Volume 8, Issue 18,
Ocean Shipping
Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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In IVolatility Trading Digest™ Volume 8, Issue 15, Momentum Waves, dated April 14, 2008, we offered suggestions for two companies in the ocean transport sector. We noted this group was not a momentum favorite, but with improving fundamentals this could change and the group could return to favor once again.
We suggested DryShips, Inc. (DRYS) at 65.41, now 89.86 in three weeks, while Genco Shipping & Trading Ltd. (GNK) rose from 58.43 to 73.23.
Since the momentum is returning and the chances are good it will continue to improve for the next few months we are adding some additional suggestions in this issue. Then we will update the Takeover File with a look at Yahoo! First a brief review of the markets.
Market Review
S&P 500 Index (SPX) 1413.90. Now that the SPX has closed above the previous 1400 resistance we can declare with some confidence that the double bottom formed on March 17, 2008 at 1256.98 is the final bottom. The measuring objective for the double bottom is up at 1543 and there is no overhead resistance until 1500 and then 1525 before reaching 1543.
The CBOE Volatility Index (VIX) 18.18. The VIX trend continues lower adding support to the market advance. But the call volume rose to 130,000 contracts on Friday with the open interest expanding to 800,000 contracts. In the recent past this has been a leading indicator of a short-term market decline. The VIX options buyers are giving us a short-term cautionary warning.
The US Dollar Index (DX) 73.50 continued higher crossing above and closing above resistance at 73.194 thereby setting off a double bottom pattern and establishing a new upside measuring objective at 75 which may take 30-60 days to reach. This portends more trouble for gold, silver and the commodity group including crude oil. It is supportive for equities and they should continue higher.
As for market breadth, our indicator, the NYSE McClellan Summation Index accelerated once again adding 153.53 for the week closing at 209.32, further supporting the bullish view.
Strategy
The US Dollar Index (DX) is telling us it is likely to continue higher so we suggest reducing, closing or hedging positions in the commodity sensitive sectors including gold, silver, agriculture, agricultural chemicals, oil & gas and oil services. In addition to the increasing dollar some of these sectors are seasonal and are due for a seasonal decline.
For these three recent suggestions we would close them along with any others in the sectors mentioned above and then beat the drums.
CBOE Volatility Index (VIX) 18.18. When we suggested this bear put spread in IVolatility Trading Digest™ Volume 8, Issue 14, Bottom Fishing, dated April 7, 2008 the VIX was 22.45 and the long Jun 22 ½ put, short Jun 20 put had an indicated debit of .8250. The current indicated value of this spread is 1.65 for a four-week 100% gain. The increasing call volume and open interest detailed above leads us to conclude we are near a short-term bottom for the VIX and we should now close this spread.
McMoRan Exploration Co. (MMR) 27.71. We suggested MMR in IVolatility Trading Digest™ Volume 8, Issue 15, Momentum Waves, dated April 14, 2008 when it was trading at 21.19. The April 20 put sold at .50 expired worthless. The May 20 put sold at 1.625 is now .20 offer, no bid. We will let this one expire as well. The long May 20 call short the May 25 call bull spread was 1.80 and is now indicated 4.45 for a 147% three-week gain.
Potash Corp. of Saskatchewan, Inc. (POT) 186.61. When we suggested POT in IVolatility Trading Digest™ Volume 8, Issue 11, Ben’s Magic Show, dated March 17, 2008 it was trading at 160.46. It then traded as high as 215.97 on April 23, 2008 before correcting. Originally the long Jun 160 call short the Jun 170 call spread was 4.40. Now the indicated value of this bull call spread is 7.05 representing a 60% gain in seven weeks.
IVOLopps™
Ocean Shipping
The ocean shipping industry consists of four general categories, bulk carriers, container ships, tankers and the newest category LPG/LNG carriers. Capital Link Shipping is a good source of fundamental information for the shipping group.
As we wrote in the first paragraph above we suggested DryShips, Inc. (DRYS) 89.86 when it was trading at 65.41. The suggested spread, long Jun 70 call with a short June 75 call was 1.70. This spread is now 3.90 representing a 129% gain in three weeks. Since we are probably still early in the momentum of the group we suggest keeping this position, but we would roll it out to the July option series on the expiration of the May options in about two weeks.
Genco Shipping & Trading Ltd. (GNK) 73.23 was 58.43 when we suggested the Jul 65/70 bull call spread. The price of this spread has increased from 1.325 to 3.10, a 134% gain in three weeks. We also suggest keeping this position open.
