Wednesday, March 18, 2015

Expanding the volatility strategy

The most lucrative strategy I've used to date is the iron condor structure under my volatility rules, which are timed to coincide with earnings announcements.

It involves opening an iron condor on the last trading day before earnings, with as short a time until expiration that will provide a reasonably high premium. I adhere to my normal preference for narrow bid/ask spread and high open interest on options that applies to all trades, whatever the strategy.

I almost always structure the positions as iron condors, which provide higher premiums than do directional vertical spreads, and also a more variable risk/reward ratio.

The strategy involves two assumptions about implied volatility:
  • When the position is opened, it must be in the 60th percentile of the most recent rise.
  • Implied volatility will collapse after the earnings announcement.
Are those assumptions valid? At this point I can't say. The trades have been wildly profitable, but I don't know what impact changing those two variables would have on results.

It's an important question. Earnings are seasonal, which means my potential trades dry up in the off-seasons, such as the period we're in now. It would be useful to have a lucrative trading strategy for those lazy crazy days between the quarterly earnings rushes.

When in doubt, turn to paper trades. I'll use this method:
  • There is no percentile requirement for implied volatility. High or low is OK.
  • The positions will be structured as short iron condors skewed in the direction of the breakout, essentially treating the bull or bear signal as an "event" similar to an event, much like an earnings announcement..
  • The options inventory must allow for a trade that will expire in 10 days or less.
  • I shall experiment on the highest-volume symbol that makes it past my screens for the price channel strategy, as reported in my daily "Prospects" and "Finalists" posts.
  • The selected symbol must also meet the 10-day maximum duration for the trade.
My postings will have the words "Paper Trade:" in the headline, followed by the symbol. Unlike my normal analyses, these won't have charts included.

-- Tim Bovee, Portland, Oregon, March 18, 2015


My price channel trading rules can be read here. My long-term share trading rules can be read here.  My volatility trading rules can be read here. The channel rules are based on the classic Turtle Trading rules, which can be read here.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.


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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.

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Based on a work at s ss'ss

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