The Behavior of Implied Volatility (IV) & Historical Volatility (HV) Before & After Earnings Announcement

As mentioned before, Implied Volatility (IV) does factor in future important events / news which are expected to move the option�s price considerably within the next 30 trading days (e.g. earnings announcement, FDA approvals, etc.).For some regular events, such as earnings announcement, which typically take place on a quarterly basis, we could see some common behavior before & after the announcement.Generally, IV would normally start to increase since a few weeks before the announcement day.Once the announcement is out, the IV will usually drop significantly.On the other hand, the Historical Volatility (HV) may rise drastically should there...

Read more »

INVERTED HAMMER vs. SHOOTING STAR

Both Inverted Hammer and Shooting Star have the same shape, i.e. candlesticks with long upper shadows and small real bodies.The upper shadow should be at least 2 times longer than the body.There should be no lower shadow, or a very small lower shadow.The color of the body is not important, although a white body has slightly more bullish implications and a red / black body has slightly more bearish implications.Inverted Hammer and Shooting Star are reversal patterns which comprised of one candle only.Whether a pattern is bearish or bullish reversal, it depends on whether it is formed at the end of a downtrend (Inverted Hammer) or an uptrend (Shooting...

Read more »

Reading Links

Adam from Daily Options Report: Gamma ThoughtsAdam from Daily Options Report: More On GammaAfraid To Trade: Six Tips to Assess the Significance of Price PatternsAfraid To Trade: Amazon Teaches Us the Three Types of GapsKirk Report: Seasonal TrendA Trade A Day: How To Trade HammersStock Bandit: When Good Trades Go BadSimply Options Trading: Is the Trend Changing?Enjoy your weekends! :)Related Posts:* Option Greeks: GAMMA* Major Candlestick Patterns: HAMMER vs. HANGING ...

Read more »

HAMMER vs. HANGING MAN

Both Hammer and Hanging Man have the same shape, i.e. candlesticks with long lower shadows and small real bodies.The lower shadow should be at least 2 times longer than the body.There should be no upper shadow, or a very small upper shadow.The color of the body is not important, although a white body has slightly more bullish implications and a red / black body has slightly more bearish implications.Hammer and Hanging Man are reversal patterns which comprised of one candle only.Whether a pattern is bearish or bullish reversal, it depends on whether it is formed at the end of a downtrend (Hammer) or an uptrend (Hanging Man).Note:The grey candle...

Read more »

PIERCING LINE vs. DARK CLOUD COVER

Both Piercing Line & Dark Cloud Cover are 2-day reversal patterns.Whether a pattern is bearish or bullish reversal, it depends upon whether it appears at the end of a downtrend (Piercing Line) or an uptrend (Dark Cloud Cover).PIERCING LINE (BULLISH)Piercing Line is a bottom reversal pattern / bullish reversal pattern.It could be formed at the end of a downtrend, or during a pullback within an uptrend, or at the support.This is a 2-candle pattern which can signal a possible turning point:The 1st day is long black/red candle.The 2nd day is a long white body candle that opens sharply lower, below the trading range of the previous day, but the...

Read more »

Book Review: When The Market Moves, Will You Be Ready?

I just finished reading a book: When the Market Moves, Will You Be Ready?, authored by Peter Navarro.Peter Navarro is the author of "If It's Raining in Brazil, Buy Starbucks", one of the famous books on Sector Rotation.I found this book to be very well written. It is clear, concise and easy to understand, even for beginners.Basically, the book introduces a top-down, step-by-step approach of investing, from the basic of fundamental analysis, technical analysis to risk management, money management, trade management, and execution.Here are the main points what the book is all about:There are 4 stages of Macrowave investing:Stage 1: To analyze the...

Read more »

HARAMI CROSS BULLISH vs. BEARISH

Harami Cross Bullish & Harami Cross Bearish resemble Harami Bullish & Harami Bearish.Harami Cross can be seen as the variation of Harami pattern.The difference between Harami & Harami Cross is that for Harami Cross, the 2nd candle is a Doji.Basically, Harami Cross Bullish & Harami Cross Bearish consist of 2 candles:The first day is characterized by a long body candle, followed by a Doji candlestick that is completely contained within the range of the previous day's body.With the appearance of a Doji, these patterns imply market indecision, signaling a possible change of trend.Harami Cross pattern is usually seen as having higher...

Read more »

HARAMI BULLISH vs. BEARISH

Both Harami Bullish & Bearish are reversal patterns.Whether the pattern is bearish or bullish reversal, it depends upon whether it appears at the end of a downtrend (Harami Bullish Pattern) or an uptrend (Harami Bearish Pattern).Basically, these patterns consist of 2 candles:The first day is characterized by a long body candle, followed by a candle whose body is completely contained within the range of the previous day's body.These patterns imply that the momentum of preceding trend may have ceased or slowed down significantly, signaling a possibility of reversal.Note:Don�t confuse this pattern with the Engulfing Pattern. The candles in these...

