« November 2011 »

IVolatility Trading Digest™

Volume 11, Issue 45
Seasonal vs. Europe

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Without the negative sovereign debt news coming from Europe, equities would be responding positively to the normal seasonal strength that typically begins in November and runs through January. Now however, it looks as if there could be another test of the lows.

After a brief strategy comment we have a three trading ideas to consider regardless of the near term market direction followed by two tables full of data to use for structuring even more option trades.



StrategyS&P 500 Index (SPX) 1215.65. Unfortunately for the bulls, the classical symmetrical triangle consolidation pattern we identified last week became an unusual reversal pattern rather than the higher probability continuation pattern we were expecting, as the European news once again overwhelmed the normal seasonal tendency. The break down below the consolidation triangle creates a new downside-measuring objective at 1163, which could become the missing right shoulder of a Head & Shoulders Bottom that we had been expecting in the later part of October.

The bulls will be further disappointed by the PowerShares QQQ (QQQ) 55.40, closing below 56 and thereby setting off a Head & Shoulder Top with a measuring objective down at 53. This would seem to fit the same pattern as the S&P 500 Index.

On Friday, our day-weighted VIX futures premium was 1.62% compared to last week at .93%. The day weighting applied 88% to the December contract and 12% to January resulting in the average premium of .70 or 1.62%.

For this short-term indicator the premium to the cash is a SPX sell signal suggesting professional expectations for the cash to increase toward the futures price. In the past, reversals have occurred when the readings were higher, both positive and negative.

While Thanksgiving week is usually marked by low volume and small price changes this year could be an exception since Europe will still be open all week grinding out more contentious news reports. As a result, our outlook for the near term has changed and we now think the chances have increased that there will be another downleg to at least 1163 for the S&P 500 Index. This could be followed by a rally into year-end after defining the right shoulder of the potential Head & Shoulders Bottom.

Jeffrey Hirsch at the Stock Trader's Almanac reports so far 2011 has been following a typical seasonal pattern and if it continues November, December and January will see higher stock prices.


We have an update for the earnings report trade idea we made in Digest Issue 44 last week for Salesforce.com (CRM) 113.43.

On Thursday, they reported third quarter non-GAAP earnings of .34 along with a 36% increase in revenues after the close. The result was a two-day price decline of 13.9% that began during the day before the report was released.

Using last Monday's closing prices, booked the suggested one-sided iron condor consisting of the short 145/140 call spread and the short 110 put for a credit of 2.88.

With the stock price decline, the all of the options expired out-of-the money and we booked the 2.88 gain of 14.69%, based upon standard margin requirement of 1,940.


Quarterly Earnings Reports

Here is another noteworthy earnings report due this week.

Deere & Company (DE) 74.27. Primarily known as a farm equipment maker DE is scheduled to report on Wednesday before the opening. The consensus estimate is 1.44 per share with a whisper number of 1.46 per share. Consistent with recent quarterly reports we expect they will meet the estimate, but then provide cautious guidance and comments about the fourth quarter especially with the economic uncertainty emanating from Europe. For this reason, we suggest a put spread. 

The current Historical Volatility is 39.17 and 31.12 using the Parkinson's range method, with an Implied Volatility Index Mean of 41.49, up from 37.46 last week. The IV/HV ratio is 1.06 and 1.33 using the range HV. The put-call ratio at .90 is in bearish territory, but could be due to hedging.



We suggest using a close back above the pivot at 78.52 as the SU (stop/unwind).

Here is another earnings idea a little further away.


Dave's Corner

Oracle (ORCL)30.60

Oracle, the benchmark for large US software companies, is scheduled to release its 2Q earnings on December 15 after the close. The consensus estimate is .55 per share. Many analysts believe this large cap technology company is undervalued, reflected by JP Morgan's price upgrade to 40 during the past week.

