« March 2010 »

IVolatility Trading Digest™

Volume 10, Issue 10
Celebrating 10 in 2010

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Celebrating 10 in 2010

10 years ago, we started IVolatility.com based upon the concept of providing affordable option analytics over the internet. Over the years we evolved into the premier provider of analytics, tools and data conveniently delivered online. In celebration of our 10th anniversary, we offer a token of our appreciation to our all of clients. Here are more details.

In this Digest Issue, we have some strategy thoughts and then some specific options trading ideas for consideration.


In last week’s rather lengthy strategy section, we suggested the equity market direction was unclear and in the short-term, it could go in either direction. This week we have more evidence of upside bias, but we are starting to see overbought signs in some indexes and indicators, such as the McClellan Oscillator and Summation Index. In addition, the VIX futures weighted premium is now reading 20.25%, very near to the premium of 21.7% on January 8, 2010 just before the last major S&P 500 Index top.

While a number of major indexes are above their January highs, the S&P 500 Index has yet to close above the January 19, 2010 high at 1150.45. It came very close last Thursday at 1150.24 before pulling back on Friday.

One scenario that is likely to develop over the next week or so is for the S&P 500 Index to continue modestly higher and then pull back to retest the breakout. Of course, the less likely alternative is for the pull back to continue lower, forming a double top. This appears to be less likely since many other indexes are above their previous highs, although now appearing overbought.

In a low implied volatility environment, the strategy is to use positions that are long volatility with the expectation of it increasing. Long volatility examples include positions with more long options than short options, such as call and put ratio backspreads, straddles, strangles, and even spreads with net long vega.


Call and Put Skew

We begin our suggestions with a scan for the top 5 stocks with call and put skew.

top 5 stocks

Used as an indicator of the current directional bias, there are several good trading candidates in this table.

Stock Trend Analysis Suggestion

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 include an Exponential Moving Average, Relative Strength Index and the Chaikin Money Flow indictor and others. For more details click here.

Caterpillar Inc. (CAT) 60.36.

Not yet, back to its January high of 64.42 consider this long call spread for the trend continuation with a current Historical Volatility of 28.71 and with an Implied Volatility Mean Index of 28.78.


A close back below the current upward sloping trendline at 57.50 would be the SU (stop/unwind).

Wyndham Worldwide Corporation (WYN) 25.17.

Here is another stock in the uptrend category. We have suggested it a number of times in pervious Digest Issues. The Historical Volatility is 28.28 with an Implied Volatility Mean Index of 33.85.


Set the SU (stop/unwind) at a close back down under 22, and below the current uptrend line.

High IV/HV Ratio

At number 3, on Friday’s high Implied Volatility compared to Historical Volatility list take a look at this idea with a positive volatility spread. With an Implied Volatility of 130.43 and a Historical Volatility of 49.29, the positive volatility spread ratio is 2.65.

Amylin Pharmaceuticals, Inc. (AMLN) 20.26.

This event trade is based upon an expected FDA ruling on their diabetes drug Byetta scheduled to be released last Friday. In the event the delayed ruling is released Monday before the opening, this short put trade opportunity will not be available at this price.

With a put-call ratio of 1.12, the recent activity was evenly matched between the speculators and hedgers, although the call open interest exceeds the put open interest by about 70K contracts.


Since this an event trade with an implied volatility of 241 it has the potential for a large move in either direction and the only practical risk management available is to limit the trade size in the event it goes lower, closing below 15 when in expires.

One-day IV Change

From the greatest one-day change category here is Friday’s number 3 at IV 72.58 with a 5.85 points or 8.77% increase in implied volatility.

Dendreon Corp. (DNDN) 36.75.

With a current Historical Volatility of 39.26, here is another stock we have suggested in previous Digest Issues. Consider this long call spread with positive vega.


We suggest using a long call spread since the FDA approval event is scheduled for May 1, 2010 and the implied volatility is likely to move considerably higher going into the event date. Use a close below 34 as the SU (stop/unwind).

At number 4 in the one-day change group with a 2.84 points or 7.71% IV change now at 30.70 is a bank mentioned in takeover chatter as the banking group moved higher last week.

SunTrust Banks, Inc. (STI) 26.86.

With a current Historical Volatility of 36.49 and an Implied Volatility Index Mean at 39.70 and rising, consider this long call spread idea with enough time to see if there is any truth to this rumor.


Use a close below 24 as the SU (Stop/unwind).


Now for another seasonal suggestion along with others in recent Digest Issues, here is one in the fertilizer group that gapped up on Friday.

Intrepid Potash, Inc. (IPI) 31.54.

The current Historical Volatility is 50.75 with an Implied Volatility Mean Index of 44.37 and with a bullish put call ratio of .25.


The June expiration was selected since it is usually when the agriculture sector peaks. Use a close below 28 as the SU (Stop/unwind).

Quarterly Earnings

While there has been a good bit of speculation about this company as a takeover candidate, we think it is just as likely to be a quarterly report story. They are scheduled to report on March 24, 2010.

Commercial Metals Company (CMC) 17.06

The current Historical Volatility is 63.71 with an Implied Volatility Mean Index of 66.87 and a bullish put call ratio of .35. Consider this short put idea.


In the event it closes below the strike price at the April expiration, take the stock by assignment. In that event, the basis would be about 14 ½ and very near the recent lows. The strategy would then be to sell calls against the long stock, as the implied volatility would most likely remain high.

Takeover File

Takeover File

Takeover activity seems to be picking up as credit spreads have been declining while perhaps signaling long-term corporate strategic planning activity before stock prices become too expensive. Working from the information provided by options trading as well as the rumors we can structure trades with defined risk that will benefit if the rumors continue. Here are two ideas.

SUPERVALU Inc. (SVU) 17.13.

Here is a rumor, if true is in the early stages. With unusually high volume, the stock traded in a 2-point range up from 16 on Friday. The options volume was twice the average and the Implied Volatility Index Mean rose to 47.22 from 30.35 a week ago. The rising implied volatility is an important indicator. The current Historical Volatility is 29.52 and the put-call ratio is bullish at .3.

Takeover File

Use a close back below the breakout at 16 as the SU (stop/unwind).

RadioShack Corp. (RSH) 22.87.

Recently there have been some large stock volume days along with some rumors of a private equity takeover in the works.

While the implied volatility numbers are not yet confirming the activity there may be some validity to the rumors. If so, we want to give it some time to develop and want to use a long vega strategy that will benefit if the implied volatility does start to rise. Consider this long call spread.


Use a close back below 21 or an inability of the implied volatility to rise in the next two weeks as the SU (stop/unwind).


It remains unclear the equity market defined by the S&P 500 Index will now continue higher or pull back from an apparent overbought condition. More rising indexes suggest it will be going higher, but a correction is likely near term. In the meanwhile, we cautiously suggest positions that will benefit as the markets continue higher.

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 update our market review in detail.

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.



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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".