Now we have two new suggestions in the tanker group.
Last year about this time we read reports that VLCC tankers we being chartered with the option to extend the charter periods beyond the voyage term to use them a temporary storage. Now there are reports from charter brokers that VLCCs are once again being used for storage. This is significant as it reduces the available tonnage and prevents a sharp decline in charter rates. With rates for most routes in excess of 100K per day this is a favorable development and we could see higher rates yet to come.
Overseas Shipholding Group Inc. (OSG) 79.71. New York based OSG) is a bulk shipping company, engaged in the ocean transportation of crude oil and petroleum products. As of December 31, 2007, the company owned or operated a fleet of 112 vessels (aggregating 12.2 million dwt and 432,400 cubic meters) of which 93 vessels operated in the international market and 19 operated in the U.S. Flag market. Currently they are paying a predictable .313 per share quarterly dividend. With a current Historical Volatility of 31.65 consider this bull call spread.
Trade Plan
DR: Freight rates are now high and may go higher as VLCCs are being used for storage by the major oil companies reducing the available tonnage for charters. Seasonally this is a favorable period that extends until the middle of July.
SU: Unwind the spread on a close back below 70, as this would break the current uptrend.
- Buy OSG OCT 85 call OSGJQ 6.15 IV 37.85 Delta .4597
- Sell OSG OCT 90 call OSGJR 4.35 IV 36.76 Delta -.3665
Debit 1.80 Position net delta .0932
The position has a maximum potential gain of 3.20 with a limited and defined downside risk.
Frontline Ltd. (FRO) 58.24. Hamilton, Bermuda based FRO claims to be the worlds largest Tanker Company with a fleet of 77 oil tankers, including oil/bulk/ore (OBO) carriers ranging in size from 135K dwt to 311K dwt.
The stock has recently broken out above its 40-52 trading range, now 58.24.
Frontline pays out much of its cash earnings in dividends. The last dividend paid in February for the fourth quarter was 2.00. For the year through February they paid 8.25. Based upon the current price this would be a 14% yield if it can be sustained.
Frontline management just announced they are contracting for the purchase of four 320,000 dwt VLCC newbuildings to be delivered in 2011. Management says they were ordered because of a positive market outlook and the deal can be executed and financed without significantly reducing their dividend capacity in the short to medium term.
The average freight rate in the first quarter 2008 is a good bit higher than in the fourth quarter 2007. Chances are the dividend for the first quarter will be higher than the 2.00 paid in February and chances are the stock is being bought for the dividend and will decline when paid.
They are scheduled to report estimated earnings of 2.33 on May 29, 2008. We will know the dividend amount at that time. Since it is a almost a month away the stock could well rise a good bit between now and then on speculation of the dividend amount to be announced. With a current Historical Volatility of 32.29 consider these ideas.
Trade Plan:
DR: As detailed above.
SU: A close below 50 (not considering the upcoming dividend) along with a collapse in the freight rates to under 100K on the AG-Korea route (now 147K per day) is the unwind/stop.
Here are two suggestions:
- Buy 100 shares of FRO at 58.24
- In three weeks sell the June 65 call FROFM now priced at .425 with an implied volatility of 32.36
Or
Buy FRO Jun 60 call FROFL 1.70 IV 35.25 Delta .4014
Sell FRO Jun 65 call FROFM .425 IV 32.36 Delta -.1385
Debit 1.275 Positions net delta .2629
The position has a maximum potential gain of 3.725 with a limited and defined downside risk.
Takeover File Update
Yahoo! Inc. (YHOO) 28.67.
On Saturday Microsoft withdrew the takeover bid after failing to agree on an acceptable price.
We would now expect to see the uncertainty premium reflected in the implied volatility of the options decline and the stock return to the lower 20’s.
As we outlined in IVolatility Trading Digest™ Volume 8, Issue 16, More Income, dated April 21, 2008 we were looking forward to a long stress free summer with high implied volatility and many opportunities to sell premium. We will now be assigned stock and will have to work all summer with little time for the beach. Needless to say we are not happy with Microsoft and Steve Ballmer.
Next week we will review the open suggestions and consider some recovery ideas.
Previous Issues and Reader Response Request
All previous issues of the Digest can be found by using the small calendar at the top right of the first page of any Digest Issue. Click on any underlined date to see the selected issue. As usual we encourage you to let us know what you think about how we are doing and what you would like to see in future issues. Send us your questions or comments, or if you would like for us to take a look at a specific stock or ETF just let us know. Use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com Website.
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