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Today


IVolatility Trading Digest™


Volume 12, Issue 2
Slim Pickings

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).

After a good bit of searching, we did manage to put together a few interesting trading ideas, but the number of possible selections was considerably less than we usually have to work with. Although volume continues to be very light it should pick up next week as the quarterly earnings reports start to be released and attention shifts from the weak euro to forecasting 2012 earnings. The weak euro does represent a trading opportunity and we have an idea below. We follow with an update, and five other suggestions including a short idea.  

 

Strategy

Strategy

 

As the euro continued declining, equities resisted their recent tendency to sell off as the dollar gained against the euro. This could just be a temporary lull or it may be the first indication that an improving US economy could provide support for equities without a weaker dollar. Our euro chart in Digest Issue 48 put it in the middle of its recent range and that has since changed, as it now appears the euro will make a run at the lower end of the range down at 1.20. Accordingly, here is a short euro trade idea.   

CurrencyShares Euro Trust (FXE) 126.71.

With our target set as the lower end of the range at 1.20, consider this put spread.

The current Historical Volatility is 9.75 and 5.71 using the Parkinson's range method, with an Implied Volatility Index Mean of 13.11, down from 13.78 last week. The IV/HV ratio is 1.34 and 2.30 using the range method to calculate the HV. The put-call ratio is very bearish at 2.0, with 31,122 contracts traded compared to the 5-day average of 22,580.

 

 

Using March options should allow enough time for it to reach the objective. Use a close back above 1.30 as the SU (stop/unwind).

 

Strategy


 

 

 

Last Wednesday's Digest Issue 1 included a quarterly earnings report trade idea for Monsanto (MON) 77.51.

As the options trading were suggesting before the report release, both the earnings and the sales exceeded expectations and management's previous guidance. Using the closing prices on Wednesday the short call ladder suggestion was booked for a credit of .59. By Friday, the stock had advanced 4.84 and both of the position's long calls were in-the-money. Marking to market on Friday it was valued with an additional credit of .83, making the total gain 1.42. Since the last time they reported the stock advanced for five days we suggest keeping the position open another week or until there are signs of retracement.  

 

Best Calendar Spread

As a regular feature on our home page in "Options Data Analysis" and the "Rankers & Scanners" sections of we offer the "Best Calendar Spread" based upon a differential between the implied volatility of the near term call compared to the implied volatility of a deferred month call.  

Netflix, Inc. (NFLX) 86.29.

Previously suggested in Digest Issue 41 and Digest Issue 42 last year, here is a new calendar spread idea.

The current Historical Volatility is 72.97 and 60.06 using the Parkinson's range method, with an Implied Volatility Index Mean of 78.65, up from 71.25 last week. The IV/HV ratio is 1.08 and 1.31 using the range method to calculate the HV. The put-call ratio is bearish at .80. There were 176,791 contracts traded Friday compared to the 5-day average of 94,350 contracts.

 

 

With a good volatility edge, the plan is to roll the short February call into March at the February expiration presuming the volatility edge remains. Use a close back below the last pivot at 69.30 as the SU (stop/unwind).

 

Trend Analysis Suggestion

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. Here are more details.  

Chipotle Mexican Grill, Inc. (CMG) 348.95.

With a bullish rank of 62.50, on a fundamental basis this is an expensive stock trading with a trailing price-to-earnings multiple of 54, a forward multiple of 40 and a price-to-earnings growth rate of 2.50. Even though expensive, this stock is one of the few that has broken out above its October high. The next earnings report is scheduled for February 1 with a consensus estimate of 1.81 per share.

The current Historical Volatility is 26.45 and 20.53using the Parkinson's range method, with an Implied Volatility Index Mean of 31.39, up from 29.94 last week. The IV/HV ratio is 1.19 and 1.53 using the range method to calculate the HV. The put-call ratio is bearish at 1.10. There were 5,780 contracts traded Friday compared to the 5-day average of 8,930 contracts.

For the trend continuation, here is a call spread.

 

 

Without a volatility edge, particular attention needs to be given to high multiple stocks. Use a close back below the last pivot at 320 as the SU (stop/unwind).

 

Short Idea

Consistent with the strategy outlined last Wednesday in Digest Issue 1 here is a short idea to add into the portfolio mix.

Sears Holdings Corporation (SHLD) 29.20. With retail operations in the US and Canada, they reported same store sales dropped 5.2% during the first two months of the fourth quarter as the stock declined from 45. While some may think all of the bad news is already in the stock, remember what Fred C. Kelly said in 1932 and later popularized by Jesse Livermore:

"A stock is never too high to buy if conditions are right; never too low to sell if affairs are turning from bad to worse."

