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Today


IVolatility Trading Digest™


Volume 10, Issue 6
Symbol Shock

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).
 

The Lost Symbol

In case you may have missed it, the options symbols changed on Friday. The four and five character OPRA codes have been replaced with a string of 15 characters after the underlying symbol. When written without spaces the new symbols appear to like a string of digital code and can be confusing.

For example, using SPY, the SPDR for the S&P 500 Index, the symbol for the February 110 call is:

SPY 100220C00110000.

The first 2 characters after the symbol are the year 2010, but limited to the last two characters 10.
The next 2 are for the month, February is 02.
Then, 2 for the February expiration day (not the last trading day) which is 20.
Next comes 1 for the option type (Call or Put), so it is C.
Then, 5 for the strike price dollar amount, so we have 00110
Finally, 3 are used for cents after the decimal, in this case 000.

When shown as SPY 100220C00110000, it can be confusing, but perhaps we will get used to it in time. We understand some brokers will be adding spaces between the characters, which should help reduce the confusion.

Confusion

After a brief strategy comment, we will use the remainder of the space in this Digest for trading ideas.


Strategy

Last week in Digest Issue 5 we made the case for an equities oversold bounce and it appears to be developing according to the plan. For the near term, they should continue somewhat higher.

The VIX Weighted Premium over cash is again positive at 9.25%, but nowhere near the early January reading of 21.7% just before the equity markets turned lower.

As a market momentum indicator, here is a table showing the skew between the Call and Put Implied Volatility. The top 5 call skews are all major market ETFs that trade with large volume and open interest, indicating the calls are being bid higher relative to the puts.

Top and bottom top stocks

In the second section, we see the bottom 5 puts that are currently favored relative to the calls, some of which may be due to hedging activity, but important nevertheless.

Advanced Futures Options

For those who use our Advanced Futures Options service we have added the VIX Futures and the COBE futures exchange to our list of available data. At the Advanced Futures Options page, enter VX for the symbol and CF for the exchange as shown below.

Advanced Futures Options page


IVolatility Trading Digest Table of Contents

We have added a link to a Table of Contents page in the Digest section of our home page. Currently we have listed all of the suggestions and ideas by underlying symbols in all of the Digest Issues for 2008 and 2009. We will be adding 2010 to the Table of Contents each quarter.


IVOLopps™

S&P 500 Index (SPX) 1075.51.

Until SPX reaches the 1120 area, or another 45 points pursuant to the trade strategy plan we offered in Digest Issue 5, we suggest using March call spreads with any of the major index ETFs listed above in the top 5 call skew section above.


Quarterly Earnings Reports

In the “Rankers and Scanner” section of our home page we feature the “Top 5 stocks by implied volatility change” Click on the link and you are taken to the Advanced Ranker Sample of the top and bottom 5 stock in four categories.

We often look at the top 5 stocks based on IV Index Mean vs 30D HV.

With an Implied Volatility of 50.23 and a Historical Volatility of 29.83 for an IV/HV ratio of 1.69 here is this week’s number 5 in the top 5 group.

Whole Foods Market, Inc. (WFMI) 29.75.

WFMI is due to report earnings on Tuesday after the close of trading and while the implied volatility is rising it may be justified based upon the large moves of 10% or more this stock has made after previous earning reports. Here is the volatility chart with the last three earnings reports indicated.

HV and IBIndex vs Price

We note that at each of the three previous reporting dates it continued in the same direction as it was moving before the report, but with considerably more momentum. After each report, there is a large reduction in the implied volatility as shown above. However, since there is also a large move in the stock price we do not suggest selling volatility by using a short straddle.

 Based upon the premise it will behave in a similar manner and will continue with an upward bias after it reports on Tuesday we offer this put calendar spread trade plan suggestion.

i

This suggestion is based upon the Friday mid prices between the bid and ask. The prices on Tuesday will be slightly different due to time decay and will need to be adjusted for any price change in the underlying.

As an alternative, here is a short put suggestion with the risk of being assigned the stock in the event it reverses direction on the earnings report and closes lower at the February expiration.

i

This suggestion is based upon the Friday mid prices between the bid and ask. The prices on Tuesday will be slightly different due to time decay and will need to be adjusted for any price change in the underlying. The delta is also based upon Friday numbers, before the position is established, and will reverse when the put is sold.

We will accept the assignment risk since the stock is in the lower part of its recent trading range and should make a good covered call candidate if assigned from the short put.

Las Vegas Sands Corp. (LVS)

Las Vegas Sands Corp. (LVS) 16.81.

LVS is due to report earnings on Wednesday after the market closes. The First Call mean estimate is for .03 and we speculate this is too low based upon the release of January’s revenue data from Macau released by the Lusa News Agency on February 2, 2010 and reported by MarketWatch. In Macau the January gambling revenue was $1.72 billion up 65% from a year earlier. Lusa reported that Sands had second largest share of this revenue at 22%.

The current Historical Volatility is 65.85 and the Implied Volatility Index Mean is 63.46. On Friday, LVS traded 39.7K options and had two call strike series that traded more than 2,000 calls each.

LVS is long stock candidate that we would own so we suggest selling puts as a long strategy. In the event the stock pulls back after reporting and is below 15 at the March expiration the stock will be assigned so the next step is to sell calls and collect more premium since the implied volatility will likely remain high.

Consider this put sale as step one.

Las Vegas Sands Corp. (LVS)

LVS is one stock we had good success with last year selling puts, then being assigned and subsequently selling calls. We suggest this opportunity continues again this year.

RT Options Scanner

We ran our RT Options Scanner searching for long candidates. Here are some interesting ideas to consider. On Friday, they all had multiple options series with call volume in excess of 2,000 and call to put ratios in excess of 2.00 (more than twice as many calls as puts).

RT Options Scanner

HV = Historical Volatility of the stock
IVXM = Implied Volatility Mean Index of the options

Summary

In the near term, we expect to see the equity markets continue higher but we suggest caution and hedging as SPX approaches the 1120 area, which could come quickly.


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In next week’s issue, we return with a complete Market Review and more trading suggestions.

Previous Issues and Reader Response Request

Finding Previous Issues and Our Reader Response Reques

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.

Comments:

Thanks.

Excellent Digest

Posted by hm on February 15, 2010 at 10:58 PM EST

HM,

Thanks for the compliment. Please let us know if you have any questions or suggestions.

Jack

Posted by Jacktrader (72.193.217.6) on February 17, 2010 at 08:20 PM EST

Love your weekly commentaries, great perspectives. A breath of fresh air from all the BS I read & hear(i m a professional sales trader).

Keep it up!

Posted by Andrew on February 18, 2010 at 04:51 PM EST

Andrew,

Thanks for the support. If you have any ideas to make it better let us know.

Jack

Posted by Jacktrader (72.193.217.6) on March 09, 2010 at 06:02 PM EST


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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".