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Volatility report - week 15 - expected moves and trade setups (Cac 40, Delta Airlines, Blackrock and GitLab)

Volatility report - week 15 - expected moves and trade setups (Cac 40, Delta Airlines, Blackrock and GitLab)

Options 10 minutes to read
Koen Hoorelbeke

Investment and Options Strategist

Summary:  This week's volatility report outlines key trade setups for CAC40 Index Weekly's (PXA/2PX), Delta Air Lines (DAL), BlackRock (BLK) and GitLab Inc (GTLB), targeting respective market movements. Amidst varying market conditions, we offer strategies ranging from bullish to bearish.

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks.

Volatility report - week 15 (Apr 08 - Apr 12, '24)

Welcome to this week's Volatility Report, a guide for traders and investors seeking to navigate the dynamic world of stock market fluctuations. In this report, we list the expected movements and implied volatility rankings* of stocks with upcoming earnings announcements, as well as key indices and ETFs. In this edition we'll also have a look at some possible trade setups for a selection of ETF's and stocks in the list; CAC 40 Index Weekly (PXA/2PX), Delta Air Lines (DAL), BlackRock (BLK) and GitLab Inc (GTLB).

Past week:

Last week, the market experienced notable volatility, with the VIX fluctuating sharply in response to a dense economic calendar and anticipatory Federal Reserve remarks ahead of the Q1 earnings season kickoff. Investor unease was palpable as the VIX escalated to $16.35, primarily driven by Federal Reserve officials' cautious stances on rate adjustments. Early discrepancies in short-term volatility indicators like the VIX1D and VIX9D foreshadowed this unease, even as markets braced for pivotal earnings reports from major financial institutions. Key economic data releases, coupled with Fed Chair Powell's testimony, heightened market sensitivity, culminating in a significant VIX1D spike before the monthly jobs announcement. This backdrop of heightened alertness and speculative anticipation set the stage for a week characterized by investor vigilance, with volatility indices reflecting a market on edge for potential shifts.

This week:

This week gears up for pivotal economic and earnings releases, casting a spotlight on Wednesday's CPI data and FOMC Meeting Minutes—key drivers expected to steer market sentiment amidst inflation and rate policy discussions. Marking the onset of the earnings season, Friday sees financial stalwarts JPMorgan, Wells Fargo, BlackRock, and Citigroup unveiling their quarterly results. The anticipation has nudged the expected market movements significantly, with the SPX forecasted to see swings of +/- 79.92 (+/- 1.54%), a notable jump from last week's 0.88%. Similarly, the NDX is projected to vary by +/- 353.34 (+/- 1.95%), up from +/- 1.32%. Although the VIX's recent dip to $16.03 hints at a brief volatility lull, the market's underlying nervousness, as reflected in a higher VVIX, sets the stage for a week brimming with potential for heightened volatility and strategic opportunities.

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

Expected moves and volatility

Volatility and Expected Moves Analysis

Expected moves**, derived from at-the-money strike prices post-earnings**, indicate potential price volatility.

In the table above you'll find the following data:

  • Volatility Comparison: Implied volatility (IV) is currently contrasted against the 30-day historical figure to assess market expectations. A significant disparity often marks a prime scenario for premium selling.
  • IV Rank Insights: IV Rank situates the current IV within the past year's range. Values above 20% generally signal higher-than-average volatility, favoring premium selling, while lower values suggest caution for such strategies.
  • IV Rank 5D: IV Rank 5D situates the current IV within the past 5 day's range. Values of 100% indicate that the IV is at it's highest in the last 5 days. A higher value indicates the IV has been rising in the last few days, and might be worth considering to sell premium.
  • Highlighted Stocks:

    The list contains 4 highlighted stocks which each have 3 trade setup ideas (bullish, neutral, bearish). These ideas are listed below.

In this section of our volatility report, we're focusing on three credit and/or debit strategies that align with various market outlooks for our featured indices/etfs/stocks/.... For each underlying, we present a bullish, neutral, and bearish trade setup, designed to match your expectations for the underlying’s future price action.

