Intrinsic Value Of An Option – How To Trade Options Video 35 part 4



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I’m going to hit Search. It comes up with a fairly decent list of stocks, here. Basically, I just stock it by EPS, so that the stocks that have the best earnings of the bunch are at the top of the list. I just start to go through them. The volatilities are in the low-30s and mid-20s. Then, I take a look and see which ones may be potentially good candidates.

You can also sort these by volume. Obviously, the QQQs, we’ve gone through. Microsoft, Intel, I don’t know. I like to search by EPS. It gives me some of the sleepers out there, like McDonald’s, MCD. All you have to do is bring up your Gamma trading worksheet, and start to enter the information in there, and see if you have any potential candidates.

As you can see, I’ve added a few since I last did an update here. There are a couple of potential candidates in here. Adobe may be a candidate. It’s in the middle of its range for historical volatility, though. There are a couple of others here that I’ve been looking at.

If you don’t want to just go by your own list, or newspaper lists, or something like that, then using the Stock Hacker tab in Think or Swim will help you determine the best stocks. At least you can start doing analysis on those, and start listing them in your analysis spreadsheet.
Anyway, just a quick update for you. Hope that helps.

I want to bring to your attention some of the finer points of Gamma Scalping, and the reason why we go after low-volatility stocks, and stocks that are low-volatility, but have a high range. I’ve done a number of analyses on different stocks, as we continue to go down.

However, take a look at the range on AVP. One of the reasons why it became one of our top picks was that the range was 11.2, on the day that we did this, with an intra-day move of approximately 58 cents, which was on the high end of the stocks that we had looked at. There were a couple of others that were higher, but they also had higher volatility, and the price of the straddle.

Our Gamma Scalping analysis worksheet really helps you stay out of trouble, when it comes to buying the straddle, and finding stocks that have a high probability of moving. One of the reasons why we pick stocks with low volatility, with a wide range and a fairly decent price on the straddle, is because volatility can affect the price of the straddle in your favor if it moves up, or against you if it moves down. If you were to pick a stock with a high volatility, even though it has a much wider range to move in – if that stock stops moving, the volatility will collapse, and you’ll lose money.

Let me show you what I mean. You can see that even though AVP, the stock that we’re currently Gamma Scalping, has moved up, volatility has gone up slightly. It’s only a matter of 2 points in volatility. Let me show you what the current straddle is selling for. If we go to “Current,” and buy our current straddle, the one I already have, you can see that it’s currently at $3.53.

We bought it for $3.10. It’s gone up 43 cents from where we bought it. A lot of the profit has come from the fact that the volatility is increased. Remember, we mentioned that the Vega is a very powerful Greek. If volatility goes up a single point, Vega will increase our profits by $53. That’s exactly what’s happened, here. Volatility has increased, increasing our profits in this issue.

If we pick a stock with a high volatility, and the stock doesn’t move, our volatility will get crushed. Not only will we lose money on the Theta, but we’ll also lose money on the Vega. That’s why you may think that not doing this worksheet will save you some money or time. I don’t know what’s going through your mind right now. If you think that you can get away with not doing this worksheet, and just going out and picking a stock to Gamma trade, I think you’re going to be sorry if you do. You really need to go through the worksheet, to find the very best candidates with the lowest historical volatility rating, and highest profit index. If you do that, it will keep you out of a lot of trouble.

Just a quick update. I’m looking at narrowing down two more Gamma Scalping candidates. One is Adobe, and the other is CMED. I’ve checked them both. They’re both easy to borrow. Their profit index is about the same – about $1.51, and $1.54 for CMED. They’re both in the mid part of their volatility ranges. They both have good range probability.

CMED is quite a bit more expensive, at the at the money straddle, then Adobe is. As far as their range index, and the cost index, they’re pretty similar. Adobe is a little bit cheaper, obviously, because it’s slightly lower-priced stock, with a higher profit range. I’m going to go for either one of these. My feeling is that Adobe would probably be a very good bet. But China Medical here, over the last 60 days – it is at the lower end of the volatility range, for the last 60 days, for CMED.

If we drill down into some of these issues, even though they appear to be on the mid end of the range, on the daily charts, on the hourly charts, they seem to be close to the low end of the range here. Either CMED or Adobe Systems would be a really good candidate to go with. My feeling is that Adobe looks like it’s very good. CMED concerns me a little bit, because it is expensive, and it’s had a pretty good run-up. I’m just afraid it’s not going to move as much anymore, because it’s been up and down so much.

It’s probably a fairly good candidate to keep an eye on. I’m going to go ahead and put an order in for Adobe. The only thing I want to check before I do that is just to get an idea of where the Dow Jones is. Let’s see what the volatility is like on the Dow Jones. It was up. It’s starting to come down, just a little bit.

Let’s take a look at the daily chart. It looks like we have somewhat of a rehearsal going on in the Dow Jones, which could reduce volatility across stocks. The only other thing I want to check is see whether earnings are coming up for Adobe, or China Med, in the next couple of days. There’s not one today.

Let’s see. I can probably just go on the chart and take a look at it. CMED is coming up August 4. There may be an increase in volatility on August 4 for CMED. It’s kind of hard to tell.

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