Last week, Warren Buffet announced on CNBC that he had purchased a large stake in IBM, which initially boosted all of the software companies. Buffet believes in IBM specifically, but his investment thesis crosses over into companies like Oracle.

The main question for investors is whether this information has been priced into the market. Technically, ORCL has consolidated in a tight range between 34, with the 50-day moving average near 30. The current consolidation comes after a 25% upmove move from the lows near 25 in mid-August.

The current Historical Volatility is 37.33 and 25.95 using the range method, with an Implied Volatility Index Mean of 38.95, up from 34.17 last week. The IV/HV ratio is 1.09 and 1.50 using the range method HV. The put-call ratio is a bearish 2.75, but understandable since put are being used for hedging going into the earnings report.

Use a put sale with a volatility advantage to finance an ORCL call spread.



Close or unwind the position if it closes below 29.


IV/HV Ratio Idea

Here is an idea in the number four place from our complimentary regular Top 5 IV/HV ratio list.

InterDigital, Inc. (IDCC) 47.37. The company designs and developments digital wireless technology and has created an extensive patent portfolio. The stock price has been in a downtrend from July after there was speculation they were considering the sale of patents.

We last offered a put sale suggestion in Digest Issue 35 for an October 45 put that would have since expired since the stock closed at 47.65 on the October expiration. Here is a replacement idea.   

The current Historical Volatility is 57.19, while the Parkinson's range Historical Volatility is 61.84. The Implied Volatility Index Mean is 107.59, up from 96.71 last week, for an IV/HV ratio of 1.88, but 1.74 using the range method. The put-call ratio at .25, means there were 4 times more calls traded on Friday than puts, while the call open interest exceeds the put open interest by more than 2 times. Friday's option volume was 19,684 contracts compared to the 5-day average of 15,900.



If it closes below 40 at the December expiration, we suggest taking the stock by assignment and then selling calls against the long stock position. Our previous forecast of declining implied volatility was not correct, remaining high and ranked number four in this week's Top 5 with an IV/HV ratio of 1.88.


RT Options Scanner Results

We ran our Scanner and found some interesting ideas that we have grouped into two categories based upon the put call ratios. The first are bullish with low put-call ratios, or a high number of calls traded compared to puts. All had several call series with more than 2K calls traded on Friday.

Although we remain near term cautious here is the bullish group.



Some of these will make interesting put sales, especially those trending higher like GLW and YHOO.

Here is the bearish group with high put-call ratios.



FMCN reported .59 per share earnings on November 17.

HPQ, in an uptrend and scheduled to report Q4 earnings Monday after the close. The consensus estimate is 1.13 per share with a whisper estimate of 1.14 per share. Puts are most likely being purchased to hedge long stock positions.

JEF is scheduled to report Q4 earnings on December 20. The consensus is .23 per share. The high put-call ratio, along with the high-implied volatility reflects the stock price decline reported to be related to concerns about their holdings of European sovereign debt.  

Put spreads are one alternative strategy to consider using for this group.

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.

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Just when equities were making some upward momentum, they were whacked once again by the sovereign debt news from Europe. We expect the S&P 500 Index will now continue lower and attempt to find support below 1163.


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 review our market indicators and offer some more option trading ideas.


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

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I used a Credit call spread additionally to try and cover for a possible up tick. I sold CRM 145 Nov 19, buy CRM 150 Nov 19, 15 contracts, for your suggestion in #44 newsletter for CRM and have closed out the position as of now (11/21/11). Thanks for the great newsletter.

Posted by dean cherry on November 21, 2011 at 08:22 AM EST


Thanks for the comment. The additional upside call spread was a good idea. Since the market seems to have developed a rather harsh attitude towards these super growth stocks that place so much emphasis on revenues and non-GAAP earnings, we though there was more downside risk in the current uncertain market environment. It sounds as if this one worked out well for you. Let us know if you have any specific ideas you would like to see in future Digest issues.


Posted by Jacktrader ( on November 23, 2011 at 06:22 PM EST

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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".