Q2 STOCKS TO BUY

Indicator of the Week: The Best Stocks For Volatility Traders

A closer look at the stocks that have offered the best straddle returns in 2015

Senior Quantitative Analyst
Dec 9, 2015 at 7:35 AM
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2015 is coming to a close and it will be the fourth straight year where the average CBOE Market Volatility Index (VIX) was below 20. The red line in the chart below, which I added mostly out of curiosity, marks the average daily value of the VIX since 2000. It's about 20.7. A low VIX indicates that option prices are low and, therefore, options get bigger returns on relatively smaller stock moves. Additionally, with the growth in weekly options, there are more opportunities to benefit from the lower option prices.

In the analysis below, I'm going to find stocks which had options that were most consistently underpriced in the past year. The results do not mean investors will continue to underprice the options on these stocks, but I find these lists interesting starting points for further analysis, whether it's looking at the stocks specifically or looking at the characteristics of these stocks and finding other stocks which are similar.

151208ITW1

A Simple Volatility Strategy: One strategy for profiting from high volatility is to buy a straddle. This consists of buying a call option and a put option on a stock or index. The strike prices and expiration dates should be the same on both the call and the put. The position can profit whether the stock goes up or down. The stock move, though, must be bigger than simply buying a call or put because it must be enough to cover both premiums that you bought.

Good Straddle Plays This Year: To find some good straddle plays, I looked back for each stock that trades weekly options and found what kind of returns you would have obtained had you blindly bought an at-the-money straddle each week on Friday that expired the next Friday. The number of straddle returns will be different on each stock, because in some cases certain stocks were recently added to the list of available weeklies, and also because if the bid/ask spread was too high, I did not include that straddle.

Going by the average straddle return, the table below shows the top 20 stocks for straddle plays so far in 2015 (using this particular method). I also show the median straddle return and the percentage of them that were positive. The last column shows the percentage of the positive straddles that were positive due to the call option. In other words, of all the positive straddles, it's the percentage that were positive due to an increase in the stock price as opposed to a decrease in the stock price. This list of stocks has been much more volatile this year than what option players had priced in.

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Below is another list of 20 stocks that were good straddle plays in 2015. These were stocks that had the highest percent positive. I find it interesting that the first two stocks on the list are down significantly year-to-date -- Alibaba Group Holding Ltd (NYSE:BABA) is down about 19% and Baidu Inc (ADR) (NASDAQ:BIDU) is down 10%. However, the majority of their positive straddles were because the stock increased. It's a reminder these short-term option plays are an entirely different animal than buy-and-hold investing.

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Finally, here is a list of stocks whose straddles doubled most often. These stocks provided a decent number of opportunities for big short-term gains for traders able to time volatility.

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