Volume 8, Issue 2
Golden Fleece
Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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In Greek mythology, the Golden Fleece is that of the winged ram Chrysomallos.
Attempts have been made to interpret the Golden Fleece not just as a fanciful object in a myth but as reflecting some actual cultural object or practice. For example, it has at various times been suggested that the story of the Golden Fleece signified the bringing of sheep husbandry to Greece from the east, or that it refers to golden grain, or to the sun.
The Golden Fleece is also known as the most Haunted Inn and Pub in York, northern England. Built in 1503 the name comes from its original ownership by wool merchants — an important industry in York. They say several ghosts have been sighted here over its long history.
Market Review
With the notable exception of gold, the market indicators that we regularly follow are mostly unchanged.
As for Comex gold (basis cash) the big day was Tuesday January 8, 2007 closing at 878, up 20.14 on the day. For the week, it then continued 17.46 higher, with a final cash closing price of 895.46. Impressive - the gold bugs must be delighted.
A new high for gold in January - we have been here before. The previous record high was set on January 21, 1980, and gold then declined 30% in the next few days. In more recent years the pattern continues with December and January highs followed by selling. Be careful and be aware of this seasonal tendency.
Head and Shoulders Top Update
In IVolatility Trading Digest™ Volume 7, Issue 44, Merry Yuletide, dated December 17, 2007
we made the case for a developing Head and Shoulders Top reversal pattern in the S&P 500 Index.
We expected the index to rise back toward the 1550 level in the last week of the year to complete
the right shoulder before turning lower once again. For the week the S&P 500 Index (SPX) closed at 1401.02 after rising up to retest the neckline at 1425. Now again it is closing below the crucial neckline thus confirming the expectation of a decline to a minimum measuring objective of 1225.
Strategy
Continue looking for shorting opportunities in US equities and indexes, especially those in the consumer discretionary sectors. On the long side look for opportunities in agriculture, agricultural machinery, solar energy, oil, natural gas and oil service, infrastructure and China. The Beijing Olympics are coming in August and China should continue to prosper despite a housing induced economic slowdown in the US.
Golden Grain
With the possibility that the Golden Fleece could refer to grain, we should now turn our attention to agricultural commodity prices.
PowerShares DB Agriculture Fund (DBA) 36.45. The PowerShares DB Agriculture Fund
(Fund) is based on the Deutsche Bank Liquid Commodity Index – OptimumYield Agriculture™ and managed by DBCommodity Services LLC. The Index is rules-based and composed of futures
contracts on some of the most liquid and widely traded agricultural commodities – corn, wheat, soy beans and sugar. The index is intended to reflect the performance of the agricultural sector.
With the passage of H.R.6, The Energy Independence and Security Act of 2007 on December 19, 2007 the US has linked agriculture prices to crude oil prices by mandating a sixfold increase in the production of biofuels, such as ethanol. The bill requires production to reach 36 billion gallons by 2022 from the current level of about 6 billion gallons.
There is a well-defined upward sloping trend line off of the August 16, 2007 low at 24.58 passing just below 31.50 on December 17, 2007, the .45 dividend payment date.
Last Friday the index jumped up to 36.45, an increase of 1.95 points producing a record 3.34% premium over its Net Asset Value of 35.27. In the past rises of this magnitude have been followed by selling and we expect to see the same over the next few days. In this past week call options volume rose fourfold with the current put/call ratio at a very low of just .1. With a current Historical Volatility of 21.79 and an Implied Volatility Index of 26.07, it now appears overbought.
We will add DBA to IVOLalerts™ expecting that the pull back toward to upward slopping trend line will offer a better opportunity with less risk and that it will maintain a positive options volatility spread
If the gold bugs are excited about gold prices, just imagine how farmers around the world must be feeling about the prospect of rising agriculture prices for the next 15 years.
Suggestions
Origin Agritech Limited (SEED) 10.91. Headquartered in Beijing, Origin Agritech Limited is one of China’s leading hybrid seed producers, and an innovative agricultural company specializing in feeding the growing populations of China and parts of Southeast Asia. Through its vertically integrated business model, Origin develops, grows, processes, and markets hybrid seeds to farmers throughout China and parts of Southeast Asia via a network of 3,200 distributors. Origin’s industry, estimated at US$2 billion is expected to double by 2010. The Company owns or leases facilities in 30 of China’s 32 provinces, as well as Beijing. Origin launched its first entirely internally developed seed in 2003. As of 2006, Origin had a proprietary portfolio of ten proprietary corn hybrids, six proprietary rice hybrids and two proprietary canola hybrids, all of which are commercialized.
The listed options are relatively new having been available just since late October; volume is still fairly small. The current Historical Volatility is 145.39 with the Implied Volatility Mean Index at 137.38 in a Type II high volatility pattern, both will likely decline.
Consider these cash covered put sales as an alternative to a long position. In the event the stock pulls back you will have the stock and can then sell the expensive calls against the long stock position.
