« April 2010 »

IVolatility Trading Digest™

Volume 10, Issue 16
Greek Isles Summer 2010

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Greek Isles Summer 2010

Finally, heavily indebted Greece formally asked for help from the European Union and the International Monetary Fund. Although the final terms have not been determined speculation will now turn to the consequences austerity measures will have on the real economy as strikes and protests are expected. Without dramatic price reductions, this summer could be a challenge, as they may have difficulty attracting tourists since the less stressful adjustment mechanism of currency devaluation is currently off the table. The problem will not be helped by strikes and protests in the streets. In the meanwhile, after only a slight pause the equity markets ignored Greece and continued higher. After a brief strategy comment, we offer a selection of options trading suggestions.



S&P 500 Index (SPX) 1217.28.

In last week’s Digest Issue 15, we offered some thoughts for assessing the expected correction and retest of the previous high at 1150.45. Surprisingly the equity markets did not seem as concerned with Greece or Goldman as we expected and by the end of the week, the SPX was trading at a new recovery high. 

The first indication was given by the VIX on Monday when it reversed and turned lower after failing to trade higher than the previous Friday’s high at 19.70. At the end of the week, it was back to 16.62. Last Monday’s second indicator was the reversal in SPX as it traded lower and then closed higher on the day. Further, we were expecting to see a decline in the E-mini S&P 500 Index futures open interest as a confirmation of short covering, but open interest actually increased by 280 contracts a low number compared to the balance of the week, probably meaning that short covering did occur Monday but it was not enough to offset the new longs. It was an impressive display of market strength.  

This relative equity strength leads us to conclude once again, the retest of the 1150.45 support will not come before reaching our Head & Shoulders Bottom measuring objective at 1233.29 as we described in Digest Issue 1 dated January 11, 2010 (only 16.01 points higher).



Quarterly Earnings Reports

Many quarterly earnings reports are now coming every day and so far, most have beaten expectations although they were probably not set very high.

Instead of trying to guess which companies will beat, our approach to earnings is to look for prospective volatility opportunities. Here are two ideas.

Louisiana-Pacific Corp. (LPX) 12.86. LPX manufactures and distributes home building products. Since it gapped up above resistance and closed at 9.05 on March 31, 2010 LPX has gone rapidly higher with no indication of correcting. The breakout was accompanied by increased volume and now the options implied volatility is rising. In addition, the building products and home building groups are showing positive relative strength. There is a good chance the strength is due to improved sales and perhaps even positive earnings that are due to be reported on Tuesday May 4, 2010.

In the event the implied volatility continues to rise, we suggest a two-part straddle we call an Earnings Report Volatility Reversal. The plan is to buy a straddle for the rise in volatility and then reverse the position on the day before the earnings report is released. With a current Historical Volatility of 49.44 and with an Implied Volatility Index Mean at 66.78, up from 54.68 last week, our forecast is for another 10-point rise into the earnings report. Here is the straddle. 


Louisiana-Pacific Corp. (LPX)


Since this is rising implied volatility position, price direction is not the concern. The SU (stop/unwind) is based upon no further rise in implied volatility up to May 3, but the plan is to reverse the position on the day before their earnings report. The risk is an early release of the report so the date needs to be checked often, especially on Friday April 30, 2010. In the event the stock continues higher before the position is reversed (most likely), a higher strike will be needed for the short straddle second part of the plan.  

The Home Depot, Inc. (HD) 36.39. Also in the relatively strong home building group HD operates as a home improvement retailer, selling a wide range of building materials, home improvement products, and lawn and garden products.

With a current Historical Volatility of 13.04 and with an Implied Volatility Mean Index of 20.93, up from 20.86 last week, our forecast is for 30 by the earnings release date on May 18, 2010. Once again, we suggest using a volatility reversal plan such as this one.


The Home Depot, Inc. (HD)


This is also a rising volatility position so our concern is a failure of implied volatility to rise. The earnings report is scheduled 3 days before the May options expiration so we will be concerned if implied volatility has not increased enough to proceed with the second reversal part of the trade plan.


Active Options Scan

Here are two suggestions from our active options with rising implied volatility scan.

MGM Mirage (MGM) 15.89.

We suggested MGM in Digest Issue 14 and we return due to continued active options activity.
On Friday, six call options series traded more than two thousand contracts and one more than six thousand.

The current Historical Volatility is now 61.34 while the Implied Volatility Index Mean has declined to 57.80 the current put-call ratio is .55. Consider this addition to the previous suggestion in Digest Issue 14.


MGM Mirage (MGM)


This put sale has good edge and the plan is to take the stock by assignment in the event it closes below 14 at the June expiration. The SU (stop/unwind) remains on a close below 12, the same as in the Digest Issue 14 trade plan.

STEC, Inc. (STEC) 15.88. STEC designs and manufactures enterprise-class flash solid-state drives for use in high-performance storage and server systems.