Think of these strategies as starting points to shape your trading plans. Each setup is flexible – you can adjust the strike prices and the widths of the spreads (set by default at $5) to suit your trading needs. The credit spreads we've chosen are bold, with strike prices set near the current price of the stock to seek higher rewards at increased risk. Feel empowered to place these strikes further away or closer based on your own market analysis and confidence.

Remember, these setups are foundational guides. It’s essential to refine them to fit your individual trading style and outlook, ensuring they support your trading objectives and risk management preferences.

CAC40 Index Weekly's (PXA / 2PX)

Here are the trade setups for the CAC40 for the week of April 8 to April 12, 2024, based on the provided screenshot:

Bullish Trade Setup (Long Call Spread):

  • Buying an 8150 call and selling an 8200 call, both expiring on 12-Apr-2024.
  • Premium paid: 184.00 EUR.
  • Maximum profit: 316.00 EUR, which is the potential gain if CAC40 expires at or above 8200.
  • Maximum risk: 184.00 EUR (the premium paid).
  • Breakeven: 8168.40 EUR (bought call strike plus premium paid).

Neutral Trade Setup (Short Iron Condor):

  • Selling an 8200 call and a 8025 put, and buying an 8225 call and an 8000 put, all expiring on 12-Apr-2024.
  • Net premium received: 111.00 EUR.
  • Maximum profit: 111.00 EUR, achieved if CAC40 closes between the short call and short put strikes at expiration.
  • Maximum risk: 139.00 EUR (the difference between the strikes of the bought positions minus the net premium received).
  • Upper breakeven: 8211.10 EUR (short call strike plus net premium received).
  • Lower breakeven: 8013.90 EUR (short put strike minus net premium received).

Bearish Trade Setup (Debit Put Spread):

  • Buying an 8100 put and selling an 8050 put, expiring on 12-Apr-2024.
  • Premium paid: 128.00 EUR.
  • Maximum profit: 372.00 EUR, realized if CAC40 falls to or below 8050 at expiration.
  • Maximum risk: 128.00 EUR (the premium paid).
  • Breakeven: 8087.20 EUR (bought put strike minus premium paid).

For the CAC40:

  • The bullish Long Call Spread is for traders who anticipate a moderate increase in the index but wish to limit risk.
  • The Neutral Short Iron Condor is for those predicting the CAC40 will trade within a certain range, taking advantage of the limited market movement.
  • The bearish Debit Put Spread is suitable for those expecting a decline and wish to profit from a potential downturn in the index's value.

Delta Air Lines Inc (DAL)

Here are the trade setups for Delta Air Lines Inc. (DAL) for the week of April 8 to April 12, 2024, based on the above screenshot:

Bullish Trade Setup (Put Credit Spread):

  • Selling a 46 put and buying a 41 put, both expiring on 12-Apr-2024.
  • Premium received: 84.00 USD.
  • Maximum profit: 84.00 USD, which is the premium received if DAL stays above 46 at expiration.
  • Maximum risk: 416.00 USD (the difference between the strike prices minus the premium received).
  • Breakeven: 45.16 USD (sold put strike minus the premium received).

Neutral Trade Setup (Iron Condor):

  • Selling a 50 call and a 45 put, and buying a 55 call and a 40 put, all expiring on 12-Apr-2024.
  • Net premium received: 81.00 USD.
  • Maximum profit: 81.00 USD, achieved if DAL closes between the short call and short put strikes at expiration.
  • Maximum risk: 419.00 USD (the difference between the strikes of the widest spread minus the net premium received).
  • Upper breakeven: 50.81 USD (short call strike plus net premium received).
  • Lower breakeven: 44.19 USD (short put strike minus net premium received).

