>>>> Click Here For More Free Expert Option Trading Videos <<<<
We have the variables that we are going to be entering – they are the stock symbol, the at the money straddle price, the range probability, the stock price, the implied volatility of the stock issue, and the historical volatility.
Now, the historical volatility is not a numerical entry, but it is a judgment entry. It’s probably the only judgment entry that you’re going to have.
Let’s take a look at another issue, so we can get another idea of whether or not it’s going to be a good candidate for our position. We’re going to talk a little bit more about the Gamma Scalping analysis that we’re going to be using.
Let’s take a look at a couple of issues, and how we plug them into our Gamma Scalping analysis worksheet. I’ve already got a few up here, which I have pre-filled in. What I want to do is, I just want to show you AVP, which is Avon Products. You can see, from a historical perspective, that the historical volatility is relatively low on this issue.
Let’s take a look at some of the other ones on my trading list. Let’s go to the AMGN. This is a judgment call, but I would say that it’s in the middle of its range, right here.
Altera Corporation looks like it’s probably in the higher end of its range. APC is in the higher end of its range. Aflac is definitely in the higher end of this range. CitiGroup is definitely in the high end of the range. Bank of America, definitely in the very high end of a long range.
The problem with Gamma Scalping in a bear market like we’ve had… Let’s take a look at the Dow Jones Industrial Average. We’ve been in a bear market, and historical volatilities are pretty high across the board for almost every single issue. In a bull market, it’s relatively easy to find issues that have low historical volatility. You want to buy options when historical volatilities are low.
That gives you an opportunity to pop, if the Theta increases dramatically. When we do Gamma Scalping, it’s very difficult to find issues in a bear market. I say that it’s difficult, but not impossible. Let’s take a look at a couple of other issues here.
I went through Netflix. Let’s take a look at Netflix. You can see that Netflix’s historical volatility is in a relatively low area. That’s one issue that it looks like we may have some success with.
If we take a look at the QQQs, for example – again, the historical volatility is at the relatively high level, compared to the previous five years. Let’s talk a little bit about this analysis worksheet, and then we’ll go directly into inputting some additional issues, so you can see how these are calculated.
Basically, what we do is we take the at the money straddle, the range of probability, the stock price, the implied volatility, the historical volatility, and then we get the range index, the cost index, and the profit index. All things being equal, we want the range in which the stock will move as high as possible.
You can see that the Netflix range is 10.76, which is a little bit on the high level, compared to the other issues that we’re looking at. The cost index is simply a calculation of the at the money straddle, divided by the cost of the stock, the price of the stock, divided by its implied volatility. We get a relatively low cost index on that, because there is quite a low cost, compared to the strike, compared to the cost of the stock itself.
If we go down, there are a couple of other issues that are extremely low cost. For example, American Express, and NIHD, which we have already done an analysis on, in this spreadsheet. I want to take a look at a couple of other issues. We’re going to take a look at Disney. We’re going to take a look at Clear Channel Communications.
If we want, we can actually do a third here. Let’s go ahead and so something likeBroadCom, BRCM, just so you have a feel for how to enter this information onto the spreadsheet.
Let’s go with Disney. First of all, we need to get the at the money straddle costs. Let’s go over to our Trade tab, and enter “Disney.” The last trade of the stock was $31.10. It’s either going to be the $30 strike price, or the $32.50, which is going to be at the money.
Let’s take a look at both of those. The 32.50 is selling for 2.33. The 30 is selling for 2.35. We might as well go for the lower cost of the two. Even though it’s only two cents, it’s still a little bit cheaper.
Let’s go ahead and analyze this as a duplicate trade. Remember, we are going to do 10 contracts. Let’s spread this out, so we make sure that we have the August expiration in here. Once we’re here, we can bring up our spreadsheet and begin entering some information.
First of all, the straddle cost is $2.33. We just plug in $2.33 here. The range probability – remember, we want the probability of touching up here, not the probability of expiration. The range here, for this issue until the nearest August expiration, is $27.46, to $35.05.
If we take those two numbers, and we subtract from each other, we have $27.46, minus $35.05. It gives us a range of $7.59. We can go ahead and include this in our worksheet.
The current stock price is $31.10. We can just include that. Using a spreadsheet like this will help us become a little more objective and keep us out of trouble when doing Gamma Scalping. The implied volatility for this stock is 37.1%. We have to calculate that in terms of decimal points, so that is 0.3710.