Sell SEED Jan 10 put QSWMB .525 IV 150.71 Delta .2992
Sell SEED Feb 10 put QSWNB 1.325 IV 136.87 Delta .3313
Solar Energy
LDK Solar Co.Ltd. (LDK) 43.50. is the fast growing Chinese manufacturer of multicrystalline solar wafers claiming to be the largest and lowest cost producer. LDK is a leading manufacturer of multicrystalline solar wafers, which are the principal raw material used to produce solar cells. LDK sells multicrystalline wafers globally to manufacturers of photovoltaic products, including solar cells and solar modules. In addition, the company provides wafer processing services to monocrystalline and multicrystalline solar cell and module manufacturers. LDK's headquarters and manufacturing facilities are located in Hi-Tech Industrial Park, Xinyu City, Jiangxi province in the People's Republic of China. The company’s US office is in Sunnyvale, California.
Apparently they have solved the accounting issue that caused the stock to decline from 75 in September to under 30 in the middle of November. Since then it rebounded, tested the old high and sold off again on a rush to the doors. Now trading just above 40 again it seems to have found some stability. With a Historical Volatility of 172 and an Implied Volatility Mean Index of 106.97 in a Type II High Volatility pattern, consider these put sale ideas.
Sell LDK Jan 40 put LDKMH 1.00 IV 93.52 Delta .22573
Sell LDK Feb 40 put LDKNH 4.00 IV 107.25 Delta .3389
More Solar
Yingli Green Energy Holding Co. Ltd. (YGE) 34.57. Through its principal operating subsidiary in China- Baoding Tianwei Yingli New Energy Resources Co., Ltd., Yingli is one of the leading vertically integrated photovoltaic (PV) product manufacturers in China, Based in Baoding, China. They design, market, manufacture and install photovoltaic products in the People's Republic of China. In addition, they sell photovoltaic modules to photovoltaic system integrators and distributors located in various markets, including Germany, Spain, China, and the United States.
We return once again after first suggesting YGE in IVolatility Trading Digest™ Volume 7, Issue 33, Dollar Dilemma, dated October 1, 2007. After selling off from the 40 level the stock seems to have found support at 30. The Current Historical Volatility is 91.15 and the Implied Volatility Mean Index is 89.73. Both volatility measures appear to be about right. The put/call ratio is a favorable .55. This put sale suggestion is a direction trade based on industry fundamentals and the bounce off of the 30 support level.
Sell YGE Feb 30 put YGENF 1.875 IV 92.24 Delta .2587
In the event this stock pulls back and closes below 30 at expiration the basis for the stock would be 28.175. Then there would be opportunities to sell calls against the stock with implied volatilites in the 90 range. Consider this trade as a cost effective back door entry into the solar energy sector.
Beijing Olympics Excitement
Focus Media Holding Ltd. (FMCN) 54.95. Shanghai based Focus Media Holding Limited operates advertising networks using audiovisual television displays consisting of commercial location networks, in-store networks, poster frame networks, mobile handset advertising networks, and outdoor LED networks. The commercial location networks includes flat-panel television displays placed in high-traffic areas of commercial buildings, such as in lobbies, near elevators, as well as in beauty parlors, karaoke parlors, golf country clubs, auto shops, banks, pharmacies, hotels, airports, airport shuttle buses, and in-air flights.
We last suggested taking a look at FMCN in IVolatility Trading Digest™ Volume 7, Issue 40, Mortgage Disaster, dated November 19, 2007. The suggested December 50 put sale at 2.525 would have now expired.
FMCN has continued to build market share in a very competitive market with its recent acquisition CGEN their main competitor in hypermarkets. In addition, they made a strategic investment in Yanhuang Health Media for the hospital and drugstore markets.
The stock sold down to the 50 level in late November before turning higher. With a current Historical Volatility of 45.31 take a look at this put sale suggestion.
Sell FMCN Feb 50 put QOHNJ 2.25 IV 65.54 Delta .2860
Forever Satellite Merger
As previously reported XM Satellite Radio Holdings Inc. (XMSR) 11.03 and
Sirius Satellite Radio (SIRI) 2.93, are attempting to merge. This is a special situation as their fate is not a function of the current equity market. The shareholders have voted in favor of the merger and now the political process will determine their future. They require approval of both the Department of Justice and the Federal Communications Commission. The endless delay, while frustrating for the companies and shareholders is the driver of the high options volatility creating options opportunities.
Now that SIRI has declined back to the 2.75 support level and turned higher once again consider adding this suggestion. With trading in excess of 43 million shares, a Historical Volatility of 47.80 with an Implied Volatility Mean Index of 104.71, consider this put sale.
Sell SIRI Mar 3 put QXOOG .55 IV 102.49 Delta .4268
With a positive volatility spread the risk here is more that it appears. In the event, the FCC and/or the Department of Justice nixes the merger this stock would probably be on its way to zero. Your basis would be 2.45 and if they did not keep hope alive by appealing the ruling this stock could be finished.
Reader Response Request
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 futures 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.
Posted by Don Jefferson on January 16, 2008 at 10:46 AM EST
Posted by Jacktrader (66.182.123.195) on January 17, 2008 at 12:54 AM EST
Posted by Demetrius Tsitrelis on January 23, 2008 at 12:26 AM EST
Posted by Jacktrader (66.182.123.195) on January 24, 2008 at 01:08 AM EST