Note that we provide the 10-day, 30-day and 60-day historical volatilities for each index, just as we do for each stock - right on the list. This allows you to compare the stock's recent volatility over several time periods to that of the relevant indices. Historical volatility is a measure of how much price has deviated from the average price over a period of time: 10 days, 30 days, etc.

Historical volatility, actual volatility, realized volatility, real volatility, stock volatility and price volatility all mean the same thing.

Comparing Indices

The first thing I do on opening the MM List is to view the MADI values for the major indices. Then I sort the lists by MADI. I want to see what the major indices are doing and then how the industry indices compare. Next I sort the list by the 30-day volatility and look also at the 10-day volatilities.

For example, a scan of the MM List showed the following volatilities, picked at random.

The major indices usually have the lowest volatility readings. Again, I want to know how volatile different industries are compared to major indices. At the time this table was prepared, the market had been pulling back for a couple of weeks after touching the top trend line of its trading range. DJX 10-day volatility increased nearly 2 percentage points over the 30-day number. It's only two points, but about a 135% increase in volatility (from 13.94 to 15.74).

Note how much more volatile than the market both JLO and POW were. JLO was nearly 3x as volatile as the DJX at this time. When an index's volatility is quite high compared to the major indices, you can bet that many of the covered call plays in that industry are even higher.

Comparing Stock to Index

Note in the table below how two of the leading stocks in the Oil Services Service industry compare to the relevant index. We can compare it absolutely (number against number) and compare the volatility trend - is the trend flat, up, down, all over the map?

All the stocks show higher volatility than the index, yet BHI's volatility has been steadily falling. The volatility of SII and SPN has stayed about the same, rising in the last couple of weeks - as has the index. In terms of actual price volatility, BHI is trending down, SII, SPNand the index are essentially holding steady.

All things being equal, it is reassuring that a stock's volatility is not too out of line with that of the index (BHI) and that the stock's volatility trend is as good or better than the index (BHI and SII). If it really is out of line, we have to wonder why. It is good if a stock's volatility is lower than that of the relevant index or the major indices, all else being equal.

Be careful of an uptrend in recent volatility, unless it is relatively minor - less than 15% or so. For example, SPN has a slight volatility uptrend going on, but it is minor. Be especially careful of a spike in the 10-day volatility.

Our MADI Indicator

CallWriter’s lists of trade candidates all feature our proprietary MADI (moving average directional indicator). This indicator shows you where the current stock price is – up, down or flat - in relation to the stock’s 20- and 50-day simple moving averages.

If one of the numbers is negative it will be in red with a minus (-) sign. We also present MADI values for each index, showing where the current index value falls in relation to its 20- and 50-day simple moving average. This allows you to compare the performance of a stock on another list to a relevant index or a major index on the Market Measure list.

The MADI for a stock simply expresses the strength or weakness of stock price compared to its 20- and 50-day moving averages. The MADI for an index does the same thing, using the current index value instead of a stock price. Where there is a relevant index for the stock, we can compare apples to apples to determine the stock's current strength or weakness relative to its peer group.

This is how we compare performance. If the stock has no sector or industry index, then it can be compared to the S&P 500, Russell 2000, Russell 1000 or other index, as appropriate. Most stocks move, at least roughly, with the industry group or perhaps the overall market. Yet some stocks will be notably stronger or weaker.

If you are thinking "DUH" at this point, the relationship of stock performance to that of its index or the larger market is not something everyone just "gets" automatically.

The comparison is a useful one: do you really want a stock that is underperforming its index (the rows with pink backgrounds)? If for example the index is really overbought, the stock being "less" overbought is no virtue, because if the index corrects, likely so will the stock. However, more strength in the stock than the index is a desirable thing, provided the stock is not toppy and overbought.

I typically start my covered call process by looking at the market, as described in approaching the lists. I look at charts and get a feel for direction. Then I look at the MM lists. This gives me a feel for what important indices are doing - gives me something to which I can compare a stock's MADI and volatility. I'm looking to see where the strength is at the time; and the weakness.

In order to avoid going back and forth from the lists to the MM list, I will note the MADI values for the following indices on a notepad, along with 10-day and 30-day volatilities.

Industry/Sector Performance

After viewing market performance with the above indices, I first sort the indicies by MADI, seeing if any industries are showing more strength than the larger indices, which can indicate a cluster of good trades. I also look for industries faring worse, and avoid these. While we still can find trades in a weak industry, it certainly is not the first place to look.

I scan the MM list, looking to see how different sectors and industry indices are performing. If I see that a particular industry or sector is currently strong but not too overheated, I will also make a note of that. Remember, my method of trade selection involves putting as many of the odds as possible in my favor. This is how we find high-probability trades - those most likely to work.

Another way to sort through industry performance is available in our Research Page by clicking on the Ind. Rank link at the top of the Research Page.

I don't really use the VIX in trading much, but I like to know where it is. It is rough gauge of premium generally available at the time.

Once this process is finished, I head over to CallWriter's Global Select (Dividends) lists. Because it short-cuts a lot of the necessary fundamental research.

Here is more basic information about the Market Measure List.