Changes in my analytical practice

Note that I've made a few changes in my analytical practice that may be seen in today's analysis, "GILD: Big Pharma bull play".

• I'm using the monthly implied volatility range of the options rather than the six-month range used previously.
• I'm calculating the present implied volatility as a percentile within that range rather than describing it in relative terms. The 33rd percentile is 33% of the monthly range above the low point.

The first change puts greater focus on the near term volatility movements, which is appropriate for my short-term style of trading.

The percentile calculation allows me to make better decision regarding how I structure positions. 

Generally, relatively high implied volatility suggests short options spreads, whether bullish or bearish, and low implied volatility suggests long options spreads.

I define high as being 60% to 100% and low as being 40% to zero. The rest is medium.

Occasionally implied volatility will spike and retreat, creating an outlier. It will be my practice to disgard outliers when calculating the percentile.

Finally, in the "Decision for my account section", I've added a calculation that shows the chance of the trade achieving maximum yield in the case of options, or of attaining any profit, in the case of shares or single options.

This can be done only for optionable stocks and is based on modelling of the options pricing. Its main purpose is to help me decide how to best place a spread on the options grid in order to create a high-probability trade.

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.