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Strategies & Market Trends : Market Gems:Stocks w/Strong Earnings and High Tech. Rank
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To: Jenna who wrote (34550)4/17/1999 1:54:00 AM
From: Jenna  Read Replies (2) of 120523
 
Trading the Volatility of Internet Options during Earnings Season

The reason buying options on the internet stocks is particularly profitable and interesting during earnings season is that the implied volatility becomes very high and when you buy options we love high volatility. A number of price explosions will and do occur in options due to price rise in the underlying stock during this season. The reason it is particularly exciting this season is due to that one-two day of correction we had.

What happens is that when prices in the internets fell so the implied volatility rose and the difference between the historical volatility and implied volatility was more acute. At the beginning of the fall puts would have been profitable. But near the end the implied volatility fizzles.

Historical volatility is a strict statistical measure of how fast prices have been changing. The historical volatility can be looked at over any set of past data that you desire, with 10-day, 20 day , 50 day etc. Implied volatility, is the volatility that the options are actually displaying right now.

Say you follow EGRP, AMTD, INKT or ABOV and they correct 10-15%.. that means they become even more desirable when the correction is over. On a normal day ABOV could have an implied volatility of say 56% an a 20 day moving average of historical volatility of say 48% and that is not that great a difference to expect a really huge price rise. The implied and historically volatility will both be high so although the stock is moving the upside is shrinking. You don't want to buy a stock that is topping.

But what happens during a correction, the option prices fall the volatility falls because there is a selloff. Now the implied volatility could be say 30% so you wait. The put call ratio and trending indicators and oscillators will let you know when the bottom is reached.

When the market begins to improve slightly the implied volatility starts to spurt and surge.. going to 87% and more.. Here is where a few points gain in the stock will cause your Option to increase by a like number points as well. So we have a double impetus to drive the options higher: the earnings and the correction

You can always determine the historical volatility from software programs. When the implied volatility begins to increase and the options are cheaper than before you have a reason to get excited.

There are many strategies to trading options very short term and I know a lot of them and have tried them with mixed success. My favorite is the straddle where you buy both a put and a call, but for our purposes we should keep it simple and get calls in-the-money for 1-5 day holds. But the important thing is that if you lose on one or two its like striking out but if you get the third you get a home run and options buyers look for the homerun. Sure I lost on my ONSL buy and had it been an option I would have lost the 2k as well but the homerun on GNET, NITE, INKT makes up for the occasional loses. Especially the five bagger on both INKT and YHOO last week. and my options of DLJ which I sold prior to the earning and the correction. I was able to turn ELNK into a triple bagger BEFORE earnings and will most likely take advantage of the pullback next week for more option positions. It was downgraded undeservedly.

A great and interesting book you might want is Lawrence G. McMillans' McMillan on Options. I can read this book over and over and always learn something new. The read is illuminative (at least for diehards like us) In fact I can attribute more than 6 figure gains from guidelines from this book in the past 3 years (the 5 figure losses I attribute to my own stupidity)
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