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Today


IVolatility Trading Digest™


Volume 12, Issue 48
Now More Bullish

Now More Bullish - IVolatility Trading Digest

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).

 

Now More BullishDespite all the "fiscal cliff" chatter the equity advance continued last week as other select "risk on" assets began participating. Although the probability remains high there will be a successful retest of the S&P 500 Index (SPX) low of 1343.35 made on November16 at some point, we know better than to fight the tape.

After a brief strategy comment and update of the VIX futures premium, we are pleased to present a new idea for Amazon.com Inc. (AMZN) from a contributing author. Then we turn our attention to a previous takeover suggestion for MetroPCS Communications, Inc. (PCS) since it was in the news. Finally, we have a biotech idea for Celsion Corp. (CLSN) that is developing into another binary biotech opportunity.

 

Strategy

Strategy

S&P 500 Index (SPX) 1416.18. The upward move from the November 16 key reversal continued higher closing well above the 1400 resistance that is now support. It may be too strong to say important lows are always retested, but there is still a chance to see the previous Head & Shoulders Top measuring objective reached down at 1327, described in Digest Issue 45.

For the month of November SPX closed up .28% a good omen for December since November is usually an up month, according to Jeffrey Hirsch, editor-in chief of the Stock Traders Almanac. Historically, a lower November close would have made the December forecast relatively weak as we mentioned in Digest Issue 46.

Since we still have several previous put spread suggestions open we will unwind or close them while waiting for the development of a short-term reversal pattern. We added the iShares Russell 2000 Index (IWM) 82.08 hedge suggestion made in Digest Issue 47 to the watch list since the condition requiring a lower high along with a lower low has not yet occurred. When it does, we will update the strike prices and implement the hedge although it could be a short counter trend pull back.

S&P 500 Index Implied Volatility (IVXM). At the end of last week, the Implied Volatility Index Mean increased from 13.29 to 13.92, while the CBOE Volatility Index® (VIX) increased from 15.14 to 15.87.

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.

 

VIX Closing Cash

 

The day weighting applied 60% to December and 40% to January resulting in an average premium of .30 or 1.88% shown above. Our alternative volume weighting between December and January is 2.12%. This the second time in the last four weeks there has been a discount in the front month premium as the average declines once again.

iPath S&P 500 VIX Short Term Futures ETN (VXX) 29.62

VelocityShares Daily Inverse VIX Short Term ETN (XIV) 19.22

Increasing volume in both the long VXX and the short XIV appears to be important influences determining the VIX premium. The long VXX trades between 1.5 and 2 times as many contracts as the short XIV, but increasing relative XIV volume reduces the VIX premium as more futures contract are sold. When the term structure is in contango, or it slopes upward over time, the advantage goes to a long XIV position since it represents a short futures position and VXX continuously sells the near term contract and buys the longer term at a higher price. We thank Wayne for pointing out the shortcoming in last week's explanation.

Fridays VIX futures volume was 106,563 contracts compared to 71,531 the short holiday week before while the open interest increased slightly to 385,333 contracts compared to 382,639 the previous week.    

NYSE McClellan Summation Index 148.35. Another development supporting the bulls was the improving NYSE Composite breadth indicator with a 211.20 point advance, taking it back above the important zero line. This was one reason we had remained cautious, but now the advance adds some additional upside support.

Other signs of "risk on" strength came from copper and crude oil, while gold seemed to be under selling pressure, which is unusual since this is a seasonally strong time for gold.

 

New Amazon Idea

The recent Traders Expo in Las Vegas gave us a chance to meet with other option traders and strategist as well as an opportunity to extend a few invitations to contribute some new ideas and approaches for our subscribers.

Dan Passarelli agreed to share a bull call spread idea from his strategy newsletter.

Sponsored by Market Taker Mentoring, Inc.

Amazon.com Inc. (AMZN) 252.05.

The trade: Buy December 250/255 Bull Call Spread (buying the December 250 call and selling the December 255 call) for 2.35 or less.

The strategy: The maximum potential profit for this trade is $2.65 (5 – 2.35) if AMZN is trading above $255 at December expiration. The maximum loss is $2.35 (or what was paid for the spread) if AMZN is trading below $250 at December expiration. Breakeven is $252.35 at December expiration based on a cost of $2.35.

The rationale: If you look at a chart of AMZN, it's pretty clear that the stock has moved significantly higher since it bounced off of its daily 200 simple moving average. It is currently trading right around $250, which is an area that has acted as support and resistance in the past. It looks like it is taking a temporary breather from climbing higher which stocks tend to do when approaching resistance. If the stock can hold and break that resistance area, its next area to conquer would be another resistance area in the $260 region.

