IVolatility Trading Digest™ Blog

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

To add comments or to ask questions please click here (or use the blog "COMMENTS" link at the very bottom of the blog page).

Last week the financial news was dominated by smoke and mirrors along with some jawboning in an effort to refinance the Greek sovereign debt at interest rates lower than warranted by the risk assumed. However, the bond market vigilantes are on the job and not buying the story as yields on 10-year Greek sovereign debt reached 7.58%, 450 basis points over German Bunds. “Increased borrowing must be matched by increased ability to repay. Otherwise we aren’t expanding the economy we’re merely puffing it up.” Henry C. Alexander (CEO JP Morgan & Company and Morgan Guaranty Trust 1950-1967) After a brief strategy comment, we offer a few option trading ideas to consider for the current equity market that does not seem overly concerned about the Greek sovereign debt problems.
Strategy S&P 500 Index (SPX) 1194.37. Last Wednesday it looked as if the expected retracement back down to the previous 1150.45 high was underway, but by Friday, it had resumed the current uptrend increasing the likelihood that the retest will not come before reaching our Head & Shoulders Bottom measuring objective at 1233.29 described in Digest Issue 1 dated January 11, 2010. While movement of the SPX continues to decline as measured by the 20-day Historical Volatility, now at 7.40 many analysts are focused on the VIX at 16.14, more than twice the historical volatility. If implied volatility forecasts historical volatility then we can expect to see wider trading ranges for SPX going into the earnings reports beginning this week.   Accordingly, we continue to encourage strategies that are net long volatility, positions with more long options than short options, such as call and put ratio backspreads, straddles, strangles, and even spreads with net long vega.
IVOLopps™ Once Again Long Euro Once again, the euro declined and tested 132 before rebounding on Friday to form a potential small double bottom. Now if it closes above 135.55 setting off the pattern it will suggest a minimum measuring objective at 138.55. For that possibility, here is another euro long call spread idea. CurrencyShares Euro Trust (FXE) 134.58. The Historical Volatility is now 9.57
Use a close below the left pivot of the double bottom at 132.37 as the SU (stop/unwind).
Bullish Sentiment Gold is one sector that reflected concern about Greece’s debit problems as prices rose to their 2010 highs on what was called safe-haven buying. Further it was reported that exchange traded funds backed by gold substantially increased their exposure last week. There is a chance these flows may be reversed if a credible solution to the Greek problem is announced, but more smoke and mirrors along with more jawboning will not do it. Here are two option ideas using junior gold miners. Yamana Gold, Inc. (AUY) 10.57 With a current Historical Volatility of 31.22 and with an Implied Volatility Mean Index of 40.36, up from 38.09 last week and with good options volume and open interest consider this longer-term bull call spread using January 2012 calls.
Use a close back below the last pivot low of 9.61 made on March 26, 2010 as the SU (stop/unwind)
Taseko Mines Ltd. (TGB) 6.01 This Canadian copper producer has one of the largest undeveloped copper and gold deposits in Canada. With a current Historical Volatility of 41.22 and an Implied Volatility Index Mean of 54.51 and because this one has less options volume and open interest, we suggest using somewhat different strategy called a covered combination also known as a “Mombo-Combo.” Buy 100 shares of stock and then,
This will produce a cost basis of just above 5 so use a close back below 5 as the SU (stop/unwind). By November expiration, the seasonal rise should be lifting the gold sector into year-end.
Active Options In the active options category we have several ideas to consider. Las Vegas Sands Corp. (LVS) 24.12. Las Vegas Sands got a boost from the February gaming win report showing a 33% increase for the Las Vegas strip. In addition, Sands has a 20% share of the Macau market that is expected to generate $1.68 billion of revenue in March. If that were not enough, Sands will shortly be opening the landmark Marina Bay Sands Singapore with three 55-story towers topped with the extraordinary sky park. With active options, large open interest, with a current Historical Volatility of 56.55 and an Implied Volatility Index of 59.45, up from 57.56 last week consider this put sale. They are scheduled to report earnings on May 5, before May options expiration.
In the event the stock closes below 24 at the May expiration, the plan is to take the stock by assignment and then sell calls against the long stock.
