expansion and contraction. Specifically we look at IV rank and how long it takes to go from below 25 to above 50 and then vice versa. We also look at the number of days IV rank stays in this range. I have not looked at this prior. My guess is that it's not going to take very long for it to go from 25 to 50. But, we're going to spend a lot more days going down than up.
Tony: It's going to be interesting.
Tom: GLD, IWM, and EWZ. Ten years. We observed the number of days it took for IV rank to go from 50 back to 25. Then we observed the number of days it took for IV rank to go from below 25 back to 50. I would say that, let me think about this for a second ... The number of days is going to be aggressive to the downside, but the amount of time it takes has got to be much quicker to the upside. Let's see that.
IV expansion below 25 to above 50. The average number of days, 192. The longest period, 811.
Tony: 196?
Tom: 196. 811. Shortest period, 5 days total time. Percent of the time, 65%. IV expansion from below 25 to above 50. It's a grind. IV contraction above 50 to below 25, it happens 35% of ... Well, obviously it's the inverse. Let's go to the next page I wanted to see where the conclusion is here.
Of the common stocks we trade, 88% of the months presented an opportunity to sell premium with high implied volatility. The majority of the time is spent in low implied volatility.
Tony: 60% of the time.
Tom: 60% of the time, which is why there's more occurrences to go the other way. Then, implied volatility contracts 43% faster than it expands. Implied volatility contracts... The IV contraction above 50 to below that ... That's exactly what it is. It contracts faster.
Tony: It contracts faster. You were trying to put another talk about it a moment ago. You really couldn't say what it takes the shortest period of time. It's 4 days versus 5 days. I think that's basically a tie. The real takeaway from here is the velocity 45% faster when it does go down from 50 to 25.
Tom: Yes. Implied volatility contracts 43% faster than it expands, and that's the whole reason for...
Tony: You're looking at almost 90%. 88% of the time you're going to look to find a trade. Again, this whole piece is about opportunity. We get a lot of emails from people saying, hey I work some of the time when the markets open. You have an opportunity just about 90% of the time to find something with a high implied volatility. Again, you're only taking high implied volatility. There are other trades out there too in low volatility environments that you could be setting up too.
Tom: Sure. I love it. I love it. It's just more good information.
I would've guessed that implied volatility... I mean obviously it contracts faster, I don't want to confuse these things because I think the terms are so similar. Obviously it contracts faster. I didn't realize that number was like ... I couldn't put context around the number. 43%, that's cool.
Tony: Agreed.
Your oil puts are down on a dollar 30ish.
Tom: Really? Because we sold, where are they?
Tony: Average price around a dollar 80 or something.
Tom: Average price a dollar 80.
Tony: They're a buck 30, they just were a buck 30. Oils come off a little bit. Its only up a buck 80 now.
Tom: The 48 puts our buck 39, now puts them at a buck 30. I'm not proud.
Tony: Yeah, yeah no.
Tom: I set up with my first sale yesterday at a buck 30. Not proud. I'd be happy to take 45 cents out of a bunch of those suckers if we could. Okay. Awesome.
Tony: Awesome.
Let's take a quick break, we'll come back. We've got the skinny on options math. We're talking about RSI. You're listening to tastytrade live.

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