With a current Historical Volatility of 53.97 and an Implied Volatility Index Mean of 86.41, up from 80.64 last week this stock is also anticipating earnings due on May 6, 2010. On Friday, 3 May call options series traded more than two thousand contacts. With good edge, consider this put sale.




Since this is another earnings related suggestion be prepared to take the stock by assignment in the event it closes below 14 on expiration in less than two weeks. With his implied volatility it could declined that far in the event earnings disappoint.


Seasonal and Earnings

Here is one that combines the seasonal tendency to rise in the spring along with an upcoming earnings report.

Tesoro Corporation (TSO) 13.25. Tesoro refines and markets petroleum products including heavy and light crude oils producing gasoline and gasoline blends, jet fuel, diesel fuel, and heavy fuel oils. Since crude oil futures are currently selling for a premium in the deferred months and crude oil supplies are plentiful, the refiners may be able to increase their margins going into the summer driving season.

The quarterly earnings report is due Thursday April 29, 2010. With a current Historical Volatility of 34.98 and an Implied Volatility Index Mean of 41.68, down from 44.26 last week, consider this combination short put and long call spread.


Tesoro Corporation (TSO)


In the event it moves higher, the gain is limited to difference between the two legs of the long call spread or 2 points. There is good support for this stock at 12, but that does leave some risk in the event earnings disappoint and it closes below 13 at the June expiration. In that event, the plan is to take the stock by assignment and then sell calls.  

Trade Review

From time-to-time, we review previous suggestions. This one from IVolatility Trading Digest™
Volume 10, Issue 12
, Bond Market Vigilantes, dated March 29, 2010 is worth beating our own drums over. We made the suggestion when it was trading at 7.26.  

DelcathSystems Inc. (DCTH) 13.12.

This medical device maker is developing a regional treatment system for cancer in the liver. They released the results of a study last Thursday, earlier than expected and the stock then opened up 3.40 points. Since drug report event trades are little more than gambling the only risk control is to keep the trade size small relative to the available trading capital. The mark-to-mark gain on the three legs is 2.32 with an initial credit of .07 for a 2.39 total gain.

Since the event has occurred we now suggest closing this trade as follows.


Delcath Systems Inc. (DCTH)


For this trade the combination of a high IV/HV ratio of 176.25 and a bullish put-call ratio of .30 worked very well. 


Takeover File

Takeover activity is picking up again and here is another suggestion from IVolatility Trading Digest™ Volume 10, Issue 12, Bond Market Vigilantes, dated March 29, 2010.

RadioShack Corp. (RSH) 23.17.

RadioShack reports Monday April 26, 2010 after the close. Since the short April 22 ½ put expired here is a suggestion for a May replacement.

The put-call ratio is now .6, the current Historical Volatility is 33.38 and the Implied Volatility Index Mean is 48.32 - consider this put sale replacement.


RadioShack Corp. (RSH)


In the event is closes below 22 ½ on expiration take the stock by assignment and sell calls as the implied volatility is likely to continue to be supported by takeover talk, but use a close back below the support at 21 as the SU (stop/unwind).

Now for a new addition to the takeover file.

SandRidge Energy, Inc. (SD) 7.79.

SandRidge is an oil and natural gas company headquartered in Oklahoma City focusing upon exploration and production. They also own and operate gas gathering and processing facilities and CO2 treating and transportation facilities. Its exploration and production activities are in West Texas, the Permian Basin, Mid-Continent, Cotton Valley Trend in East Texas, the Gulf Coast, and the Gulf of Mexico.

Primarily a natural gas producer SandRidge is transforming itself into a diversified company by adding less expensive traditional oil reserves with the recent announcement to acquire Arena Resources (ARD) 37.65. The terms are $2.50 in cash and 4.77 shares of SD for each ARD share valuing ARD 39.65 at current prices.

Most takeover trades focus on the company being acquired, but this deal seems to create value in the combined companies as SD has now broken up above its downward sloping trendline around 7.50. On Friday the June 7 ½ calls traded more than seven thousand contracts creating a very bullish put-call ratio of .2 and drawing our attention to the breakout above the downward sloping trendline.

The current Historical Volatility is 38.54 and the Implied Volatility Index Mean is 41.69. Here is a combination idea to consider.


SandRidge Energy, Inc. (SD)


There is risk below the recent support at 7 so be prepared to take in the stock if it closes below this level at the September expiration.

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.



A majority of the S&P 500 Index companies have reported better than expected earnings, adding support to the equity markets despite the headline financial news from Greece and Goldman. Our upside minimum measuring objective of 1233.29 is most likely to be reached very soon as equities continue higher.


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In next week’s issue, since we will be attending the Options Industry Conference in Phoenix we will offer a brief market review and some thoughts about the importance of finding an edge.

Previous Issues and Reader Response Request

Finding Previous Issues and Our Reader Response Request

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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".