Read more »

Good Reading Links

Corey from Afraid To Trade: How Do We Play Overextended Conditions?Dr. Brett Steenbarger from Traderfeed: Ten Generalizations That Guide My TradingStockbee: How To Trade Earnings?Chris Perruna: A Technique For Profit TakingCasey Murphy in Investopedia: Trade Broken Trendlines Without Going BrokeDr. Bruce Hong in Trader Psychology: Assessing Trader�s Strength Part 1, Part 2, and Part 3.Adam from Daily Options Report: Showed some interesting volatility behavior in his post �Speaking of Volatility�.Have a nice & meaningful weekend ahead!...

Read more »

Major Candlestick Chart Patterns: BULLISH vs. BEARISH ENGULFING

Both Bullish & Bearish Engulfing are reversal patterns.Whether a pattern is bearish or bullish reversal, it depends upon whether it appears at the end of a downtrend (Bullish Engulfing Pattern) or an uptrend (Bearish Engulfing Pattern).Basically, these patterns consist of 2 candles:The first day is characterized by a small body candle, followed by a candle whose body completely engulfs the previous day's body.Shadows are not a consideration.BULLISH ENGULFING PATTERNBullish Engulfing is a bottom reversal pattern / bullish reversal pattern.It could be formed at the end of a downtrend, or during a pullback within an uptrend, or at the support.Price...

Read more »

Learning / Understanding Candlestick Charts

Previously, we�ve covered some basics on candlestick charts reading & candlestick formations. In the next posts, we�ll continue to discuss some major candlestick chart patterns.Before that, as usual, to be more organized, I�d like to put the links of all posts on this topic below, and place the link to this post on the top left corner for easier future reference.Click the following links to read each of the posts:1) How To Read Candlestick Chart � The Basic2) Understanding Candlestick Formation:a) Part 1: Long & Short Candlesb) Part 2: Long Shadows, Hammer / Inverted Hammer, Spinning Topsc) Part 3: Doji, Long-legged Dojid) Part 4: Dragonfly Doji, Gravestone Doji3) Major Candlestick Patterns:a) Bullish vs. Bearish Engulfingb) Harami Bullish vs. Bearishc) Harami Cross Bullish vs. Bearishd)...

Read more »

How To Determine If An Option Is Cheap (Underpriced) Or Expensive (Overpriced) � Part 2

Go back to Part 1.How To Determine If IV is High or Low? (Cont�d)Example:Picture courtesy of: ivolatility.comFor AAPL, the IV figures (gold colored line) range between 24% to 54%.The peaks / highs of the IV charts are around 45% - 55%. When the IV is relatively high for the stock, that means the option�s price is relatively expensive.On the other hand, the bottoms / lows of the IV charts are about 25% - 30%. When the IV is relatively low for the stock, that means the option�s price is relatively cheap.The area between 35% - 40% seems like the average area. Hence, when IV is around this area, the option�s price can be considered quite �reasonable�,...

Read more »

How To Determine If An Option Is Cheap (Underpriced) Or Expensive (Overpriced) � Part 1

As discussed before in the previous post, in options trading, Implied Volatility (IV) has a huge impact on an option�s price.An option�s price can move up or down due to changes in IV, even though there is no change in the stock price.Some times, for instance, we also find a stock price has gone up, however the Call option of the stock did not increase, but it decreased instead. This kind of case is not surprising if we understand the factors that affect an option�s price. The reason why this phenomenon happens is usually due to a drop in IV.Therefore, before we buy or sell an option, it is important to check if an option is relatively cheap (underpriced) or expensive (overpriced).An option is deemed cheap or expensive not based on the absolute dollar value of the option, but instead based...

Read more »

Understanding Candlestick Formation � Part 4: DRAGONFLY DOJI & GRAVESTONE DOJI

The following are some form of Doji candlestick (Cont�d):(Please refer back to Part 3 for the pictures of each of the following formation)3) Dragonfly DojiDragonfly doji is formed when the Opening and Closing price are at the High of the session (i.e. Open = Close = High) and the Low price creates a long lower shadow, resulting in a candlestick with a long lower shadow and no upper shadow (Looks like a "T").Dragonfly doji indicates that sellers dominated trading and pushed the price lower in the beginning of session. However, towards the end of the session, buyers reemerge and drove the price back to the opening level and the session high. This signals a potential trend reversal.Dragonfly doji may imply a trend reversal depending on previous trend and future confirmation.After a downtrend,...

Read more »