At the end of the day, a probability-based trading strategy like options volatility depends on a high number of occurrences. However, that certainly doesn't mean we want to sacrifice quality in favor of quantity.

As a result, most volatility traders are constantly scanning/filtering the market for high-grade opportunities. If you've been looking for new ideas, or even new methods of finding ideas, then a new episode of tasty Bites is definitely worth a few moments of your time.

The show focuses on scanning the marketplace for recent movers (big moves up and down) as well as Implied Volatility Rank outliers, as two different ways that traders can find new ideas. In both cases, the potential opportunities revolve around contrarian bets, or a reversion to the mean.

For the biggest price movers, that might be a rebound for a stock that has sold-off recently, or a decrease in volatility for a name in which IVR has spiked.

The graphic below highlights the one-month returns in some of the best-known, and most widely traded, Exchange-Traded Funds (ETFs):

Sizeable Opportunities

Using the data above, it's easy to see where the outliers are in the group. However, we can now apply additional filters to the data in order to reduce the overall number to our top possible candidates.

On tasty Bites, the hosts walk viewers through a review of recent IVR levels in each of the symbols listed above. This secondary level of analysis revealed that the following ETFs are trading with heightened levels of volatility, especially as compared to the rest of the group: XRT, GDX, GDXJ, XME, XBI, EWZ, XOP, and OIH.

At this point, traders can choose from several different approaches. In terms of directional bets (using delta or volatility), traders can select from the original group of ETFs to find a contrarian exposure they might find attractive. Additionally, traders can also choose from the IVR filter, and potentially deploy a short premium position seeking to take advantage of mean reversion in one of the underlyings experiencing heightened volatility.

The last element that the hosts of tasty Bites considered was the absolute value of the underlying in question. For traders managing smaller accounts, it can be advisable to target underlying symbols with lower absolute value, because of the associated buying power reduction advantage with lower priced names.

Using all of the above information, the hosts assembled two sample trade structures that met the criteria filter. These positions are outlined in the graphic below, including their overall directional bias:

Sizeable Opportunities

While the two positions outlined in the graphic above may not fit your unique outlook and risk profile, they do at least serve as a good example of how traders can use market data to uncover new opportunities.

If you aren't completely certain about a particular position, you can always mock trade it (i.e. paper trade) and monitor the trades behavior and performance over time. This is an easy way to build market experience without the risk of capital losses.

It's also can be helpful to establish a disciplined routine in terms of setting aside time every day, week, or month to analyze the market landscape - particularly for finding new ideas.

As we've outlined in tasty Bites, this process could include the following:

  • Reviewing price movement in underlying symbols that have made big moves (up or down) in recent days/weeks/months

  • Applying additional screens, such as absolute price or IV Rank, to filter for the most optimal opportunities

If you have any questions about filtering the market for new trading ideas, or any other aspect of the trade cycle, don't hesitate to leave a message in the space below, or reach out to @tastytrade on Twitter or send an email to at your convenience.

We look forward to hearing from you!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.