Maximizing First-Order Analytics to Help Even the Odds

Options trading on the retail side is all about reducing uncertainty to increase the chances of success. It’s akin to solving an SAT question – eliminating false answers to improve your odds. Volatility skew, available through a Barchart Premier membership, is a crucial tool for traders. It provides insights into smart money positioning based on the premium structure of implied volatility (IV), a key indicator of a stock’s potential kinetic output derived from actual order flows.

The curvature of the volatility skew across the strike price spectrum reveals valuable information about hedging urgency among smart money traders. Combined with the Expected Move calculator, based on the Black-Scholes model, IV fluctuations in an options chain offer a framework for predicting where the target security is likely to land. This statistical model indicates that a stock will typically fall within one standard deviation from the spot price about 68% of the time, factoring in volatility and days to expiration.

Analyzing the volatility skew for cryptocurrency miner Cipher Mining (CIFR) for the March 20 expiration date shows relatively relaxed downside hedging activity. While put IV increases at lower strike prices, call IV also rises, with premiums for calls generally exceeding puts in the lower range. The flat curvature of IV for both puts and calls at the upper boundaries indicates a lack of urgency for hedging.

For a multinational e-commerce company like Shopify (SHOP), the volatility skew for the March 20 expiration date suggests a similar relaxed approach to downside protection. Although put IV rises for out-the-money (OTM) puts on the left wing, the IV curvature for both puts and calls remains flat on the right wing, with calls extending further than puts. The Expected Move calculator projects a dispersion between $98.68 and $126.73 for SHOP stock, highlighting a potential range for the security’s movement.

In the case of financial technology company Fiserv (FISV), the volatility skew for the March 20 expiration date indicates a downward trend in put and call IV at lower strike prices, suggesting less emphasis on protecting against tail risk. The upward curve in IV at the upper boundaries, with call IV slightly dominating puts, hints at a potential positioning for upside convexity by sophisticated market participants.

In conclusion, utilizing tools like volatility skew and the Expected Move calculator can provide valuable insights into smart money positioning and potential stock movements. By analyzing these indicators, traders can make informed decisions on options trading strategies to maximize their chances of success.