« November 2010 »

IVolatility Trading Digest™

Volume 10, Issue 43
Ben Delivered QE2

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Ben Delivered QE2

The last time we featured Ben delivering the goods was in Digest Issue 32 Volume 7, dated September 24, 2007. Then he surprised the financial markets by delivering a more than expected 50 basis points reduction in Fed Funds rate. This time everybody knows it was an extra $100 billion for the QE2 program. Then as now, the raw materials and precious metals stocks responded favorably. Following a brief strategy comment, we have several suggestions to consider this week.

Ben Delivered QE2

Last week we noted the developing divergence in the advance-decline line, but lower a VIX futures premium and a high SPX put-call ratio and concluded it was reflecting the markets uncertainty about the expected QE2.  

Since QE2 was better than expected many stock indices along with some commodities, gold and silver now look overbought and due for a correction. Accordingly, the list of new long selections is limited to special situations.

From a technical perspective, the SPX, now at 1225.85, has exceeded its April 26 high at 1219.80 and thus puts in doubt the Head & Shoulders Top described in Digest Issue 34. However, some caution is still warranted as the SPX has a tendency to overshoot technical objectives and then reverse. We would like to see it continue somewhat higher before declaring this Head & Shoulders Top canceled by closing above the previous head of the pattern. Interestingly if it continues up to 1233.29, it would fulfill our Head & Shoulders Bottom minimum measuring objective described in Digest Issue 36, Volume 9, dated September 14, 2009.      

Since the equity markets are once again trending higher we suggest focusing on special situations and avoid the temptation to short overbought equities expecting corrections since counter trend corrections have a tendency to quickly reverse to the upside. We think the better strategy is waiting for the correction to be completed before adding more longs.



Trend Continuation

Here are two ideas trading higher in the trend continuation category after reporting earnings.

QUALCOMM Inc. (QCOM) 48.33.

QCOM gapped higher after reporting earnings of .68 per share, better than the .59 per share consensus estimate along with improving guidance for the current quarter. After reporting, the Implied Volatility dropped from last week’s reading of 31.09 to 23.32. With a current Historical Volatility of 21.73, an IV/HV ratio of 1.07 and a bullish put-call ratio of .3, consider this attractively priced long call spread.




Use a close back below the current upward trendline at 45 as the SU (stop/unwind).

Fluor Corporation (FLR) 54.53.

Fluor, the international engineering management company, also gapped higher after reporting earnings of .02 per share, better than the expected -.26 per share consensus estimate. In addition, they reported a backlog of $33 billion, an 18% increase, and the second consecutive quarter of backlog expansion.  

With a current Historical Volatility of 37.06 and an Implied Volatility Index Mean of 31.58 with an IV/HV ratio of .85 and a put-call ratio of .65, here is a long call /short put combination idea.


Fluor Corporation


Use a close back down below 50 as the SU (stop/unwind).


Active Options

Here an interesting idea in the precious metals sector that registered on the Friday active options list.

North American Palladium Ltd. (PAL) 5.48.

With record high palladium prices and with one of only two primary producing palladium mines in the world, consider this attractive long call/short put combination.

The current Historical Volatility is 48.63 and the Implied Volatility Index Mean is 65.78 with an IV/HV ratio of 1.35 and a very bullish put-call ratio of .10.


North American Palladium Ltd.


Use a close back below 5 as the SU (stop/unwind) or be prepared to take the stock by assignment in the event it closes below 5 at the March expiration. Use caution with order entry as this one is thinly traded.


Takeover File

Here are two updates and two new ideas for the takeover file.

Potash Corp. (POT) 141.06.

Canada has issued a provisional rejection of BHP's $130 offer to buy POT leaving BHP to consider alternatives, one of which is to withdraw the offer entirely. Since the Implied Volatility Index Mean has declined from 37.22 last week to 29.66 on Friday the declining options prices are suggesting the probability of a higher BHP offer has also declined. The current Historical Volatility is 21.30 and the IV/HV ratio is 1.39 with a bearish put-call ratio of .7.

Since the original BHP offer, POT reported quarterly earnings and upgraded guidance. In the event BHP withdraws its offer, POT will most likely come under pressure from the stockholders to support the stock price. Accordingly consider this put sale idea that would result in a long position in the event the stock closes below 125 at the December expiration.


