[](Default.aspx) Expiry Week Stock Sentiment and Ranking System Scroll to the bottom of this page to subscribe
Our Approach
Our Stock Rating System is based entirely on what is happening in the options market. Options by their very nature are focused on the future and can therefore provide insight into the probable near term price performance of the underlying stock. We have developed a proprietary algorithm that samples, normalizes and then compares option premiums for a large sample of US traded equity options. If call premiums are rising relative to put premiums on the same underlying stock, we interpret this as being bullish. Conversely, if call premiums are falling relative to put premiums we interpret this as being bearish.
In Theory Our Approach Is Not Supposed To Work!
Consider the case of a call option and put option on the same underlying stock having the same strike price and expiry date. If the stock does not pay a dividend, then the two options should have exactly the same price. If they are different, a risk free arbitrage opportunity would exist and arbitrage traders would immediately step in to the bring the prices back into alignment. This is known as put call parity and it suggests that Call premiums should not differ from Put premiums on the same underlying stock in any meaningful way.
But It Does Work
We can find many examples where the implied volatility of calls differs significantly from the implied volatility of puts suggesting that for some reason or other the expected arbitrage trade is not happening.
A common method used to gauge how option traders view the risk inherent in a particular stock, is to plot the Implied Volatility Surface of its options.
The graph above depicts how implied volatility changes as a function of how far an option is out of the money and how close it is to expiry. This will give you some idea as to the challenges one faces when trying to normalize and compare options that fall on different points along the grid. Our goal is even more complex than this since we are trying to compare the Implied Volatility Surface of a stock's Call options to the Implied Volatility Surface of its Put Options.
One way to compare the implied volatility of call options to the implied volatility of put options is to compare the prices being projected by each to the current price of the underlying stock. In other words, where would the stock price be if it rose by an amount equal to the implied volatility of its call options and where would it be if it fell by an amount equal to the implied volatility of its put options? This is the approach we use at Expiry Week LLC.
We have found that the proportional midpoint of the two projected targets is almost always lower than the current stock price. This suggests that the disparities between call and put premiums are caused by put premiums rising and falling and not by changes in call premiums.
Here Is What We Think Is Happening
If Calls were overpriced relative to Puts the arbitrage trade would be to write the Call, buy the Put and purchase the underlying stock. In most cases finding shares to purchase on the open market would not be a problem so the arbitrage trade would always occur. Hence Call options would never become over priced relative to Put options.
If Put options were over priced relative to Calls the arbitrage trade would be to write the Put, buy the Call and short the underlying stock. Here we have a potential problem since the trader would need to find someone to lend them the shares so they could short the stock. If the outlook for the stock was already fairly negative then all the shares that could be borrowed will have already been borrowed by other short sellers. Hence the arbitrage trade would not be executed and the Put options would remain over priced relative to the Call options. Further more the fact that no shares are available to short would encourage bearish traders to purchase Put options instead, thereby further distorting the premium disparity.
We now have a theoretical framework that explains why Put options could have a higher implied volatility that Call options on the same underlying stock.
The Expiry Week Stock Ranking System
We rank stocks based on where the stock's price is in relation to its projected target (proportional midpoint of the call and put projected targets). The lower the projected target is relative to the stock price, the greater the risk of owning the stock. We assign a percentile rank to each stock where 99 is the highest rank (lowest risk) and 0 is the lowest rank (highest risk). If a stock has a rank of 99 it means that 99% of the stocks we follow have a lower rank that this stock. A rank of 50 means that 50% of stocks have a lower rank. As a general rule stocks ranked below 50 should be avoided or considered as possible short candidates since they have a higher risk profile that the average stock.
The Expiry Week Sentiment Indicator
We believe that you could trade successfully simply by holding a diversified portfolio of stocks Ranked 99 and replacing stocks when they fall below a certain Rank threshold (example Rank <=80). However all stocks both good and bad tend to move in cycles and also tend to move in the same direction as the overall market. For this reason we developed a Sentiment Indicator that you can use to improve the timing of your trades. Think of our Ranking System as a tool to help you decide what to buy and our Sentiment Indicator as a tool to help you decide when to buy.
Our Sentiment Indicator measures the direction in which a stock's risk profile is currently heading. if a stock's projected target is falling relative to the stock's actual price then sentiment is Bearish; otherwise it is Bullish. As a general rule you should avoid purchasing a stock while its Sentiment Indicator is Bearish and avoid shorting a stock while its Sentiment Indicator is Bullish. We have posted a few examples below to illustrate that our Sentiment Indicator can at times be a very useful ally.
Disclaimer
ExpiryWeek LLC and its staff are not registered financial advisors or brokers. Any opinions, alerts, and suggestions are solely speculation. Users of ExpiryWeek.com services should consult a financial advisor before acting on any suggestions given and before investing in any security. Investing involves risk, including loss of capital. By viewing any of our pages or Emails, all members, visitors, and guests agree and fully understand we cannot be held liable for any investment advice given. In addition, they also agree that they bear complete responsibility for their own investment decisions. ExpiryWeek.com does not guarantee completeness, timeliness, or accuracy of the news, services or products found on any of its pages, emails or related sites. By subscribing you agree that you have read and understand the [terms of service](termsofservice.aspx) associated with this offer.
FREE Product Version
If you have not already done so we recommend that you try out the [free version](stockRatings.aspx) of our product before making a purchase decision. All visitors automatically get free access to our platform for the Dow 30 Industrial Stocks. The only thing you won't be able to do with the free version is save stocks to your watch list. We charge subscribers a premium price for a premium product so we want you to know exactly what you are getting before subscribing.
Subscription Fee
$99 per Month (USD)
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