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Today


IVolatility Trading Digest™


Volume 12, Issue 26
Sell the News

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).

 

Going into the FOMC meeting last week equities gave us another reminder of that old Wall Street adage "Buy the rumor and sell news." Combined with the curious Goldman Sachs sell recommendation from a technical perspective the market was whacked Thursday pushing the S&P 500 Index (SPX) 1335.02 back below the neckline of the Head & Shoulder Bottom pattern. We expand upon this a bit more in the section below.

This week with the Supreme Court expected to rule on the health care proposal we suspect the markets will have a harder time discounting this news since our implied volatility indicators are suggesting considerable uncertainty as reflected by our Top 5 implied volatility-ranking table below.

First, we update the VIX futures premium along with a trade progress report on Arena Pharmaceuticals, Inc. (ARNA), and then turn our attention to earnings announcement ideas beginning early next month. Next, we offer long speculation ideas in both the natural gas and agricultural sectors assuming they have bottomed.

 

Strategy

StrategyS&P 500 Index (SPX) 1335.02. Although it closed below the neckline of the active Head & Shoulder Bottom pattern Thursday creating a question that the pattern may have been negated, we note this is not the case since the failure of Head & Shoulders patterns requires a close beyond the Head, meaning it would need to close below the June 4 low of 1266.74. Therefore, even if the Goldman Sachs short recommendation to 1285 were to occur the Head & Shoulder Bottom pattern would still be operative until such time it closed lower than 1266.74, a long way below the current price.   

The second curious thing about the Goldman Sachs short recommendation is the substantial improvement in market breath that occurred last week, as the NYSE McClellan Summation Index, advanced 286.43 points, the largest single week gain since January 2, and is now just -.24, bringing it almost back to the zero line. This makes us wonder if Goldman Sachs ran the short recommendation by their technical analysts and if so were the technicians overruled, which further leads is to wonder if Goldman knows something more that the rest of us, perhaps having to do with the Supreme Court healthcare ruling due this week.  

In the meanwhile, here is the updated VIX futures premium reflecting more uncertainty.

S&P 500 Index Implied Volatility (IVXM). In the last week, the Implied Volatility Index Mean decreased from 18.56, to 16.36 while the CBOE Volatility Index® (VIX) decreased from 21.11 to 18.11.     

The table below shows the VIX cash compared to the next two futures contracts as well as our calculation of Larry McMillan's day-weighted average between the first and second months.

 

 

The day weighting applied 85% to July and 15% to August resulting in the average premium of 4.05 or 22.35% shown above. Our alternative volume weighted premium between July and August is 24.33%. Both are up substantially from last week when the day-weighted premium was 11.22% and the volume weighted was 7.10%.  

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 premiums in excess of 20%, have usually preceded corrections, although not a precise timing tool it did appear to be a good way to measure professional hedging sentiment. On the recent decline, that formed the Head & Shoulders Bottom the VIX premium indicator failed to increase as expected. With the increase, it again reflects increased uncertainty. However, Friday's VIX options volume declined to 216,362 contracts compared to the 5-day average of 540,710 contracts.

 

Arena Pharmaceuticals, Inc. (ARNA) 9.88.

In Digest Issue 24, we suggested a June strangle, long both the 7 call and 6 put. We booked the call for 1.46 with an implied volatility of 157.14 and the put for .92, its implied volatility was 165.75, for a 2.38 debit.

Friday ARNA made a key reversal closing down 1.80 after making a new high at 11.99 with a low of 7.80, a 4.19 point range, for a stock that was 7.07 when we booked the strangle two weeks ago, that's volatility!  

Marking-to-market the call was 3.83 with an implied volatility of 456.79 and the put was .75 with an implied volatility of 512.52, total 4.58, a two-week 92% gain without direction risk.

Since we found nothing indicating a delay for the Wednesday June 27 scheduled FDA announcement, we will maintain our original trade plan to sell the position Tuesday, June 26. 

Trend Analysis

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 criteria include an Exponential Moving Average, Relative Strength Index and the Chaikin Money Flow indictor and more. For more details about the criteria, click here. Here is Friday's top trend selection with a 62.5 bullish rank.

Amgen Inc. (AMGN) 72.46. Amgen Inc. discovers and develops innovative therapeutics for cancer, kidney disease, rheumatoid arthritis, and other serious illnesses.

Tuesday the stock broke out above previous resistance at 72 then returned to retest 72 reversing higher again on Friday on extremely high volume of 18.9 million shares compared to average volume of 5 million shares. Previously high volume was 10 million, so Friday's volume was almost double the previous high volume as the stock advanced .81 on what appears to be institutional accumulation.

The options data follows:

The current Historical Volatility is 19.04 and 16.79 using the Parkinson's range method, with an Implied Volatility Index Mean of 18.67, down from 19.10 last week. The IV/HV ratio is .98 and 1.11 using the range method to calculate the HV. Friday's put-call ratio was extremely bearish at 12 as there was a substantial decline in call volume replaced by put volume as the implied volatility declined suggesting put selling. Friday's volume was 6,441contracts traded compared to the 5-day average volume of 8,020 contracts.

