Something I noticed about a stocks IV...

J

JJacksET4

Hi guys.

I was setting up a straddle P/L chart (on WFMI) and noticed that the software (OptionsXpress) was defaulting to assuming about a 30 IV (either for expiration or whatever date I set).

I then realized that the IVs of the options themselves were closer to 40, so I looked a bit closer and realized that the OCT options have around 30 IV and the NOV, FEB, and other listed options are closer to 40 IVs. I looked at the IV Charts that OX has and it shows the IV around 30. So then I checked earnings and see that they are set for early November. OK, so in a way it all makes sense, right - OCT IV is low because they don't encompass the next earnings - NOV and later do, so they have a higher IV - no problem.

My issue I guess is that there seems to be too much weighing to the short term options then and really a person could get confused - for example a beginner might think that once OCT expiration passed - NOV options will likely fall to a 30 IV - this is incorrect of course - assuming other things remain constant (i.e. market IV, etc.) the NOV and later will still retain the higher IVs because earnings will still be coming up to the actual early NOV date that they come - this will make the IV chart appear to surge most likely when OCT options expire.

I understand what is going on of course, but the way it is viewed it could look like options IV is surging as earnings is approaching, but it might really just be that OCT options went away! Most likely all else remaining constant, the NOV options could retain a similar IV to what they have now, but the overall stock IV would now appear to be much higher as all option series now encompass the next earnings report. I understand the later options have higher IVs for the earnings, but that doesn't seem reflected at all in the overall IV chart.

There is nothing here I'm sure that alot of people don't already know, but I was just surprised - I was making straddles with nearly 40 IV purchase, but it was assuming a 30 IV by default (even after OCT, but before earnings - of course it doesn't know when earnings are) for the P/L chart. The fact the OCTs even exist hurts the apparent IV of the stock (WFMI). I wonder if the front month is weighed too heavily in these calcs.

I have attached some pictures to this and/or the reply posts.
wfmi_oct - shows around 30 IVs for ATM options
wfmi_nov - shows around 40 IVs for ATM options
wfmi_feb - shows around 40 IVs for ATM options
wfmi_vol - shows WFMI IV as being around 30. If you are interested, view this chart again after Oct 15th - it will likely show a fairly large IV gain (again assuming other things remain constant).

Any comments welcome (please be civil lol)

Thanks,

JJacksET4
 

Attachments

Basically, there won't be a surge in IV once Oct options expire as Optionsxpress is probably calculating the IV index for a stock in a similar way to VIX. So it is a sort of a rolling 30 day IV, which means that as we get closer to Oct expiry the weight of the Nov options in the IV index calculation would gradually increase and thus it would be a smooth transition from 30 to 40 or whatever level.

Personally, I don't put too much weight on the stock IV precisely because of these things. It is just an index, so if you want a full picture look at the option chains.
 
Quote from JJacksET4:

My issue I guess is that there seems to be too much weighing to the short term options then and really a person could get confused - for example a beginner might think that once OCT expiration passed - NOV options will likely fall to a 30 IV - this is incorrect of course - assuming other things remain constant (i.e. market IV, etc.) the NOV and later will still retain the higher IVs because earnings will still be coming up to the actual early NOV date that they come - this will make the IV chart appear to surge most likely when OCT options expire.
More...
Is OX weighting the IV or just defaulting to the near month? If one took a position in Nov (40 IV) would the software use an IV of 30? A call to OX might resolve that quickly :)

As you know, front month that includes earnings date will probably surge in IV as EA approaches. So it's really a moving target and one needs software where base IV can be varied.

Ughhh, options are so complicated! :)
 
Quote from MTE:

Basically, there won't be a surge in IV once Oct options expire as Optionsxpress is probably calculating the IV index for a stock in a similar way to VIX. So it is a sort of a rolling 30 day IV, which means that as we get closer to Oct expiry the weight of the Nov options in the IV index calculation would gradually increase and thus it would be a smooth transition from 30 to 40 or whatever level.

Personally, I don't put too much weight on the stock IV precisely because of these things. It is just an index, so if you want a full picture look at the option chains.
More...

Ok, I see what you are saying. It might still kind of appear as a surge over time I think then though as the Octs get closer to expiry - just that it won't all be on the next day after expiration. Thanks for the explaination though if that is how OX is doing it.

I certainly try to remember to look at each IV in the chains as well, but of course sometimes I am searching for stocks within an IV range or whatever.

JJacksET4
 
Quote from spindr0:

Is OX weighting the IV or just defaulting to the near month? If one took a position in Nov (40 IV) would the software use an IV of 30? A call to OX might resolve that quickly :)

As you know, front month that includes earnings date will probably surge in IV as EA approaches. So it's really a moving target and one needs software where base IV can be varied.

Ughhh, options are so complicated! :)
More...

I'm not sure how OX is doing it, but MTE is probably correct. I don't think they are just defaulting to the near month, but they do seem to give it plenty of weight. Yes, I was putting the position in as Novs, but the program for P/L was defaulting to about 30 for the IV (you are able to change that however). I guess it's OK as long as a person is expecting it.

Just as an extra note, ivolatility.com also showed around 30 and they say they used a weighted IV (it shows over 30 now after one more day of data). Also, the IV list from Larry McMillians' site shows around 30 as well (that is week end of last week, but still shows that the stock was considered like a 30 IV stock).

JJacksET4
 
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