Options can deliver winners in a wide range of ways
Subscribers to Chart of the Week received this commentary on Sunday, May 11.
Stay on our website for longer than five minutes and you’re bound to find references to Schaeffer’s Volatility Scorecard (SVS). The internal metric is a goldmine for options traders, helping identify opportunities using a scored rating of volatility expectations in the last year. But there’s more to SVS than meets the eye; the hypothetical straddle trades that are foundational to SVS can be taken in a lot of different directions. Using tables to group the data, it’s interesting to note the variety of choice an options a trader has.
SVS is a lagging indicator that measures a stock's realized volatility against the volatility expectations priced into that stock's options over the past year. The goal is to find which stocks have been the best -- and worst – performers for premium buyers. SVS is calculated by creating a hypothetical at-the-money straddle trade with a constant 21 days until expiration each trading day of the year, generating about 250 data points annually, with implied volatilities (IVs) derived from actual at-the-money options. The hypothetical straddle is assumed to be held until expiration, when it's closed out for intrinsic value.
Based on these trades, the SVS accounts for three criteria: 40% is based on the average straddle return; 40% is based on the percentage of positive returns; and 20% is based on the percentage of straddles that doubled. These metrics are then combined into a score ranging from zero to 100. If a stock has a high SVS, the underlying equity has tended to realize greater volatility on the charts over the past 12 months than what its options have priced in. The SVS then accounts for not just IV relative to itself, but IV relative to historical volatility (HV).
The more often a stock boasts a high SVS, the more often it’s the part of a successful options trade. Consider the table below, curated by Senior Quantitative Analyst Rocky White, of stocks with SVS’ above 90 for the most weeks. Vaccine maker Moderna Inc (NASDAQ:MRNA) may be down 40% in 2025 and 80% year-over-year, but consistently makes the moves required for an option to yield a moderately positive return.
The table below is organized by consistently positive straddles. While the odds of a big hit – the straddle doubling, for example – are low, the usual suspects from the first table are there.
At Schaeffer's, we have a simple mantra for vetting stocks before buying an option: F.A.R., or Fast, Aggressive, and in the Right direction. With FAR in mind, the table below is grouped by average straddle return. It’s a who’s-who of outperformers in the last 12 months, a confirmation bias that is nonetheless helpful to see with data behind it. Fresh out of the earnings confessional software stock AppLovin Corp (NASDAQ:APP), shows up due to its absurd 712% gain in 2024. Similar stocks with outsized year-over-year gains like Hims & Hers Health Inc (NYSE:HIMS), Rocket Lab USA Inc (NASDAQ:RKLB), and SoundHound AI (NASDAQ:SOUN) should be familiar to investors monitoring explosive growth stocks, as all boast average straddle returns of 60% or more.
There’s a little bit of something for everyone, depending on how you sort the data. If you want to hit singles, names like Mondelez International (NASDAQ:MDLZ), MRNA, Delta Air Lines Inc (NYSE:DAL), and Oracle Corp (NYSE:ORCL) have a history of consistently rewarding options traders with positive returns. All four boast positive straddle rate of 60% or more and their SVS’ are consistently above 90 in the last 26 weeks. And now, with all four companies out of the earnings confessional, premiums will start to come down in a volatility crush.
For the home run hitters, there’s a world where following risky growth stocks pays off for options traders. More conservative, traditional investors may balk at HIMS or HOUN as longer-term plays to pile money into. But as Rocky’s SVS data shows, the time decay element and outsized move potential makes these names the perfect target for an options trader with nothing to lose. Whatever your appetite risk, with earnings season mostly out of the way, look for a volatility crush to make some of the names you see above more affordably priced, from a premium perspective.