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Today


IVolatility Trading Digest™


Volume 11, Issue 31
Opportunities Galore

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).
 

Opportunities GaloreAfter two weeks of uncertainty, high volatility and volume equities look as if they have found a short-term bottom. For traders incorporating volatility strategies into their plans there are so many ideas available this week we thought the best description was Opportunities Galore. After a brief strategy comment, we offer eight put sale ideas along with five call spread put combinations, a synthetic long, and a put spread all with a directional bias designed to take advantage of a continued equities advance along with expected declining volatility.

 

Strategy

Strategy

At the close on Friday our day-weighted VIX Futures premium over cash was -22.44%. On Monday of last week when the VIX closed at 48 the discount to cash was -33.11% the highest discount we have recorded to date. Readings above 20% are generally a good indication of increased professional hedging in anticipation of an immediate decline while negative readings suggest complacency about protecting long stock positions by buying VIX futures contracts. Low and especially negative readings such as those seen last week, have been good leading indicators for short-term market advances. After last Monday's extreme discount the S&P 500 Index (SPX) 1178.81 made a key reversal and appears to be headed higher based upon our indicators, including the skew and kurtosis readings that both reached extremes last Monday.  

All of the improvement after Tuesday's reversal could be unwound if there is more negative news from Europe over the weekend. Our colleague in Europe reminds us Italy is a huge debt problem and since the European banks will need to raise capital, they will tighten lending, especially interbank lending which may create liquidity issues.

As for last week's volatility in the equity markets, here is an appropriate quote from Samuel Brittan in last Thursdays Financial Times. "The stock exchange always has been and always will be a mixture of investment appraisal and sheer gambling."

For those who implemented some of our put sale suggestions in previous Digest Issues may be concerned about being assigned stock on the August expiration coming at the end of the week. If we are right about the reversal continuing higher this week the number positions that may be candidates for assignment will most likely diminish and for those who need to buy back short puts implied volatility will most likely continue declining this week.  

 

Now we turn our attention to selecting a few ideas from the many that are now available. In order to include more ideas we will abbreviate and leave out some of the detail we usually include with the suggestions and present some ideas in tables.

 

 

We begin with some near term August put sales. Since they will expire at the end of the week they will quickly lose time value, including over the weekend, so be prepared to see lower quotes on Monday, but from an implied volatility perspective, they should still be high on Monday and then decline with the time value during the week.

 

 

*Hewlett Packard is scheduled to report earnings on Thursday, the consensus estimate is 1.10 and the whisper number is 1.12.

Next, here are four more September and one October put sale idea. These are less sensitive to time decay over the week so their Monday prices should be closer to their Friday prices.

 

 

On the theory, the market will continue higher, here are some combinations of long calls along with put sales in order to gain some volatility edge from the higher implied volatility of the puts.

Direxion Daily Small Cap Bull 3X Shares (TNA) 45.01. This ETF seeks daily investment results, before fees and expenses, 3 times the price change of the Russell 2000 Index.

The current Historical Volatility is 144.23 with an Implied Volatility Index Mean of 116.19, up from 104.26 week. They should both be declining back into the 80 range, the IV/HV ratio is.81 and the put-call ratio is .60.

 

 

Use a close back below the recent low at 35.36 as the SU (stop/unwind).

Las Vegas Sands Corp. (LVS) 43.59. Previously suggested in many previous Digest issues LVS operates casinos in Las Vegas, Macau, and Singapore.

 

The current Historical Volatility is 61.25 with an Implied Volatility Index Mean of 54.37, down from 58.26 last week. They should both be declining back into the 40 range, the IV/HV ratio is.89 and the put-call ratio is bullish at .45.

 

 

Use a close back below the last pivot at 36 as the SU (stop/unwind) or be prepared to take the stock by assignment in the event it closes below 38 on the September expiration.

Molycorp, Inc. (MCP) 58.90. MCP focuses on the development, production and sale of rare earth oxides from stockpiled raw material.

The current Historical Volatility is 88.85 with an Implied Volatility Index Mean of 76.01, down from 87.67 last week. They should both be declining back into the 60 range, the IV/HV ratio is.86 and the put-call ratio at .637 is almost bearish.

 

 

Use a close back below the last pivot at 45 as the SU (stop/unwind) or be prepared to take the stock by assignment in the event it closes below 45 on the September expiration.

Marvell Technology Group Ltd. (MRVL) 12.58. MRVL designs, develops, and markets analog, mixed-signal, digital signal processing, and embedded and standalone ARM-based microprocessor integrated circuits.

The current Historical Volatility is 43.02 with an Implied Volatility Index Mean of 68.55. They should both be declining back into the 40 range after reporting earnings on August 25. The IV/HV ratio is a very favorable 1.59 and the put-call ratio is a very bullish .18.

 

 

Use a close back below the last pivot at 11.25 as the SU (stop/unwind) or be prepared to take the stock by assignment in the event it closes below 11 on the September expiration.

Yahoo! Inc. (YHOO) 13.59. YHOO is a digital media company.

The current Historical Volatility is 61.18 with an Implied Volatility Index Mean of 54.07. They should both be declining back into the 40 range. The IV/HV ratio is .88 and the put-call ratio is a very bullish .128.

 

 

Use a close back below the last pivot at 11as the SU (stop/unwind) or be prepared to take the stock by assignment in the event it closes below 12 on the September expiration.

NetApp, Inc. (NTAP) 43.42. NTAP provides enterprise storage and data management software for the cloud. Scheduled to report earnings on Wednesday, the consensus is .55 and the whisper is .58.  

The current Historical Volatility is 47.30 with an Implied Volatility Index Mean of 51.70, down from 55.39 last week; both should both be declining back into the 40 range. The IV/HV ratio is 1.09 and the put-call ratio is a bullish .40.

 

 

As a synthetic long, or risk reversal this one requires some management since the near term short put will expire two days after they report earnings. Use a close below 40 as the SU (stop/unwind).

Finally one in the other direction, however it also depends upon the market continuing to work its way higher.

SPDR Gold Shares (GLD) 169.97. This trust holds gold bullion.

After a parabolic rise, it should pull back if the equity market continues to improve. From the chart, it appears it could pull back to the gap just above 160.

The current Historical Volatility is 18.82 with an Implied Volatility Index Mean of 24.34; both should both be declining back into the 15 range. The IV/HV ratio is 1.29 and the put-call ratio is a bearish at .72, but it is used for hedging so higher ratios are the norm.

 

 

Use a close back above 175 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.

 

Summary

Our indicators suggest equities made a pivot last week and unless we receive more negative news from Europe that once again upsets the markets, we expected equities to continue higher.

 

IVolatility.com Bookstore  In addition to the vast number of articles and other information on our web site, take a browse through our bookstore for more reference information and material.


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In next week's issue, we will review all of our market indicators and update the progress of declining implied volatility.

 

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.

 

Next week’s 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".