Here is a call combination with a short put idea.

 

 

Although there appears to be substantial support at 70 be prepared to take the stock by assignment in the event is closes below 70 at the July expiration. Use a close below 70 as the SU (stop/unwind) to close out the long October call spread.

Health Care Uncertainty

As a reminder to those who are looking for trading ideas and may not be familiar with our website, we offer several ideas as a regular feature not requiring a premium subscription to access. They are located in the "Rankers and Scanner" section of our home page. First, there is a link to the "Top 200 stocks by volume/open interest" and then the " Top 5 stocks by implied volatility change." By clicking on the second link and you will find the Advanced Ranker Sample of the top and bottom five stocks in four categories.

Here is Friday's Top 5 group ranked by Implied Volatility divided by Historical Volatility.

 

 

While there are occasionally two in the same sector is unusual to see them all in the same sector reflecting high options implied volatility relative the historical volatility. Since the Supreme Court ruling could come early this week, it may too late for volatility trades, but perhaps there is still time.

Quarterly Earnings Report Preview

Since there have recently been comments about possible Q2 earnings disappointments, it seems like a good time to look for some possible volatility trades in anticipation. The plan here is to get a long straddle or strangle in place before most market participants begin focusing on the earnings report. The table below has some ideas for stocks scheduled to report in the next four weeks where the implied volatility has previously shown a tendency to increase going into the report date.

 

 

If the implied volatility of the market as measured by the Implied Volatility Index Mean of the S& 500 Index currently at 16.36 should rise then the Current IVXM and Potential IVXM estimates will increase as well.

Natural Gas Bottom

Based on the theory that the bottom is near, or already made in natural gas, here is one idea to consider.

SandRidge Energy Inc. (SD) 6.06. SD is an Oklahoma City oil and natural gas exploration and production company, focusing on exploration and production activities in West Texas, the Cotton Valley Trend in East Texas and the Gulf Coast, Piceance Basin of Colorado, the Gulf of Mexico and the Anadarko and Arkoma Basins.

The current Historical Volatility is 64.72 and 56.93 using the Parkinson's range method, with an Implied Volatility Index Mean of 58.58, down from 62.55 last week. The IV/HV ratio is .91 and 1.03 using the range method to calculate the HV. Friday's put-call ratio was extremely bullish at .20 with volume of 4,659 contracts traded compared to the 5-day average volume of 12,630 contracts.

Here is another call spread short put combination.

 

 

Without an implied volatility edge, this one is strictly a directional trade based upon the assumption the support at 6 will hold. In the event it closes below 6 at the July expiration take the stock by assignment and then sell calls against the long stock position.

 

Ag Sector Bottom

Like natural gas it looks like there could be a bottom forming in the agricultural sector as well. If so, here is one idea to consider.    

Potash Corporation of Saskatchewan (POT) 40.34. As the name implies POT is the world's largest potash company, the third largest phosphate producer and the second largest nitrogen producer in the world.

The current Historical Volatility is 32.02 and 27.21 using the Parkinson's range method, with an Implied Volatility Index Mean of 29.75, down from 33.64 last week. The IV/HV ratio is .93 and 1.09 using the range method to calculate the HV. Friday's put-call ratio was just bearish at .80 with volume of 11,196 contracts traded compared to the 5-day average volume of 22,000 contracts.

Once again, here is a low cost combination to consider.

 

 

Without an implied volatility edge, this one is another directional trade based upon the assumption the support at 38 will hold. In the event it closes below 38 at the July expiration take the stock by assignment and then sell calls against the long stock position.

All of the suggestions above use the closing middle price between the bid and ask on Friday. On Monday, the option prices will be somewhat different due to the time decay over the weekend and any price change.

 

"Options data with predictive qualities - Nobody does it better!"

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Summary

Despite the Goldman Sachs short sell recommendation last Thursday, the equity market continues looking favorable from a technical perspective, although there is considerable uncertainty in the health care sector ahead of the Supreme Court ruling expected this week.

 

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 again offer a complete review of our market indicators and update the progress of the Head & Shoulder Bottom pattern.

 

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. Another way to find them is the Table of Contents link in the blog section of our website.

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

Comments:

Hello,

I really enjoy receiving the IVolatility Digest via email and find it a great educational resource. However, there is a misprint error in the referenced issue. Taking a look at the proposed POT combination, you erroneously listed the POT Jul Put option price of .57 in twice, omitting the Jul strike.

Posted by Rick on June 25, 2012 at 07:21 PM EDT
Website: http://www.ivolatility.com/roller/page/trader?entry=volume_12_issue_26_br

Rick,

Thanks for the response. We spotted the errors and the corrections have been made to the website version.

Thanks for your interest.

Jack

Posted by Jacktrader (70.173.104.146) on July 13, 2012 at 02:59 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".