Bearish Trade Setup (Debit Put Spread):

  • Buying a 46 put and selling a 41 put, expiring on 12-Apr-2024.
  • Premium paid: 84.00 USD.
  • Maximum profit: 416.00 USD, realized if DAL falls to or below 41 at expiration.
  • Maximum risk: 84.00 USD (the premium paid).
  • Breakeven: 45.16 USD (bought put strike minus premium paid).

For DAL:

  • The Put Credit Spread reflects a bullish sentiment, with the expectation that DAL's price won't fall below the sold put's strike price.
  • The Iron Condor suggests a neutral outlook, predicting DAL will remain within a range, profiting from low volatility and time decay.
  • The Debit Put Spread shows a bearish inclination, with the trader betting on a potential decrease in DAL's price.

Blackrock Inc. (BLK)

Trade setups for BlackRock Inc. (BLK) based on the above screenshot:

Bullish Trade Setup (Put Credit Spread):

  • Selling a 790 put and buying a 785 put, both expiring on 12-Apr-2024.
  • Premium received: 150.00 USD.
  • Maximum profit: 150.00 USD, retained if BLK stays above 790 at expiration.
  • Maximum risk: 350.00 USD (the difference between the strike prices minus the premium received).
  • Breakeven: 788.50 USD (sold put strike minus the premium received).

Neutral Trade Setup (Iron Condor):

  • Selling an 835 call and a 785 put, and buying an 840 call and a 780 put, all expiring on 12-Apr-2024.
  • Net premium received: 240.00 USD.
  • Maximum profit: 240.00 USD, achieved if BLK closes between the short call strike (835) and short put strike (785) at expiration.
  • Maximum risk: 260.00 USD (the difference between the strikes of the widest spread minus the net premium received).
  • Upper breakeven: 837.40 USD (short call strike plus net premium received).
  • Lower breakeven: 782.60 USD (short put strike minus net premium received).

Bearish Trade Setup (Call Credit Spread):

  • Selling an 820 call and buying an 825 call, expiring on 12-Apr-2024.
  • Premium received: 170.00 USD.
  • Maximum profit: 170.00 USD, realized if BLK stays below 820 at expiration.
  • Maximum risk: 330.00 USD (the difference between the strike prices minus the premium received).
  • Breakeven: 821.70 USD (sold call strike plus premium received).

For BlackRock Inc. (BLK):

  • The Put Credit Spread reflects optimism, betting that BLK's price won't dip below 790.
  • The Iron Condor strategy is best for traders expecting BLK to trade within a range, with a neutral market sentiment.
  • The Call Credit Spread is designed for a bearish outlook, assuming that BLK's price will not breach the 820 level.

GitLab, Inc. (GTLB)

Trade setups for GitLab Inc. (GTLB) based on the above screenshot:

Bullish Trade Setup (Debit Call Spread):

  • Buying a 60 call and selling a 65 call, both expiring on 19-Apr-2024.
  • Premium paid: 105.00 USD.
  • Maximum profit: 395.00 USD, realized if GTLB is at or above 65 at expiration.
  • Maximum risk: 105.00 USD (the premium paid).
  • Breakeven: 61.05 USD (bought call strike plus premium paid).

Neutral Trade Setup (Short Iron Condor):

  • Selling a 61 call and a 56 put, and buying a 63 call and a 54 put, all expiring on 12-Apr-2024.
  • Net premium received: 55.00 USD.
  • Maximum profit: 55.00 USD, retained if GTLB closes between the short call and short put strikes at expiration.
  • Maximum risk: 155.00 USD (the difference between the strikes of the bought options minus the net premium received).
  • Upper breakeven: 61.55 USD (short call strike plus net premium received).
  • Lower breakeven: 55.45 USD (short put strike minus net premium received).

Bearish Trade Setup (Long Put Spread):

  • Buying a 57 put and selling a 52 put, expiring on 12-Apr-2024.
  • Premium paid: 55.00 USD.
  • Maximum profit: 445.00 USD, realized if GTLB falls to or below 52 at expiration.
  • Maximum risk: 55.00 USD (the premium paid).
  • Breakeven: 56.45 USD (bought put strike minus premium paid).

