Volume 8, Issue 30
Beijing Olympics
Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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In the geopolitical sphere there is no doubt the big event last week was the opening of the Beijing Olympics. Calling it spectacular is an understatement that fails to give adequate credit to all of the thousands of people who must have practiced and rehearsed for months and then performed flawlessly for the main event. It is truly a credit to the organizational and management skills of China.
Surprisingly, however the same credit can not be extended for the performance of its equity markets. Since October 31, 2007 the iShares FTSE/Xinhua China 25 Index (FXI) now 42.08 has dropped from a high of 73.19, a 42 ½ % decline.
In two weeks when the Olympic Games are finished will China then apply the same considerable organizational and management skills to their economy? Hu Jintao recently stated that “We shouldn’t sacrifice development to curb inflation” and “At the moment we should not rush more tightening measures”. Hu seems to “get it” and is saying the right things.
With the US Dollar recovering there should be less pressure to revalue the RMB and we expect the Chinese equity markets to begin turning higher soon. Perhaps before very long we will look back at the Olympics and remember it as the time when the markets made the bottom.
We begin with a look at the US Dollar Index (DX) and we devote the Market Review space to it. We will also offer some ideas on potential beneficiaries of the strengthening dollar.
Then employing IVolatility.com tools we will search for some more ideas using three criteria, high volatility, positive volatility spread and high put/call ratios. We will continue using our abbreviated format and as usual we suggest checking the fundamentals and identifying the upward sloping trendlines to use for the SU (stop/unwind) levels.
Market Review
US Dollar Index (DX) 75.85. The DX was the main event last week. After a steady rise early in the week it soared 1.298 points on Friday after taking out the previous June 13, 2008 high at 74.314 and adding downward pressure to oil, gas, gold and the commodity sector. Currency traders have been focusing upon economic weakness spreading to other countries and the narrowing of the US trade deficit that will likely result from a slowing US economy.
Strategy
Due to the DX strength we should be looking for the beneficiaries in some of the sectors that have been struggling with higher oil prices, airlines are a good example. Some others include the independent trucking companies and chemical companies. While it may be too late to short oil and gas it is probably still too soon for bargain hunting. The iShares Russell 2000 Index (IWM) 73.12 with less international currency exposure should continue outperforming the S&P 500 Index (SPX) 1296.32 with considerable currency exposure. Europeans looking for inexpensive strategic acquisitions should become more anxious to get deals completed before the currency advantage window closes.
IVOLopps™
PowerShares DB US Dollar Index Bullish (UUP) 23.53. On Friday the UUP broke out of its previous trading range when it gapped up .43 on the open. With a current Historical Volatility of 7.19 consider this dollar up opportunity with good edge.
- Sell UUP Sep 22 ½ put UUPUX .275 IV 17.27 Delta .2032
Here is an alternative longer term bull call spread.
- Buy UUP Dec 22 ½ call UUPLX 1.625 IV 18.82 Delta .7072
- Sell UUP Dec 25 call UUPLE .60 IV 18.82 Delta -.3524
Debit 1.025 Position net delta .3548
If the dollar strength continues until the end of the year this position would more than double in value with a defined and limited risk without the volatility and time decay risk associated with an individual option position.
High Volatility
In the high volatility category here are two suggestions with current high Implied Volatility and high Historical Volatility with the expectation both will decline in the near future. In addition, these ideas support the higher dollar lower crude oil strategy.
AMR Corporation (AMR) 11.26. With a current Historical Volatility of 170 consider this airline for a continuation of the declining oil prices.
- Sell AMR Sep 10 put AMRUB 1.30 IV 129.99 Delta .6901
Alaska Air Group Inc. (ALK) 19.92. With a Historical Volatility of 132 consider this airline put that is 4.92 points out-of-the-money.
- Sell Sep 15 put ALKUC .725 IV 103.72 Delta .1625
Positive Volatility Spreads
These ideas were found using the Advanced Ranker and the results are in three categories. Some of the companies have recently reported earnings, but have a volatility advantage. Some will report next week and finally the balance will be reporting later in the month.
DryShips, Inc. (DRYS) 67.89. This dry bulk shipping company has been included in previous issues. It has recently reported earnings and with a Historical Volatility of 62 consider this company for continued growth in China using a short term put sale with decent edge. If this one works it can be repeated again for the September expiration.
- Sell DRYS Aug 60 put DQRTL .625 IV 82.32 Delta .1403
Tessera Technologies Inc. (TSRA) 20.74. This miniature electronics firm has recently reported earnings and the stock is moving higher. With a Historical Volatility of 61 take a look at this one.
