Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Contrary to the image above, or what some may initially assume, an Outside Range Day is not a day at the driving range, but a technical analysis pattern described as when the price makes a high that is higher and the low that is lower than previous day. Its relevance relates to the major equity indices as the S&P 500, the E-mini S&P 500 Futures, and the Russell 2000 Index all made outside range days on Friday. Referred to as minor trend change indicator the expectation is for a change in the previous trend, however it only suggests a higher high for the next day.   Based upon the minor trend change indicator and several other indicators the equity markets appear oversold so we have some long suggestions along with some new shorts and takeover ideas.
Strategy In Digest Issue 31 we made the case for a rising wedge with a downside minimum measuring objective at 1042 and the S&P 500 Index (SPX) 1064.59 met the objective with lows of 1039.83 on August 25 and then again at 1039.70 on Friday when it reversed to close higher, creating the outside range day. Now the chances are good it will rally back up to test resistance at 1100, so most outstanding shorts should be closed and new long trades considered.
IVOLopps™ iShares Russell 2000 Index (IWM) 61.65. While the S&P 500 Index turned higher before testing the July 1 low of 1011.40 the IWM continued lower and retested its July 6 low at 58.66 before turning higher while making an outside range day and a double bottom. Using the previous resistance at 67.50 as the objective here are two ideas to consider. The current 30-day Historical Volatility is 27.21. The first is a short put.
The second is a long call spread.
The put sale has some advantage since the IV sold at 34 is higher than the HV at 27.21 but it is still relatively low for put sales while there is no volatility advantage in the long call spread. Use a close back below the previous pivot at 58.80 as the SU (stop/unwind).   Stock Trend Analysis Selection Direct from the "Options Data Analysis" and the "Rankers & Scanners" sections of our home page we offer this "Stock Trend Analysis" suggestion as a regular feature. The selection criterion includes an Exponential Moving Average, Relative Strength Index and the Chaikin Money Flow Indictor and more. To see the complete explanation click here . Based upon the trend analysis, here is a put sale idea.   Freeport-McMoRan Copper & Gold Inc. (FCX) 71.20. The current 30-day Historical Volatility is 40.29.
Use a close back down below the last pivot just above 65 as the SU (stop/unwind).   More Put Sale Ideas Here are three more put sale ideas as long alternatives all with some implied volatility edge.
The suggested stop levels are indicated on the right column labeled SU. In the event the stocks are below their strike prices at the October expiration, an alternative strategy is to take the stock by assignment and then sell calls against the long stock.     Increasing Implied Volatility Here is an interesting stock in an active group that was ranked number 6 in our increasing implied volatility scan. Hecla Mining Co. (HL) 5.49. On Friday, the implied volatility increased 5.08 to 59.10 producing an interesting IV/HV ratio of 1.44, which usually implies something is happening. Some investigation revealed there were 25K December 5 calls traded around .91 with an implied volatility of 54.31. This and other call activity drove the implied volatility index higher. The call activity could be related to takeover speculation or simply expected seasonal year-end silver price strength. With a very low and bullish put-call ratio of .18, consider this long call spread also with December expirations.
Use a close back below the last pivot at 4.75 as the SU (stop/unwind).   Bearish Sentiment
Despite the probable short- term rally in the broad market indices here are two we have classified in the bearish category since they appear to have some negative fundamental headwinds.   InterOil Corporation (IOC) 58.54. With a current 30-day Historical Volatility of 48.98 and with a bullish put-call ratio of .38, but with a skew between the calls at IV 59.87 and the puts at IV 60.68 look at this put spread idea on a company that has been long on promises and short on drilling results for a long time.
Use a close back above the gap at 61 as the SU (stop/unwind). ITT Educational Services Inc. (ESI) 54.01. From what we can determine there several for- profit educational companies that continue to decline due to expectations they may not be able to continue using their current pricing and marketing practices as restrictive revisions are being implemented by the US Department of Education, their primary revenue source.  With a current 30-day Historical Volatility of 60.13 and a put-call ratio of .6 consider this put spread.
We suggest using a close back above 60 as the SU (stop/unwind).   Takeover File
Next, we turn to the hot August takeover category with two new additions. Check Point Software Technologies Ltd. (CHKP) 35.20, markets, and supports a range of software, and hardware products and services for information technology security. With a current 30-day Historical Volatility of 16.72 and a bullish put-call ratio of .20 and a IV/HV ratio of 1.67 think about this company as a takeover candidate and consider this bull call spread.
Use a close back below the last pivot at 33.24 as the SU (stop/unwind). Lincoln National Corp. (LNC) 23.73, sells a range of wealth protection, accumulation, and retirement income products including fixed and indexed annuities, variable annuities, universal life insurance, variable universal life insurance, term life insurance, mutual funds, and group life insurance. The speculation is that a $32 offer may be in the works from Toronto based Manulife Financial (MFC) 11.43. If so, there could be considerable upside from Friday’s closing price. The current 30-day Historical Volatility is 49.76 with the Implied Volatility Index Mean at 54.26 is up from 45.01 last week. The HV/IV ratio is 1.09. The unusual volume with a 2.21 price increase on Friday and the extremely low put-call ratio of .10 adds considerable credibility to this story. Look at this bull call spread idea partly financed by a put sale.
Use a close back below 20.65 as the SU (stop/unwind). All of the suggestions above 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 and any price change.   Summary For the major market indices, it looks as if Friday may have been a turnaround based upon outside range days. The short-term expectation is for the rally to carry the indices back up to the previous resistance levels about 3-4% higher. The rally theme was supported selected buying in oversold groups and continuing takeover news.
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In next week’s issue, we will once again review all of our current market indicators and update the progress of the S&P 500 Index at the end of the traditional summer holiday period.

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