For GitLab Inc. (GTLB):

  • The Debit Call Spread is a bullish strategy, indicating an expectation that GTLB's price will rise above the breakeven point of 61.05 USD by expiration.
  • The Short Iron Condor is a neutral strategy, aiming to profit from GTLB trading within a specific range, with the price staying between 61 and 56 USD.
  • The Long Put Spread indicates a bearish sentiment, betting on a decline in GTLB's price to below 57 USD.
Note about spread management: as we present our trade setups, it's crucial to address the management of spreads that approach expiration in the money. Whether your position is fully or partially in the money, standard practice recommends closing the trade before expiration. This action is taken to prevent the risk of assignment, which can lead to unintended stock positions and additional capital requirements. Proactive closure of these positions, especially in the final day leading to expiry, allows for better control over the outcome and helps avoid the complexities and potential costs associated with exercise and assignment.
 

* Understanding these metrics is important for anyone involved in volatility-based trading strategies. The 'Expected Move' is an invaluable tool that provides a forecast of how much a stock's price might swing, positively or negatively, around its earnings announcement. This insight is essential for options traders, allowing them to gauge the potential risk and reward of their positions. Read more about it here: Understanding and calculating the expected move of a stock etf index

Moreover, the 'Implied Volatility Rank' (IVR) offers a snapshot of current volatility expectations in comparison to historical volatility over the last year. This ranking helps in identifying whether the market's current expectations are unusually high or low.

In addition to the Expected Move and Implied Volatility Rank, it’s also crucial to understand the concepts of ‘Implied Volatility’ and ‘Historical Volatility’. Implied Volatility (IV) is a measure of the market’s expectation of future volatility, derived from the prices of options on the stock. On the other hand, Historical Volatility (HV) measures the actual volatility of the stock in the past.

The relationship between these two types of volatility can serve as a valuable indicator for options traders. When IV is significantly higher than HV, it suggests that the market is expecting a larger price swing in the future, which could make options more expensive. Conversely, when IV is lower than HV, it could indicate that options are relatively cheap. Some traders use this IV-to-HV ratio as a signal for when to buy or sell options premium, adding another layer of sophistication to their trading strategies.

** A crucial application of the expected move in options trading is evident in strategies such as iron condors and strangles, particularly when these are implemented through short selling. In these strategies, the expected move serves as a pivotal benchmark for setting the boundaries of the trade. For instance, in the case of a short iron condor, traders typically position the short legs of the condor just outside the expected move range. This strategic placement enhances the probability of the stock price remaining within the range, thereby increasing the chances of the trade's success. Similarly, when setting up a short strangle, traders often choose strike prices that lie beyond the expected move. This ensures that the stock has to make a significantly larger move than the market anticipates to challenge the position, thus leveraging the expected move to mitigate risk and optimize the success rate. Utilizing the expected move in this manner allows traders to align their strategies with market expectations, fine-tuning their approach to volatility and price movements.

In this report, the calculation of the expected move for each stock and index is based on a refined approach, building upon the concepts outlined in our previous article. Traditionally, the expected move can be estimated by calculating the price of an at-the-money (ATM) straddle for the expiration date immediately following the event of interest. However, in this analysis, we've adopted a variation to enhance the accuracy of our predictions.

Our method involves a blend of 60% of the price of the ATM straddle and 40% of the price of a strangle that is one strike away from the ATM position. This hybrid approach allows us to closely mirror the expected move as indicated by the implied volatility (IV), offering a more nuanced and precise estimation. By utilizing this simplified yet effective method, we are able to provide an expected move calculation that not only resonates with the underlying market sentiments but also equips traders with a practical tool for their volatility-based strategies.

For continuous insights and updates on market/options strategies, interact with me/follow my social media account on Threads.

Previous "Volatility reports": 

Previous episodes of the "Saxo Options Talk" podcast

Previous "Investing with options" articles: 

Previous "What are your options" articles: 

Related articles:

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.

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