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Today


IVolatility Trading Digest™


Volume 13, Issue 12
Increasing Volatility Ideas

Increasing Volatility Ideas - 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).

 

VectorVestSince the current S&P 500 Index (SPX), uptrend appears stalled or perhaps in the process of forming another symmetrical triangle continuation pattern, the options implied volatility has started increasing although from a low level. If the uptrend resumes we can expect to see lower implied volatility once again, in the meanwhile perhaps we should consider some ideas in the event implied volatility continues increasing.

Dan Sheridan sent us an increasing volatility idea for SPDR S&P 500 (SPY) to consider. Then we have an earnings report idea for BlackBerry (BBRY) followed by a high-implied volatility idea in the tech sector for controversial Uni-Pixel, Inc. (UNXL). First, we have a brief strategy comment and update the VIX futures premiums.

 

Strategy

Strategy

S&P 500 Index (SPX) 1556.89. Either another symmetrical triangle continuation pattern is underway like to one that started on February 21 or a larger correction that could test the current 1530.94 support has begun as volume increased from the prior week. Although the VIX closed the week higher, both the VIX futures premium and the Skew Index declined suggesting less hedging activity.

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 applies 85% to April and 15% to May for an average premium of 10.35% shown above. Our alternative volume weighting between April and May is 12.29% in the middle of the normal range on lower volume and open interest after the March future contract expired.

iPath S&P 500 VIX Short Term Futures ETN (VXX) 20.95. The five-day average volume was 70.3 million up substantially from 48 million shares the week before.

VelocityShares Daily Inverse VIX Short Term ETN (XIV) 22.55. The 5-day average volume for the inverse was 19 million shares compared to 15.9 million the week before making the VXX/XIV volume ratio 3.69.

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 next longer term contract at a higher price. The current spread between April and May is -1.23, while the May - June spread is -.92.

In the event the trading range expands or the market continues lower, increasing implied volatility is likely. If so, consider this idea.

 

Dan Sheridan's Increasing Volatility Idea

Income Trade for a low volatility environment

For those over 45 who can remember the battle cry from Clara Peller, the little old lady in the Wendy's commercial "Where's the Beef"? We are hearing similar battle cries today in the options world. Credit spread traders, covered writers, cash secured put sellers, Iron Condor and butterfly traders all across the country are yelling "Where's the time premium"? Of course they are referring to the lack of time premium received when doing strategies like the ones mentioned above. What’s the solution? Do we find another hobby while we wait for premium levels to increase? Of course not, there are strategies to employ in low time premium environments that benefit when volatilities go up. Really, your not joking? Really! With the VIX at 13.57 and RVX at 16.97 option volatilities are near 5 year lows. If you are willing to expand your option knowledge you can add new strategies to your repertoire. Here is a long vega strategy for monthly income that benefits when time premiums expands, when option volatilities are very cheap, when there is much more room for them to go up than to go down.

SPDR S&P 500 (SPY) 155.60.

Double Calendar

Part one, buy 1 May 156 call and sell 1 April 156 call.

 

 

Part two, buy 1 May 151 put and sell 1 April 151 put.

 

 

Total debit 1.42 (142).

Implied volatility levels are extremely low and this trade would benefit if implied volatility levels increased. When would I do this type of trade? Double Calendars can be particularly attractive when Implied volatility levels are cheap and you think they could increase a bit. How do price moves affect this strategy? As the price moves beyond your short strikes past your expiration breakeven points, you will need to take off or adjust the position. If the price stays between your short strikes, you will usually be in good shape and the trade will usually be profitable. What can I do if the price moves too far? One quick idea is to take off the calendar trade farthest away. What do you mean? If SPY in this example goes up to say 157, one point past our short strike, I would take off the put spread at the 151 strike. If SPY is between 152 and 156 by Thursday March 28 , and Implied volatility increases just 1 point, this trade would be up approximately 10% before commissions. Keep an eye on this! Here is the graph.

 

 

Long vega trades can be used for monthly income. The challenge is to put these types of trades on for 2-3 months on paper to get the feel of them. I will make you a guarantee. This won't make sense unless you practice! Keep working on the craft! Check Sheridan Options Mentoring for more information.

Dan Sheridan dan@sheridanmentoring.com

Earnings Idea

BlackBerry (BBRY) 14.91.

Although scheduled to report earnings Thursday before the opening with a consensus estimate of -.28 per share, the real story will be about the early sales report on the new BlackBerry 10 devices and the hype generated by mobile takeover ad campaign starting Monday. Forbes says, "Those mobile takeovers will fill your screen with what looks like a BlackBerry 10's, demoing a specific feature like its photo "Time Shift" capability that allows you to scroll through several captured options for each face in a picture."

First the option data.

The current Historical Volatility is 76.50 and 71.96 using the Parkinson's range method, with an Implied Volatility Index Mean of 88.17, up from 87.29 last week. The IV/HV ratio is 1.15 and 1.23 using the range method to calculate the HV. The 1.45 put-call ratio is bearish with Friday's volume of 426,543 contracts traded compared to the 5-day average volume of 213,670 so this one is generating a lot of interest going into the reporting event.

Consider this long call spread with a short put.

 

 

Although the March 28 put shown above at .55 is based upon Friday's mid price it will be substantially less Monday due to time decay over the weekend. Before any price change, it should be about .33 turning the credit into a .18 debit. With a favorable volatility edge, be prepared to take the stock by assignment in the event it closes below 14 at the close on Thursday. If assigned, the position will be long stock so sell covered calls, as the implied volatility is still likely to remain relatively high. In the event it opens higher Monday, eliminate the put leg unless the premium is at least .25. Use a close below 13 as the SU (stop/unwind).

High IV/HV Ratio

Uni-Pixel, Inc. (UNXL) 29.49.

While this one is not our top ranked for high implied volatility relative to its historical volatility it is one of the more controversial technology stocks with recent insider selling, a high short interest and rapidly rising price with the launch of its UniBoss and Diamond Guard flexible electronic products. Since there are considerable details available at Seeking Alpha, we encourage a thorough review of the downside risk before deciding to take this controversial speculation.

The current Historical Volatility is 99.05 and 95.25 using the Parkinson's range method, with an Implied Volatility Index Mean of 122.12, up from 103.14 last week. The IV/HV ratio is 1.23 and 1.28 using the range method to calculate the HV. The bullish .3 put-call ratio tops the list but Friday's volume is light at 10,678 contracts traded compared to the 5-day average volume of 9,570 making it thin with wider bid/ask spreads.

Since additional partnering information is due for release at their next earnings report date in late May, implied volatility is likely to remain relatively high, so a near term put sale at a strike price below the recent upward gap seems like a reasonable risk.

 

 

With a good volatility edge, it could go higher before expiration. In the event it closes below 20 at the April expiration, be prepared to take the stock by assignment and then sell calls against the long stock position, as the implied volatility will most likely remain high until the May reporting date.

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.

 

VectorVest

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Summary

The recent increasing implied volatility reflects the market direction uncertainty after a week of digesting new macroeconomic risk from Europe. From a technical perspective, it appears another continuation pattern is underway. However, be prepared as it could also be the start of a more pronounced correction.

 

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 update of our market indicators.

 

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".