« August 2008 »

IVolatility Trading Digest™

Volume 8, Issue 32
Dollar Redemption

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).

For the third week the US Dollar is in the macroeconomic and financial markets spotlight. We think it is about time to make it our headline story and review its recent rise from the depths of despair. Then we offer a suggestion for it’s continuing strength using a low risk options strategy.

Next we have an idea for the oversold oil and gas sector and another airline. The earnings season is winding down but we still have one suggestion for an upcoming earnings report followed by a long-term growth idea. We close with the addition of a few more biotech ideas.

US Dollar Index Cash (DXY0) 76.81 (ICEUS). Take a look at the chart below.

From a classical bar chart technical analysis perspective, last week we reached the upside minimum measuring objective of 76.87 (MO) from the double bottom formed by the March 17 low (1) of 71.73 and July 15 low (2) of 71.77. The distance from the June 13 high (3) of 74.31 to the line that connects the two bottoms is 2.56. Adding this to the breakout at 74.31 produces the upside-measuring objective at 76.87 and marked MO and the chart. The next resistance is the December 20, 2007 high at 77.85 (not shown) and the DX rose up to 77.41 on Aug 19 before turning lower. Our double bottom projection has been very accurate and we have concluded the December resistance is the next objective, but first we could experience some additional corrective action perhaps back down to 75 before resuming this new uptrend.

The rapidly rising US Dollar Index reflects the perception of economic weakness spreading to the major trading countries and the narrowing of the US trade deficit from declining imports and improving exports, that will cause an upward revision in the second quarter GDP growth rate. On a relative basis the US seems to be doing better that some of our trading partners and with the now declining cost of crude oil the US could recover faster. If the European Central Bank (ECB) lowers interest rates to support the euro area economy the interest rate differential will be reduced giving further support to the dollar. For now the momentum is with the dollar as it has climbed out of the July 15, 2008 depths of despair at 71.77.

In IVolatility Trading Digest™ Volume 8, Issue 30, Beijing Olympics, dated August 11, 2008, we suggested some DX positions and we now renew one of the ideas for the rising dollar.

Consider this low cost position with a limited and defined risk to get long the US Dollar.

PowerShares DB US Dollar Index Bullish (UUP) 23.93. The gap down on Thursday August 21, 2008 appeared to be the start of a correction but was short lived with a gap back up on Friday August 22, 2008. We think there could be more of a correction to come but the reversal back up on Friday is noteworthy and makes us want to increase our positions.

With a Current Historical Volatility of the ETF at 8.37 look at this bull call spread idea.

The value of the spread is limited to the difference between the two strike prices, for this position it is 2 ½. If the dollar strength continues until the end of the year this position would almost double in value. With a defined and limited risk of the 1.35 debit and because we are long one option and short the other we offset and neutralize the volatility and time decay risk associated with an individual option position. Since the current correction may continue for awhile longer, we suggest using these longer dated December options to allow sufficient time for the expected correction to be completed.

While UUP is trading with reasonable volume the options have only been trading since late June and are still fairly thin. Be careful with order entry, use a spread order and adjust the spread price for the next day trading in the ETF by using the position net delta above.


Oversold Oil and Gas

For those in the camp that thinks crude oil and natural gas companies are oversold and due for a rebound we have a suggestion for an exploration and production company to consider. If, on the other hand, you think any rebound will be short-lived and the group will shortly continue lower we have an airline that benefits from lower crude oil prices.

Petrohawk Energy Corp. (HK) 33.43, engages in the acquisition, exploration, development, and production, of oil and natural gas properties in mid-continent region of the US. The stock rose from 20 in March to more than 50 in June before correcting. With a recent Call/Put volume ratio of 5.97 and with a current Historical Volatility of 108 (likely to decline) take a look at this one.

This put is 8.43 out-of-the-money and would seem to be a good opportunity since HK recently turned up again from 25.64 on August 11, 2008. If put the stock by assignment on expiration because it closes below 25 the basis would be 24.50 which is below the last pivot at 25.64.

UAL Corporation (UAUA) 12.72, Chicago based United Airlines operated as of December 31, 2007, 3,300 flights to approximately 200 destinations from its hubs in Los Angeles, San Francisco, Denver, Chicago, and Washington, D.C serving approximately 900 destinations in 160 countries worldwide.

With a significant fuel bill consider this one for a possible continuation of the decline in crude oil prices. Also with a high Call/Put ratio of 3.73 and a current Historical Volatility of 235 (likely to decline) here is another idea.

This put is just out-of-the-money and the stock just recently made a pivot upward from the 10 level. If assigned on the September expiration the basis would be 10.625 while the Implied Volatility would most likely remain quite high providing the opportunity to sell calls against the then long stock.

Earnings Report Due Soon

Joy Global, Inc. (JOYG) 69.50, Milwaukee based Joy manufactures and services underground and surface mining equipment used for the extraction of coal and other minerals. They are scheduled to report third quarter earnings before the opening on September 3rd. The estimates are .88. With a recent Call/Put ratio of 4.64 and a current Historical Volatility of 56 (likely to decline) consider this put sale for the earnings report.

