Home Site Map About Us My Account Shopping Cart Help Sign In

Schaeffer's Tool Box: Examining IV Spreads on Conagra Inc. Puts and Calls

Uncovering overpriced and underpriced options is made easier through implied volatility scans

by Joseph Hargett (jhargett@sir-inc.com) 11/5/2009 11:00 AM

Text Size |

Email a friend |

Print |

Keywords:

In today's column, we are revisiting the topic of implied volatility (IV). For the record, IV is the estimated volatility of the underlying security's price, and helps determine the price of the option. In essence, implied volatilities are driven by market expectations for the underlying stock. While I often focus on whether an option's IV is higher or lower than historical volatility (HV) in my daily Options Update column, today we will take a closer look at IV on specific put and call options for individual equities via the Implied Volatility Ratio Scan.

This particular filter searches for broad skews between IV on equity calls and puts, and can be tailored for at-the-money, near-the-money, and out-of-the-money options. This tailoring can be accomplished by setting the "percent out-of-the-money implied put/call ratios" field to the desired figure - i.e., 0% would give you results featuring at-the-money options, roughly 5% would give you near-the-money options, and anything greater would provide out-of-the-money results.

Below is an example of what to expect when using the Implied Volatility Ratio Scan, including today's filter results:

Implied Volatility Ratio Scan screen shot

First, it is important to note that you can sort any of the columns in your results by clicking the column headers. This is particularly useful for switching between IV skews that favor calls and those that favor puts. To do this, simply click the header at the top of the "Put/Call IV Ratio" column.

The default sort is descending per the "Put/Call IV Ratio" column, which places stocks with higher put IV at the top of the list. Today's top result is Conagra Foods Inc. (CAG: sentiment, chart, options), due to the broad skew between IV on its November 22.50 call and its November 17.50 put. According to the filter, implieds on the call rest at 22.10%, while implieds on the put are more than double that at 44.80%, resulting in a put/call IV ratio of 202.71%.

The important question here is, "What does this spread between put and call IV tell us?" Generally, implieds rise when buy-to-open demand for an option rises, and decline when an option sees an increase in selling. Thus, higher IV for the November 17.50 put would suggest that demand for these options is considerably higher than that for the November 22.50 calls.

We can take these results one step further by comparing CAG's November 17.50 put and November 22.50 call IVs to the stock's historical volatility. Doing so will allow us to determine if prices on these options are bid above historical levels, and thus more expensive. The Schaeffer's implied volatilities tool allows you to view a cross-section of a stock's options and their IV as of the close for the prior trading session. Below is a table of CAG's option implied volatilities for today:

As you can see, IV is close to historical levels for the November 22.50 call, but there's a wide discrepancy between historicals and IV for the November 17.50 put.

So, what have we learned from the Implied Volatility Ratio Scan and the implied volatilities in regard to CAG options? That the skew between the near-the-money November 22.50 call and November 17.50 put is heavily weighted in favor of the put option. As such, buy-to-open demand for the November 17.50 put appears to be elevated. Furthermore, traders have bid CAG put option prices higher, as IV is above the stock's one-month HV. While this data in and of itself is not completely actionable, it does give you an excellent jumping-off point for additional research into the stock's technical and sentiment backdrops.

Click here for new fall issue of SENTIMENT magazine

Discuss this article:

Post your own comment

Schaeffer's Tool Box: Are Massey Energy Co. Calls the Place to Be?

(11/19/2009 12:30:00 PM)

This column is designed to introduce you to some of the valuable trading tools available on the SchaeffersResearch.com Web site. Today, we're going to use the Schaeffer's stock screener to look for bullish trading ideas by sifting through stocks with high Schaeffer's put/call open interest ratios (SOIR). For more on why monitoring near-term options activity can help guide your trading, please click here.

read more...

Schaeffer's Tool Box: Betting on an Akamai Technologies Breakout

(11/4/2009 1:20:00 PM)

This column is designed to introduce you to some of the valuable trading tools available on the SchaeffersResearch.com Web site. Today, we're going to use the Schaeffer's stock screener to look for bullish trading ideas by sifting through stocks with heavy pessimism and strong technical performance. For more on why we think counter-trend sentiment can help guide your trading, please click here.

read more...

Schaeffer's Tool Box: Huntsman Corp.'s Put/Call Ratio Spikes

(10/29/2009 11:06:00 AM)

One of the foundations of a solidly performing portfolio is picking the right stocks that will outperform and keep your returns in the green. In order to pick the right stocks, however, one needs to be well-informed of the risks, benefits, and potential drivers that could positively or negatively impact a potential trade. Here at Schaeffer's, we have a plethora of stock- and options-related tools designed to make your trading experience as informed as possible. Building upon the premise and success of the Schaeffer's Tool Box column, we are expanding the scope of this piece beyond the realm of the Schaeffer's Contrarian Stock Screener to include the variety of other tools and filters available in the Quotes & Tools section of SchaeffersResearch.com. Long-time readers should not fear: Wednesday's column will still revolve around stock and option selection via the stock screener.

read more...

Schaeffer's Tool Box: Whole Foods Market Inc.'s Bullish Prospects

(10/28/2009 12:00:00 PM)

This column is designed to introduce you to some of the valuable trading tools available on the SchaeffersResearch.com Web site. Today, we're going to use the Schaeffer's stock screener to look for bullish trading ideas by sifting through analyst rankings. For more on why we think analyst ratings can help guide your trading, please click here.

read more...

