« October 2010 »

IVolatility Trading Digest™

Volume 10, Issue 39
Smooth Sailing 2.0

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).
  Smooth Sailing 2.0


After clearing the 1150 resistance level and with no further significant technical resistance the S&P 500 Index now looks like it will make a run at 1219.80, the previous April 26 high. For now, it looks like smooth sailing upward. It was the week of October 5 last year, when we offered version one of smooth sailing. At that time, the S&P 500 Index closed at 1071.49, now at 1165.17 it is better by 8.7% for the year. In this Digest, we have several interesting smooth sailing suggestions right after a short strategy comment.



The trading range case we had been making in several previous Digest issues ended decisively last Tuesday when S&P 500 Index closed up 23.72 points on the day at 1160.75. Further, it remained above 1150 for the entire week. While there could be some resistance around 1173, there are very few other areas of resistance and it now looks headed up to test 1219.80. Accordingly, the pair trades in Digest Issue 37 and the hedge trade in Digest Issue 38 are no long necessary, but this became obvious last Tuesday. 

As for the fundamental considerations, it appears the markets are front running the Federal Reserve’s expected QE2 actions by taking Treasury bond yields lower while pushing up commodity and equity prices. The US Dollar index hardly paused at the previous 78 support level closing the week at 77.33. Perhaps there will be some dollar support at 76, but the momentum continues downward.



Trend Continuation

First among many such companies in the trend continuation category this week, we have a quality manufacturing company with extensive international business that benefits from the declining dollar.

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 for your consideration. The selection criterion includes an Exponential Moving Average, Relative Strength Index and the Chaikin Money Flow indictor and more. For more trend selection details, click here.


Trend Continuation


Caterpillar Inc. (CAT) 80.37.

CAT is scheduled to report earnings next Thursday October 21. The analysts' consensus estimate is 1.08 compared to last year's actual earnings of .64. The Historical Volatility is 21.61 and the Implied Volatility Index Mean is 32.76 for an IV/HV ratio of 1.26. Compared to some previous quarters the implied volatility has not risen very much as the stock has broken out above resistance at 72.50. As trend continuation trade, consider this long call spread.


Caterpillar Inc.


In the event of a sell off after the report use a close below the last pivot at 76.51 as the SU (stop/unwind).

iShares Silver Trust (SLV) 22.73.

In Digest Issue 37, we suggested Silver Wheaton Corp. (SLW) 26.63 as the long side of a hedged pair trade. Since then the iShares Silver Trust has gained upside momentum and is now performing better. Consider this precious metals continuation idea with a Historical Volatility of 20.74, up from 16.67 last week, and an Implied Volatility Index Mean of 31.13, up from 28.23 last week. The put-call ratio is a bullish .32.


iShares Silver Trust


Use a close back below the gap at 21.64 as the SU (stop/unwind). A close below this level would also be a close below the current upward sloping trendline from the August 24 low of 17.48.

Las Vegas Sands Corp. (LVS) 37.30.

With a Historical Volatility of 38.98 and an Implied Volatility Index Mean of 49.36 for a favorable IV/HV ratio of 1.27, consider these two put sale ideas with good edge.

Las Vegas Sands Corp.


Use a close below the current upward sloping trendline at 33 as the SU (stop/unwind).

Here are two in the budding agriculture sector that broke out Friday to the upside. There is a good chance they will correct from the breakout highs so waiting a few days may be worthwhile.  

Mosaic Co. (MOS) 65.61. HV 38.02, IVXM 44.62, IV/HV ratio 1.17


Mosaic Co.


Use a close below the last pivot at 57.95 as the SU (stop/unwind).

PowerShares DB Agriculture (DBA) 28.71. HV 24.11, IVXM 24.30, IV/HV ratio 1.01


PowerShares DB Agriculture


Use a close back below the last pivot at 26.57 as the SU (stop/unwind).


RT Options Scanner Results

Now we have some interesting ideas from our options scanner.

All had active multiple call options series in excess of 2,000 with high call to put volume ratios, the inverse of the put call ratios we use above, accompanied by increasing implied volatility which is usually a good indicator of unusual activity driving options prices higher. Several factors could be driving the implied volatility higher including expected earnings reports or takeover speculation.

Two have been featured in previous Digest issues and two are new entries. MMR has an unusually high IV/HV ratio while BMC has an unusually high call put ratio. All had unusual call activity on Friday.



Column headings

Sym = Symbol
Last = Friday’s closing price
HV= 30 day Historical Volatility
IVXM = 30 day Implied Volatility Index Mean
IV-WA= Implied Volatility Index Mean week ago
IV/HV = Implied Volatility to Historical Volatility ratio
Call/Put = Friday call volume divided by put volume
Earns = Next scheduled earning report due

Some strategy ideas include short puts, buy writes, long call spreads and others with long delta.

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.



While the dollar has been declining for several weeks the Treasury bond and equity markets, along with commodities, were actively discounting the expected quantative easing from the Federal Reserve. Now above the 1150 resistance level the S&P 500 Index has cleared to way to challenge the April high at 1219.80.



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In next week's issue, we will return once again with our complete market review and report on the progress of the S&P 500 Index.


Smooth Sailing 2.0


Finding Previous Issues and Our 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 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.



Posted by AL on October 11, 2010 at 09:01 AM EDT

I'm relatively new to your site but I noticed that you suggest long trades where the IV is much higher than the historical volatility. I thought the objective was to sell high volatility and buy low volatility. What am I missing?

Posted by Bob Hughey on October 11, 2010 at 01:20 PM EDT


The last volatility chart included in a Digest Issue was number 38, on October 4, 2010.

You can always find the volatility charts on our site at Basic Options. For a more volatility details, also try using Advanced Historical Data.


Posted by Jacktrader ( on October 20, 2010 at 01:23 PM EDT


Thanks for the question. You are on the right track and not missing anything. Ideally for a long trade it would be nice to find them when the IV is lower than the HV, but this is not always possible as we don’t’ make the markets we can only participate in what is available. Usually when we are planning a long trade and the IV is higher than the HV we will use a short put as a proxy long. However, we will also use long call spreads that don’t always have a volatility advantage. When done in combination with a short put sale we can obtain some volatility edge, but also increase our direction risk. There are also examples where both IV and HV are high and will likely return (regress) to their estimated mean values. In this case there is somewhat less concern about the IV/HV ratio and the focus will be on combinations are net short options.


Posted by Jacktrader ( on October 20, 2010 at 01:24 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".