- Sell TSRA Aug 20 put TJQTD .70 IV 85.91 Delta .3618
As an alternative consider this somewhat longer dated and more expensive put sale.
- Sell TSRA Sep 20 put TJQUD 2.20 IV 92.90 Delta .3893
Medicis Pharmaceutical Corp. (MRX) 21.48. Here is a suggestion in the recently improving pharmaceutical sector. With a Historical Volatility of 30 and a good volatility spread check into this company that has just reported earnings and consider this put sale with a lot of edge.
- Sell MRX Sep 20 put MRXUD 1.125 IV 63.17 Delta .3265
GeoEye, Inc. (GEOY) 23.51. This is the first time this satellite company has been included in the Digest. The Historical Volatility is 48.21 and there is a very good positive volatility spread as this company is scheduled to report earnings on Wednesday August 13, 2008.
- Sell GEOY Aug 22 ½ put QZYTX .925 IV 100.79 Delta .3569
Here is a the longer term and more expensive alternative.
- Sell GEOY Sep 22 ½ put QZYUX 3.075 IV 114.44 Delta .3774
Ctrip.com International Ltd. (CTRP) 45.25. This Chinese online travel agency with a forward p/e ratio of 30 also reports earnings on Wednesday August 13, 2008. The Historical Volatility is 39.69 and there is a good positive volatility spread in anticipation of the earnings report. If you are ready for some China exposure consider this one.
- Sell CTRP Aug 45 put QCTTI 2.575 IV 102.83 Delta .4500
Or
Sell CTRP Aug 40 put OCTTH .825 IV 107.20 Delta .1920
And the longer term, but less expensive alternatives as measured by IV are:
- Sell CTRP Sep 45 put OCTUI 3.50 IV 60.22 Delta .4408
Or
Sell CTRP Sep 40 put OCTUH 1.65 IV 64.58 Delta .2462
AgFeed Industries, Inc. (FEED) 12.56. Here is another China company that reports next week on Thursday August 14, 2008. Consider this one in the agricultural sector with a current Historical Volatility of 66 and a good positive volatility spread.
- Sell FEED Aug 12 ½ put FQZTV .95 IV 130.52 Delta .4573
Open Text Corp. (OTEX) 31.96. This electronic content solutions provider reports on August 19, 2008. With a current Historical Volatility of 37.72 ponder this idea with a good positive volatility spread.
- Sell OTEX Sep 30 put QFTUF 2.825 IV 89.06 Delta .3563
Solarfun Power Holdings Co. Ltd. (SOLF) 12.19. This Chinese solar power manufacturer is scheduled to report on August 27, 2008. The current Historical Volatility is 73.51 and there is a positive volatility spread for these in-the-money puts.
- Sell SOLF Aug 12 ½ put QFGTV .875 IV 94.16 Delta .5541
And the longer term more expensive alternative.
- Sell SOLF Sep 12 ½ put QFGUV 2.025 IV 110.87 Delta .4523
Call – Put Ratio Search
In this section we take a different approach and offer suggestions from a search using the IVolatility.com RT Options Scanner.
The concept here is to find underlying securities that have high call/put ratios, that is many more calls are being traded than puts. Some caution is needed to make sure there is adequate total volume being traded so the high ratio has significance. The result will be based upon a single day volume so it is important to look at the call/put ratio chart for several months to make the current trading activity relevant to the recent past. The call/put charts are found in the Advanced Historical Data section accessed from the Home Page.
ValueClick Inc. (VCLK) 13.09. The market has not been kind to this Internet advertising company that has been included in previous issues. This company was recommended in a recent Barron’s article suggesting it was a value opportunity in the rapidly growing Internet advertising sector. The call/put ratio is interesting and reasonable at 7.64 while the current Historical Volatility is 86.49.
Here are two options strategy ideas for this value opportunity. The first is a put sale without a volatility edge and the second is a bull call spread.
- Sell VCLK Sep 12 ½ put QCSUN .675 IV 54.60 Delta .3640
- Buy VCLK Dec 15 call QCSLC 1.275 IV 60.56 Delta .4372
- Sell VCLK Dec 17 ½ call QCSLW .675 IV 59.50 Delta -.2760
Debit .60 Position net delta .1612
Red Hat Inc. (RHT) 22.88. This open source software solutions provider’s stock price is rising and the call/put volume is high at 91.24 while the current Historical Volatility reading is 29. Take a look at this put sale idea with a small edge.
- Sell RHT Sep 22 ½ put RUTUX .875 IV 34.82 Delta .4130
Since the volatility edge is small an alternative bull call spread might also be considered for RHT.
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.
