Sunday, August 20th 2023
Find Stocks With Undervalued Implied Volatility
Use the Low IV30d scan in the ORATS stock scanner to identify stocks with undervalued implied volatility.
This post introduces the Low IV30d stock scan, designed to identify stocks with undervalued implied volatility. The scan uses ex-earnings IV to normalize comparisons to historical data and ETFs, and filters stocks based on their IV ratios and sector comparisons. Long straddles and strangles are good strategies for trading undervalued volatility.
Scanning for stocks is a critical component in any trader’s toolkit. Since volatility is such a primary driver of options prices, scanning for stocks with meaningful changes to their implied volatility can help options traders make informed decisions on which stocks to trade. In this post, we’ll look at the Low IV30d scan, designed to identify stocks where the implied volatility (IV) is undervalued. You can check out the scan here: https://dashboard.orats.com/stock-scanner/scanner?id=2251799813685402.
Identifying undervalued stocks
Sometimes, the implied volatility of a stock gets undervalued usually because of supply and demand imbalances in the options. We look at the ratio of the ex-earnings 30-day implied volatility versus its 5-day, 20-day, and 50-day average to identify these times. We also look at how the implied volatility of each stock compares to other stocks in its same sector. The filtered stocks would be candidates for long straddles or strangles.
Why is ex-earnings implied volatility important?
We use ex-earnings implied volatility in this stock scan because it provides a normalized comparison to historical data as well as to the stock’s best ETF. Earnings effects are seen when a stock is approaching it’s earnings date, and the implied volatility steadily rises until the moment earnings are reported, at which point it falls immediately back to normal levels. ORATS’ ex-earnings indicators are a reflection of the true implied volatility of the stock without any of the earnings effects.
How to trade undervalued volatility
Once you’ve run the scan and identified trades with undervalued implied volatility, you can hop over to the option scanner and import the stock scan in the “Add symbols” section. This will take the top 25 symbols and scan for options that meet your criteria. Long straddles and strangles are good strategies to take advantage of undervalued volatility, because you’re expecting volatility to increase back to its normal levels. Any strategy with a positive Vega goes well with this stock scan.
Here is a list of all the indicators used in this stock scan:
- iv30d / orHv90d is <0.9: 30 calendar day interpolated implied volatility / 90-day historical intraday volatility.
- iv30d ratio to Best ETF_C is <1.68: The Best ETF_C is the component ETF that tracks a weighted average of the components of the symbol’s closest SPDR sector ETF.
- orFcst20d / exErnIv30d is >1: The orFcst20d tracks the ORATS forecast of stock volatility for the next 20 days based on data with earnings taken out. Forecasts are developed using a combination of ex-earnings implied volatility, historical volatility patterns, and relationships to the volatility of the best ETF_C.
- stockPrice is >5
- confidence is >40: The total weighted confidence from the monthly implied volatilities derived from each month’s number of options and bid ask width of the options markets. A higher confidence indicates that ORATS is more confident in its forecast of volatility.
- iv30d is >5
- ivPct1m is <66: A measure of implied volatility vs its past 1 month values. If IV percentile is 66% – It means that current IV value is higher than 66% of previous 1 month values (and lower than 34% of them).
- ivPct1y is <66: A measure of implied volatility vs its past 1 year values. If IV percentile is 66% – It means that current IV value is higher than 66% of previous 1 year values (and lower than 34% of them).
- etfIvHvXernRatio is <1: orIvXern / orHvXern20d ratio divided by the ETF 30day implied / orHv20d ratio.
- exErnIv30d_ratioTo5dAvg is <1: exErnIv30d is the implied 30 calendar day interpolated implied volatility with earnings effect out. This indicator compares it to its 5-day moving average.
- exErnIv30d_ratioTo20dAvg is <1
- exErnIv30d_ratioTo50dAvg is <1
- avgOptVolu20d is >500: The average option volume for all strikes over the last 20 days.
- tkOver is 0: This filters out all takeovers or rumored takeovers.
Use the Trade Builder to visualize the options chain on a graph and interactively build single or multi-leg trades.
Learn about the three ways you can analyze volatility in the Trade Builder.