MGM Mirage (MGM) 14.83. The February gaming win report showing a 33% increase for the Las Vegas strip also gave a lift to MGM as it broke out above 14 on high volume. MGM recently open the ARIA City Center with 4,004 guestrooms, including 568 suites, with panoramic floor-to-ceiling windows offering views of the Las Vegas skyline. ARIA’s tower is uniquely designed to deliver corner-window views from every guestroom. The next earnings report is scheduled for May 3, 2010. With a current Historical Volatility of 55.50, an Implied Volatility Index Mean of 65.95 and a current put- call ratio of .5 consider this put sale.
As an alternative or in combination, here is a long call spread idea.
Use a close back under 12 as the SU (stop/unwind). Consider taking the stock by assignment should it close below 12 at the June expiration.
McDermott International Inc. (MDR) 27.76. MDR is an engineering and construction company operating worldwide in three segments: Offshore Oil and Gas Construction, Government Operations, and Power Generation Systems. With a current Historical Volatility of 28.90 and an Implied Volatility Index of 36.45, the calls were bid higher on Friday pushing the put-call ratio to a bullish .25. The next earnings report is scheduled for May 11.   Here is a long call spread to consider.
Use a close below 26 as the SU (stop/unwind).
Jacobs Engineering Group Inc. (JEC) 47.61. JEC provides professional, technical, and construction services that comprise various aspects of engineering and construction, operations, and maintenance, as well as scientific and specialty consulting services. They are expected to report second quarter earnings on April 26, 2010. With a current Historical Volatility of 30.59 and with an Implied Volatility Index Mean of 37.61 with a fairly bullish put-call ratio of .4 consider this put sale.
Use a close back under the last pivot at 43.83 as the SU (stop/unwind).
Increasing Implied Volatility From number 5 on Friday’s list of Top 5 stocks with greatest IV change from yesterday, a regular feature found in the Rankers & Scanners section on our home page, we have a natural gas exploration and production company. Petrohawk Energy Corporation (HK) 22.72. HK with 98% natural gas production has a large position in the Haynesville shale and other shale plays in Texas, Louisiana and Arkansas. The current rising stock price and the increasing implied volatility could be related to speculation about acreage sales or joint ventures. While less important than current natural gas prices for moving the stock price, the next earnings report is scheduled for May 6, 2010. With a current Historical Volatility of 40.63, an Implied Volatility Mean Index of 49.78 and a very bullish put-call ratio of less than .25 consider this put sale with good edge.
Use a close back under the last pivot at 18.98 as the SU (stop/unwind).
High IV/HV Ratio In the high IV/HV ratio category, also called a Type I positive volatility spread we find an IT company. CA, Inc. (CA) 22.94. CA engages in the design, development, marketing, licensing, and support of information technology (IT) management software products that operate on a range of hardware platforms and operating systems. They are scheduled to report earnings on May 13, 2010. With a current Historical Volatility of 17.57 and an Implied Volatility Index Mean of 26.19 with a bearish put-call ratio of 1.0, here is another put sale to consider although it is below our ideal implied volatility standard of 40 it has a good positive volatility spread.
Use a close under 22 as the SU (stop/unwind). All of the above suggestions are based upon last Friday’s closing prices using the mid price between the bid and ask. On Monday, the option prices will be somewhat different due to the time decay over the weekend.
Summary While the bond market continues to struggle with the ramifications of refinancing Greek sovereign debt issues, the equity markets appear to be less concerned as it continues higher, although there are now some signs of increased safe-haven gold buying.
Visit us at twitter for more ideas from our scanners and other developments
IVolatility.com Bookstore. In addition to the vast number of articles on our web site, take a browse through our bookstore for more reference information and material.
In next week’s issue, we will do a complete market review including the important volatility measures and update the progress of the S&P 500 Index.

Finding Previous Issues and Our 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 us to look at a specific stock, ETF or futures contract, let us know. Use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com Website. If you would like to receive the Digest by e-mail let us know at Support@IVolatility.com.

Permalink