If the volatility fits, wear it

The trend is your friend until it ends, and the range is…

Not a lot of rhyming opportunities there, but suffice it to say trading ranges are viewed by some short-term traders as dead zones to be avoided or ignored.

But experienced traders know that ranges can sometimes give way to high-momentum price moves. The catch is that—just like trends—it’s hard to know when a range is going to end. It’s one thing to think of a trading range as a potential breakout opportunity, it’s another to enter a trade and watch your market continue to go nowhere. But there may be hidden signals that price is potentially getting ready to push out of a range.

Millennial-leaning apparel company Urban Outfitters (URBN) has been moving sideways for nearly six weeks after hitting a record high above $48 on June 13. The weekly chart inset in the daily chart below shows the recent uptrend marked a big reversal of fortune for the stock, which in mid-2017 had fallen to its lowest level since 2009.

Urban Outfitters (URBN), 3/22/18 – 7/24/18. Urban Outfitters (URBN) price chart. Biding its time.

Source: OptionsHouse

URBN’s historical volatility (which is simply a measure of the stock’s past price fluctuations) was around 28.3% yesterday—near the lower end of its 52-week range of 23%–78%. That’s about what you’d expect for a stock that’s been in a multi-week range.

In contrast, a LiveAction scan yesterday showed URBN options had experienced a big (37.87%) implied volatility (IV) increase from the previous week:

LiveAction scan: Big One-Week Gain in IV, 7/24/18. IV up 38% from last week.

Source: OptionsHouse


What makes this interesting is that IV is the market’s estimate of future volatility (in this case, the next 30 days) contained in an option’s price; it has nothing to do with the stock’s past price movement (historical volatility), although the two will often go hand in hand. An uptick in IV can be a possible sign some options traders were anticipating a possible move in the stock in the not-too-distant future.

Also, Urban Outfitter’s next quarterly report isn’t scheduled until mid-August, so yesterday’s increased IV reading wasn’t a function of traders anticipating a big earnings-driven move in the next few days—something that happens all the time.

If IV remains elevated, it could mean traders are positioning themselves for a return of volatility where it counts—in the stock price.

Market Mover Update: Lockheed Martin (LMT) managed to touch its near-term support and resistance levels yesterday after releasing its Q2 earnings. The company beat both revenue and earnings estimates, and raised its outlook for 2018. Baxter (BAX) briefly traded to a record high yesterday, while Wells Fargo (WFC) added on to Monday’s breakout move, trading to its highest level since March 1.

Tech tops again: The Nasdaq 100 (NDX) shot to a new high yesterday as tech stocks got another boost from Alphabet’s (GOOG) blockbuster earnings release. The NDX gapped higher, breaking out of its short-term consolidation and rallying more than 1% intraday before pulling back.

More tech and FAANG earnings are on tap today, including Facebook (FB), PayPal (PYPL), Qualcomm (QCOM), Advanced Micro Devices (AMD), and F5 Networks (FFIV). Amazon (AMZN), Intel (INTC), Spotify (SPOT), Juniper Networks (JNPR), and Verisign (VRSN) are on deck for tomorrow.


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