« September 2011 »

IVolatility Trading Digest™

Volume 11, Issue 37
Awaiting Bundestag OK

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).

We would like to think some good fundamental or technical analysis combined with a clever strategy will make a difference this week, but the reality is the only things that matter are the political/macro developments in Europe. On Thursday, the Bundestag will vote on the bill to reform the European Financial Stability Facility (EFSF). In the meanwhile, equity markets will be watching to see if the S&P 500 Index can hold the current support level.                                        

In this Digest we review some recent suggestions and offer some thoughts on gold and new ideas that should be less dependent on the near term market direction.





StrategyOn Thursday, September 29, the German Bundestag or Parliament will vote on the European Financial Stability Facility and presumably, the rules and conditions Germany will impose for further debt support for European countries. Since the Bundestag budget committee approved the government's bill last Wednesday and most opposition parties have indicated they intend to vote with the government the vote could just be a formality. Even so, this is not likely to be the end to the European sovereign debt problem, but perhaps it will be enough for the equity markets to find some support.

Last week we noted gold was about to decline below its upward slopping trendline and unfortunately did not include a corresponding trade suggestion since there was still some doubt. With the breakdown, the picture has changed so we now have a suggestion, as there still appears to be more downside.

Now near the bottom of recent 1101.54 - 1230.71 range we suggest caution when considering further short positions since our VIX futures day-weighted premium has returned to a discount of -6.38%.

Last week, at 2.86%, we noted it had turned positive for the first time in 7 weeks and suggested implementing an IWM put spread. The return to a discount suggests the 1100 support will likely hold.


Trade Review

In Digest Issue 35, we suggested a call spread for ProShares UltraShort Euro (EUO) 18.94. This ETF seeks to provide daily move corresponding to twice (200%) the inverse (opposite) of the daily change in the US dollar price of the euro. The fund invests in swap agreement, futures contracts, forward contracts, option contracts.

We suggested buying the October 19/21 call spread, that is long the October 19 call and short the October call. On September 12, we booked our spread at a debit of .40. Marking it to market using the Friday's closing prices it was valued at .47 for a two week again of 17.59%, while not too bad it is less than we would have expected with the recent dollar strength. We think this ETF is an underperformer and suggest closing it.

Last week in Digest Issue 36, we suggested a put spread for iShares Russell 2000 Index (IWM) 65.14.

This suggestion was to buy the October 70/65 put spread, by buying the October 70 put and selling the October 65 put. With last Monday’s decline of 1.28 we booked the spread with a 1.53 debit, compared to the original plan based upon the previous Friday's numbers of 1.39. Marking it to market using this Friday's closing prices, it was 2.74, for a one-week gain of 97%. We suggest leaving this position open, but note last Thursday's gap lower and now suggest using the last Wednesday’s low of 66.54, as the new SU(stop/unwind).


Gold Breakdown

Although we should have made a short suggestion for gold last week, we remember Jesse Livermore's advice that it is never too late to sell something that is going down. With that thought in mind, consider this put spread.

SPDR Gold Shares (GLD) 159.80.

After several previous suggestions while GLD was trending higher, we now return for the downside. Last week it was not clear it would close below the upward sloping trendline, although it did close below it on Thursday September 15, creating a noticeable gap that rang the bell, it rebounded and then tracked the trendline line higher until last Thursday when it made a large gap lower, only to be followed by another on Friday. Now many technical analysts are referring to the double top formation that was set off on Thursday. Using the December futures contract we estimate the minimum downside-measuring objective from the double top at 1490 or about 149 for GLD.

Since there is still some distance to go, consider this put spread idea.

The current Historical Volatility is 35.28, and 21.34 using the range method, with an Implied Volatility Index Mean of 36.82, up from 27.02 last week. We estimate the normal IV range is 15-20. The IV/HV ratio is 1.04, but 1.73 using the range method, while the put-call ratio is bearish at 1.13, however since this ETF is used for hedging other gold positions higher put volumes like those seen recently should be expected. Friday's options big volume was 865,949 contracts compared to the 5-day average of 422,140 contracts.



Use a close back above the second gap at 170 as the SU (stop/unwind).


Takeover File

We have two interesting developments in the takeover file.

Yahoo! Inc. (YHOO) 14.71. YHOO is a digital media company in the process of reorganizing or perhaps being sold.

Up .72 on Friday, it was accompanied by unusual call option volume as 18 strike prices had call volume in excess of 2,000 each while the total options volume reached 334,706 contracts compared to the 5-day average of 164,110 contracts.

The current Historical Volatility is 46.89, while the Parkinson's range Historical Volatility is 39.80. The Implied Volatility Index Mean is 74.07, up from 59.20 last week, for an IV/HV ratio of 1.58, but 1.86 using the range method. On Friday there were 11 times more calls traded than puts, while the call open interest exceeds the put open interest by more than 2 times.

Here is the same spread combination we suggested in Digest Issue 35 with updated prices and implied volatility numbers. This combination still looks attractive.



Use a close back below the last pivot at 12.45 as the SU (stop/unwind) or be prepared to take the stock by assignment in the event it closes below 14 on the October. If so, then the plan is to sell calls against the stock position. If the October put expires out-of-the-money then sell the November 14 put and then once again in December reducing the call spread cost each time.

Range Resources Corporation (RRC) 58.53. RRC is an independent natural gas exploration and development company with gas properties in the Appalachian and southwestern regions of the US. The company produces tight-gas, shale, coal bed methane, and conventional natural gas and oil production in Pennsylvania, Virginia, Ohio, and West Virginia.

On September 19, rumors circulated through the markets that Royal Dutch Shell was interested in the company as the stock increased 2.39 on increased volume. However, in an interview with the Financial Times on Thursday, Peter Voser, Shell’s chief executive, seem to pour cold water on the idea. He said Shell would not play much of a role in any further consolidation of gas reserves and they had 40 trillion cubic feet of gas reserves in the US and Canada and it was time to deliver it.

Then on Friday Bloomberg reported that a Pennsylvania appeals court ruling posed questions regarding ownership of all natural gas found within the Marcellus shale formation. The stock declined 7.57 points as the options implied volatility increased 18.41% placing it number four on out of five on our list of largest implied volatility increases.   

The current Historical Volatility is 58.82, while the Parkinson's range Historical Volatility is 65.60. The Implied Volatility Index Mean is 86.08, up from 45.86 last week, for an IV/HV ratio of 1.46 but 1.31 using the range method. At .90, the put call- ratio is bearish. Friday's options volume was 14,519 contracts compared to the 5-day average of 19,160 contracts.

Consider this October strangle combination and an out-of-the-money call spread to reduce upside risk just in case Shell does make a play for the company. Strangles are volatility trades , but are complicated since they require some management and are better suited for those who can watch them and make adjustments. In addition, this one has four legs so commission costs need to be considered.



With the short put at 55 be prepared to take stock by assignment if the stock is below 55 on expiration. On the upside the breakeven is just above 75 so this becomes 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.


Become a better trader

Read Expiring Monthly

Subscribe now!



While the S&P 500 Index found support last Friday above 1,100, this week the direction will once again most likely be determined by events in Europe. Our VIX futures day- weighted premium indicator currently suggests the support will hold.


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.

Twitter Follow us on twitter for more ideas from our scanners and other developments.



In next week's issue, we will return with a complete review of our indicators along with more suggestions.


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




Copyright 2011 IVolatility.com
All rights reserved.



Comments are closed for this entry.

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".