Potash Corp


If BHP withdraws their offer, POT will quickly decline, but could be supported at some lower level by management actions. In that event, the short put would result in a long position in the stock just under 124 and just above the price before it gapped higher in August on the BHP offer. The result would be a long position in a stock with an improving fundamental outlook and the opportunity to sell calls against the long stock.

Pride International Inc. (PDE) 33.29.

Originally suggested in Digest Issue 37 consider adding this put sale.

PDE continues to be the subject of takeover rumors and the Wall Street Journal reported they have been talking with Ensco PLC (ESV) 50.14. Previously there were rumors SeaDrill Ltd. (SDRL) 33.29 would increase their existing ownership stake in the company.

The current Historical Volatility is 32.73 with an Implied Volatility Index Mean of 42.05, an IV/HV ratio of 1.28, but a bearish put-call ratio of .7.



Use a close back down below the last pivot at 30 as the SU (stop/unwind).

Massey Energy Co. (MEE) 46.94.

Coal mining company MEE was up 4.73 Friday on a Wall Street Journal report that the company is considering a takeover offer from Alpha Natural Resources Inc. (ANR) 44.45. When metallurgical coal prices are high M&A activity tends to heat up in the coal sector and Massey has more than 1 billion tons of metallurgical coal reserves.  

Option prices were increasing along with the stock price, as MEE showed up as number three on our proprietary "Top 5 stocks with greatest IV change from yesterday" list increasing from 47.97 to 54.03, a 12.64% increase. The current Historical Volatility is 46.45 for an IV/HV ratio of 1.16 and a put-call ratio of .5.

Consider this put sale idea



With a decent edge, this position would result in a long position under 40, if assigned at the December expiration, in a company will good fundamentals.


Ben Delivered QE2


Hecla Mining Co. (HL) 7.93.

Silver did extremely well after the QE2 announcement rising 8% for the week from 24.73 to 26.72, basis cash. Hecla went from 6.89 to 7.93 for a gain of 15%.

It owns a 100% interest in the Lucky Friday mine located in northern Idaho and a 100% interest in the Greens Creek mine located on Admiralty Island, near Juneau, Alaska.

In addition, it was number five on our on our proprietary "Top 5 stocks with greatest IV change from yesterday" list increasing from 62.96 to 69.49 up 10.37%. Further, there were seven call option series with volume more than 2,000 contracts, with the December 7 contract trading 21,318 and the December 8 at 26,676. The high volume in multiple options series leads us to speculate there could be more going on than just the increase in the silver price.

The current Historical Volatility is 51.06 with an IV/HV ratio of 1.36 and an extremely bullish put-call ratio of .15.

For those who may want to speculate there is more than just the increase in silver prices going on here are two ideas to consider. The first a December call spread.


Hecla Mining Co.


Next, a January long call spread/short put combination.



Use a close back down below 7 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.


With the S&P 500 Index breaking out above the April high there is a good chance it will continue up to the original upside measuring objective from the March 2009 Head & Shoulders Bottom. However, some sectors appear overbought so there could first be a correction.


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In next week's issue, we will review all of our current market indicators and report on the progress of the S&P 500 Index as it moves up toward the original March 2009 Head & Shoulders Bottom upside measuring objective.


Ben Delivered QE2


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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.


Requester : bob vozek Due by time : - Category : Description : Expecting stock to fall "POT" and suggesting to sell put which will increase in value /LO$$ to $eller/ it is most dumb idea I`ve ever seen - sorry for language. Until now "ivolatility" was reputable letter in my mind. Next time You may suggest to sell Call or buy Put in similar sytuation. Bol B.

Posted by Bob B ( on November 09, 2010 at 10:52 AM EST

Bob B. Thanks for the comment. It sounds as if I did not do a good job explaining this trade idea. Since the objective is to establish a long position based upon improving fundamentals perhaps we should have suggested a covered call, long the stock and short a call. Since the risk profile of a short put is the same as a covered call, we prefer using put sales as long proxies. For the POT idea if the stock declines below 125 by December, and we are not certain it will, it will produce the desired long at less than 124. Based upon the improving fundamentals we are happy to be long at 124. However, there is a chance the stock will not decline below 125 at the December expiration and in this situation, we will keep the premium and try again. Jack

Posted by Jacktrader ( on November 09, 2010 at 11:08 AM EST

I think the POT idea was great. We should all know put selling is done when we want to buy a good UL. The premium is a bonus..and we can try again all the way up. Thanks for the idea

Posted by scott on November 09, 2010 at 12:49 PM EST

Permalink Comments [3]

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".