There are two other interesting points about this trade idea. The implied volatility on the options is currently lower than its historical average, which tends to make buying options like a debit spread a little bit cheaper. And two, if the stock follows the same course it took in late July when it moved from around $220 to just above $260, this bull call spread will look like a real beauty. A bullish sign to tip off a strong trade entry would be if AMZN can close near Friday's high.

This trade idea is from the Market Taker Edge Options Newsletter. Get a free two-week trial of the Market Taker Edge.

Takeover File Update

MetroPCS Communications, Inc. (PCS) 10.65.

Previously in Digest Issue 40 we suggested both a short October 12 straddle and a long February straddle. Closing the short straddle just before the October expiration produced a .62 gain. Now marking the long February 12 straddle to market shows a .61 loss.

On the news that an analyst expects a bid from Sprint, PCS ranked number one in Friday's positive IV Change scan. Here is what Investor's Business Daily reported he said.

"We believe MetroPCS could receive a bid from Sprint within the next one to four weeks, likely in the $12-$13 per share range", said Guggenheim analyst Shing Yin, in a report published Friday.

Now for the updated option data.

The current Historical Volatility is 34.79 and 32.81 using the Parkinson's range method, with an Implied Volatility Index Mean of 57.47 up from 44.14 last week. The IV/HV ratio is 1.65 and 1.75 using the range method to calculate the HV. Friday's put-call ratio was very bullish at .10, while the volume was 65,206 contracts traded compared to the 5-day average volume of 20,500.

We should see further a increase in implied volatility as the expected date approaches that should equal the 80 level when the Deutsche Telekom merger proposal was announced, so we want to retain our February straddle, but it needs adjusting back to delta neutral since the call is out-of-the money and the put is in-the-money. Since we originally used a one-lot straddle, we will need to make the adjustment using stock. The delta of the Feb 12 call is .3442 while the Feb 12 put is -.6548 so we will need to buy 31 shares of stock (.3442 -.6548) to be delta neutral. Then in order to offset the loss of time decay the plan is to make further weekly adjustments each .50 of price change, about one standard deviation.

The first step is to buy 31 shares of stock.

In addition, we will add the following long call spread.

 

MetroPCS Communications, Inc.

 

In the event the Sprint bid is announced in the next couple of weeks this should give us some upside. Just in case, use a close back below 10 as the SU (stop/unwind).

Number One High IV/HV Ratio - Binary Biotech

Celsion Corp. (CLSN) 7.50.

In January, this drug development company is expected to release the results of its "Phase III HEAT Study, a multinational, double-blind, placebo-controlled, pivotal study of ThermoDox® in combination with radiofrequency ablation (RFA) for the treatment of hepatocellular carcinoma (HCC), also known as primary liver cancer." The company claims it could be a "$1 billion therapy."

The current Historical Volatility is 78.45 and 76.54 using the Parkinson's range method, with an Implied Volatility Index Mean of 193.84 up from 123.28 last week. The IV/HV ratio is 2.47 and 2.53, using the range method to calculate the HV, the highest in the Friday scan. The put-call ratio was in bearish territory at 1.00, while the volume was 6,929 contracts traded compared to the 5-day average volume of 20,930.

Since the implied volatility is higher in February than January it suggests the release of the Phase III test results are more likely after the regular options expiration on January 18. Accordingly, this provides an opportunity to sell January out-of-the money put below the October support level.

 

Celsion Corp.

 

In addition, we suggest adding a February long call spread with a short put combination.

 

Celsion Corp.

 

While keeping in mind high implied volatility represents potential price movement in either direction and it could continue increasing between now and the end of January, this suggestion is unusual. In the event the Jan 4 put expires as expected before the announcement a .83 credit will have been booked. Presuming the announcement disappoints and the stock closes below 3 at the February expiration, another 1.20 will be credited from the February put sale, to this the loss on the long call spread of .65 will be added for a net basis of 1.62, considerably below the 3 support level back in the summer. On the upside, a close above 10 after the announcement will result in a gain approaching 3.38, calculated by 1.35 from the long call spread and two put sales, .83 and 1.20. Since this is a binary event the only real risk management available is to limit the position size and remember the implied volatility will most likely continue rising into the late January event date, so make some allowance for subsequent trades.

The suggestions above use the closing middle price between the Friday bid and ask. 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!"

"The best volatility charts in the business."

 

Summary

As the equity market continues to advance, other select "risk on" assets are following although a pull back to retest the November 16 pivot low is due at any time. Once completed a further advance lasting into yearend is most likely unless derailed by negative "fiscal cliff" news from Washington D.C.

 

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 more of our market indicators and report the progress of our contingent hedge trade plan.

 

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

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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".