Schaeffer's Tool Box: Cephalon Inc. Is Debit Spread Material

(10/7/2009 12:00:00 PM)

Analyst rankings are an important sentiment indicator that we track here at Schaeffer's, as they are a quick way to gauge Wall Street's collective opinion of a certain stock. Analysts use different ranking systems based on the preferences of their specific brokerage firms, with labels such as "buy," "outperform," "overweight," "neutral," "sector perform," and so on. For our purposes, we typically rely on the data gathered by Zacks, which divides the analysts' opinions into five broad categories: strong buy, buy, hold, sell, and strong sell.

read more...

Schaeffer's Tool Box: Reviewing a Potash Corp./Saskatchewan Iron Condor

(10/1/2009 12:10:00 PM)

On Aug. 26, Potash Corp./Saskatchewan (POT: sentiment, chart, options) popped up on a Schaeffer's Tool Box filter designed to find "Analyst most liked stocks." Having kept my eye on POT following its rally into resistance near $100 per share, the stock's appearance as a potential bearish stock pick led me to believe that we had a potential winning long put option trade on our hands. You see, when optimism begins to unwind on a falling stock it can exacerbate the equity's decline, leading to potentially substantial gains for any put options. In POT's case, the shares were retreating sharply from psychological resistance, and, if analysts decided to downgrade the shares in tandem with this weak price action, the security could have been in real trouble.

read more...

Schaeffer's Tool Box: Three Kroger Co. Options Strategies

(9/30/2009 1:00:00 PM)

The basis for today's Tool Box filter is the Schaeffer's put/call open interest ratio (SOIR). This ratio monitors open interest levels of puts and calls for all options with less than three months until expiration. Readings above 1.00 indicate that bearishly oriented put options are more popular among speculative options traders, while readings below 1.00 denote a more bullish slant. As such, a filter designed to find "Stocks with a low put/call ratio" will return those equities with a wealth of bullishly oriented call options. When combining this heavy-handed optimism with an underperforming stock, we have the makings of a potentially lucrative trading idea.

read more...

Schaeffer's Tool Box: Is Franklin Resources Set to Grind Sideways?

(9/23/2009 3:00:00 PM)

The basis for today's Tool Box filter is the Schaeffer's put/call open interest ratio (SOIR). This ratio monitors open interest levels of puts and calls for all options with less than three months until expiration. Readings above 1.00 indicate that bearishly oriented put options are more popular among speculative options traders, while readings below 1.00 denote a more bullish slant. As such, a filter designed to find "Stocks with a high put/call ratio" will return those equities with a wealth of bearishly oriented put options. When combining this heavy-handed pessimism with an outperforming stock, we have the makings of a potentially lucrative trading idea.

read more...

Schaeffer's Tool Box: Implied Volatility Soars on GTX Inc.

(9/21/2009 2:30:00 PM)

On Aug. 14, GTX Inc. (GTXI: sentiment, chart, options) said that an independent data safety monitoring committee recommended the continuation of the late-stage trials of its experimental prostate cancer drug toremifene. The shares rallied heading into the report, and GTXI has soared more than 35% since the beginning of September. Whether in response to this report or the prospect for more data on the company's prostate cancer drug, implied volatility has since spiked sharply higher on GTXI, placing the security on today's Schaeffer's Volatility Index vs Historical Volatility Filter.

read more...

SchaeffersResearch.com can alert you to new articles containing your favorite authors, ticker symbols or keywords. Enter your favorite authors, ticker symbol or keyword and click go.

Today's Most Popular Stories

Read

Emailed

Editor's Pick

Options Edge: CF Industries, Solarfun Power, E TRADE Financial, and Conseco, Inc. 11/19/2009 9:29 AM

Options Report: Buying Opportunities Among Internet Retailers 11/19/2009 3:30 PM

Schaeffer's Media Outtake: Thoughts on Hedging, Volatility 11/19/2009 4:15 PM

Market Recap: Chipmakers Blaze the Path Lower on Sector Downgrade 11/19/2009 4:17 PM

Featured Companies

Conagra Foods (CAG)

Add to Watchlist

Add Alert

Receive FREE access to Schaeffer�s

premier online options magazine!

Podcasting

Videocasting

	Schaeffer's Daily Q&A: What Is Put Selling Nov 20 2009 4:12 PM
Options Stew: A Taste of the Week's Spiciest Pl... View More...

Partner Center

<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/ff2.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=166;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=166;s=1;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>	<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/ff2.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=167;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=167;s=1;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>	<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/ff2.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=168;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=168;s=1;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>	<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/ff2.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=169;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=169;s=1;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>
<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/ff2.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=174;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=174;s=1;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>	<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/fo.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=171;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=171;s=0;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>	<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/ff2.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=172;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=172;s=1;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>	<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/fo.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=173;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=173;s=0;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>

Monday Morning Outlook:
Prepare for the investing week ahead. Every week, Bernie and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves.

Market Recap:
At the end of every market day, we review the trading day in detail, covering major events and key market developments. Don't miss this critical, timely and insightful report.

Opening View:
Every morning, our research staff analyzes the prior day and the overnight markets, and monitors the morning wires to give you an accurate preview of the day to come. delivered to your inbox before the opening bell.

First Name Add your first name Last Name Add your last name Email Add a valid address Password Min. size 4 chars

I would like to be contacted periodically by Schaeffer's Investment Research concerning its own products and services, and those of carefully selected advertisers. I understand that I can opt-out of further messages at any time.

� 2009 Schaeffer's Investment Research, Inc. 5151 Pfeiffer Road, Suite 250, Cincinnati, Ohio 45242
Phone: (800) 448-2080 FAX: (513) 589-3810 Int'l Callers: (513) 589-3800 Email: service@sir-inc.com