Fourth quarter earnings are scheduled to be released on February 23, with a consensus estimate of .68 per share that is likely now too high.

The current Historical Volatility is 97.83 and 58.70 using the Parkinson's range method, with an Implied Volatility Index Mean of 95.40, up from 91.70 last week. The IV/HV ratio is .98 and 1.63 using the range method to calculate the HV. The put-call ratio is bearish at 1.60. There were 24,530 contracts traded Friday compared to the 5-day average of 21,520 contracts.

Here is a put spread idea.

 

 

With a slight volatility edge, use a close back above the gap at 37.90 as the SU (stop/unwind).

 

Increasing Implied Volatility

As number 5 on this week's regular list of increasing implied volatility, here is a company in the shale oil sector attracting attention after several recent joint venture announcements. An UBS analyst included this company along with four others as having similar characteristics as those making recent deals. The speculation was confirmed Friday with increasing options implied volatility and volume.

Southwestern Energy Co. (SWN) 33.20.

The current Historical Volatility is 32.50 and 28.97 using the Parkinson's range method, with an Implied Volatility Index Mean of 42.58, up from 36.22 last week. The IV/HV ratio is 1.31 and 1.47 using the range method to calculate the HV. The put-call ratio is very bullish at .13, with almost 8 times more calls than puts traded on Friday on volume of 43,640 contracts compared to the 5-day average of 16,520 contracts.

Think about this call spread with a short put combination.

 

 

Use a close back below the last pivot at 31.90 as the SU (stop/unwind).

 

Possible Trend Change

Dave's Corner

Amazon.com Inc. (AMZN) 182.61

Holiday sales have been mixed and the disparity between discounters and high-end stores has furthered the divergence between retailers. Despite the overall pressure, Amazon seems to have benefited from declining sales seen at competitor Barnes and Noble. Scheduled to report fourth quarter earnings on January 24 after the close, the consensus estimate is .17 per share.

Barnes & Noble's holiday sales of their Simple Touch Nook reader missed expectations and Amazon's Kindle Fire is eating into the Nook market. Barnes & Noble shares fell 17%, hitting an 8-month low on Friday, just as Amazon may have made a bottom.

The current Historical Volatility is 38.68 and 32.98 using the Parkinson's range method, with an Implied Volatility Index Mean of 42.18, up from 41.73 last week. The IV/HV ratio is 1.09 and 1.28 using the range method to calculate the HV. Friday’s put-call ratio is at .50 is bullish with the 123,797 contracts traded compared the 5-day average volume of 69,220 contracts.

Implied volatility has historically edged higher into earnings, so this strategy should take advantage of a pre-earnings rally. Consider this attractively priced call spread.

 

 

With a slight implied volatility edge, use a close below 166.97 as the stop level to 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

Last week the market traded in a narrow range with low volume while watching the euro decline. Since earning reports will start next week, attention will likely shift from Europe to earnings estimates for 2012.

 

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 update our market indicators along with offering more 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

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:

Although FXE may be in mid range on a monthly chart the EUR/USD pair is trading at the bottom of a well defined channel since Nov on the daily and could be in the first day of a bounce off the lower trend line. While I agree the long term trend is to be short waiting for the bounce to run its course prior to going short seems more attractive.

Posted by PositiveTHeta on January 09, 2012 at 09:45 AM EST

is there an available record of the results obtained when the trades set forth in the "Digest Issues" have been recorded for results?

Posted by alvin lobell on January 09, 2012 at 01:04 PM EST

I would like to know what is meant by the following: "close back and SU (stop/unwind)". I am just starting to learn Options and have not hear these terms before.


Posted by joel on January 09, 2012 at 05:38 PM EST

PositiveTHeta,

Thanks for the euro comment. Your suggestion is a good one, as it currently looks oversold.

Jack

Posted by Jacktrader (70.180.158.135) on January 11, 2012 at 01:43 PM EST

Alvin,

Thanks for the question about the record. Since we offer a combination of several strategies, some long, some short, some neutral, we do not run a model portfolio or keep a running record of all the suggestions. We did this in 2009 and it is available as an Excel spreadsheet. If you are interested, just e-mail support and ask for the 2009 spreadsheet.

Jack

Posted by Jacktrader (70.180.158.135) on January 11, 2012 at 01:44 PM EST

Joel,

Thanks for the question. A close back below or above a certain price point is the stop level where some action is suggested. Instead of calling these points a “stop” as is common in the industry we use SU, short for stop or unwind. For example, with a spread trade by unwinding one leg of the spread you can reverse its delta, or direction. These levels are predetermined before the trade is made.

Jack

Posted by Jacktrader (70.180.158.135) on January 11, 2012 at 01:54 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".