On August 6, 2008 the stock made a pivot at 63.43 and turned higher. This put is 4 ½ out-of-the- money and if it closes below the strike price at the September expiration in 26 days the basis of the assigned stock would be 62.80, below the last pivot.

Long Term Growth

Monsanto Co. (MON) 118.07, St Louis based Monsanto’s business is agricultural products, seeds and genomics for corn, soybeans, canola, and cottonseeds, as well as vegetable and fruit seeds. After rising to 145.80 on June 18, 2008 it declined to 103.50 on August 8, 2008 where it made a pivot and has now turned higher once again. They recently announced the increase of their investment in their joint venture with China National Seed Group, which provides corn seed to Chinese farmers. Although selling at 33 times earnings and growing at approximately 19% annually this probably represents one of the better opportunities to get a position in MON. With a current Historical Volatility of 52 consider this long-term bull call spread.

This stock has been selling at a premium p/e ratio for some time and it has been difficult to find a reasonable entry point. With a limited and defined risk this could be the best one for awhile.

More Biotech Ideas

Last week Barron’s offered suggestions on five biotechs that could be possible takeover candidates. For those interested in the biotech group we suggest reading the article. Previously we included two of the companies in IVolatility Trading Digest™ Volume 8, Issue 29, Biotech Encore, dated August 4, 2008. We now add these three more that were suggested in the Barron’s article.

Vertex Pharmaceuticals Incorporated (VRTX) 27.08. With a market capitalization of 4.2 billion Vertex has been working with Johnson & Johnson (JNJ) 71.42 on a drug for Hepatitis C which is in Phase III testing. They are still burning money and the last earnings report on August 4, 2008 showed a .66 per share loss. With a current Historical Volatility of 57.78 consider this bull call spread.

This position has a maximum defined value of 5 points, which is the difference between the strike prices and should allow sufficient time for them to report their testing results.

United Therapeutics Corp. (UTHR) 106.40, profitable having just reported .59 per share earnings, is a 2.5 billion market capitalization company that has a promising hypertension drug. With a current Historical Volatility of 35.60 take a look at this put sale.

At 6.40 out-of-the-money and with a decent edge the basis of the stock if assigned on the September expiration would be 97.375 and a good bit below the most recent pivot just above 100.

Alexion Pharmaceuticals, Inc. (ALXN) 87.79, profitable having just reported .06 per share earnings on July 29, 2008 is a 3.6 billion market capitalization company that has Soliris, a drug for the treatment of PNH, a blood disorder. The current Historical Volatility is 45. Look at this bull call spread.

After gapping up on the positive earnings announcement and now correcting back down to perhaps fill the gap, this stock would need to make a pivot soon and turn higher once again if this position is to increase in value very much by the November expiration.

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.


"adjust the spread price for the next day trading in the ETF by using the position net delta above." Explain, please

Posted by Mcrhoc on August 25, 2008 at 09:31 AM EDT

From above: "Be careful with order entry, use a spread order and adjust the spread price for the next day trading in the ETF by using the position net delta above." Please explain, how do you adjust spread price by using delta?

Posted by MCRHOC on August 26, 2008 at 01:12 PM EDT

Mcrhoc, Thanks for the question about the next day trading adjustment. First we want to apologize for the delay in responding. It seems our response notification system had some problems. We prepare our suggestions based upon the options and stock pricing data available on the Friday close. When the market opens on Monday the data will change for several reasons, the primary one is the stock price. In addition, since it will be three days later the time value will change and the “Greek values” will be different. Therefore, in order to have a trade that is priced as close as possible to the suggestion and in order to maintain the volatility advantage we suggest that you use the net delta of the suggested position as the guideline for your trade price. Simply adjust the price you are willing to pay on Monday by the stock price change multiplied by net delta. For example, assume that the position net debit was 1.50 and the position net delta is .15. On Monday if the stock is trading higher (or lower) by 1 point adjust the spread by .15. If higher you would be willing to pay 1.65 and if lower it would be 1.35. As a practical matter you will often have to be willing to give up some of the difference between the bid and offer prices on order to get the trade completed. So, we may decide that we are willing to pay as much as 1.70 if it advances or 1.30 if it declines. Jacktrader

Posted by Jacktrader ( on September 08, 2008 at 10:20 PM EDT

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IVolatility Trading DigestTM Disclaimer
IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter constitutes a recommendation to buy or sell any security. Before entering a position check to see how prices compare to those used in the digest, as the prices are likely to change on the next trading day. Our personnel or independent contractors may own positions and/or trade in the securities mentioned. We are not compensated in any way for publishing information about companies in the digest. Make sure to due your fundamental and technical analysis homework along with a realistic evaluation of position size before considering a commitment.

Our purpose is to offer some ideas that will help you make money using IVolatility. We will also use some other tools that are easily available with an Internet connection. Not a lot of complicated math formulas but good trade management. In addition to Volatility we use fundamental and technical analysis tools to increase the probability of success and reduce risk. We prepare a written trade plan defining why the trade is being made, what we call the "DR" (determining rationale) and the Stop/unwind, called the "SU".