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Today


IVolatility Trading Digest™


Volume 13, Issue 42
Earnings Mix Bag

Earnings Mix Bag - 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).

 

Earnings Mix BagA mixed bag, an unexpected or unorganized assortment of things or ideas describes last week's activity and this week's opportunities. We ventured no further than our Top 5, a regular feature in the "Rankers and Scanner" section of our home page featuring complimentary ranker samples at the " Top 5 stocks by implied volatility change" link to find more ideas than we have space to fit.

Since the macro headwinds that had been a concern for the last month are diminishing, we can again focus on finding more trading opportunities. After a quick review and a few brief strategy comments, we have ideas for Abercrombie & Fitch Co. (ANF), Archer Daniels Midland Company (ADM), Green Mountain Coffee Roasters, Inc. (GMCR), TiVo Inc. (TIVO) and Valero Energy Corporation (VLO).

 

Review Notes Clip Art

S&P 500 Index (SPX) 1759.77. The advance continues after a temporary deal emerged from Washington to reopen suspended government activities through January 15, 2014, while postponing the need for any further debt limit authorization until February 7. Without further political hindrance from Washington, chances are good the market advance will continue into year-end although rebounding too quickly it created the conditions for another correction of say 3%, like the one in February that would bring the index back to a more sustainable rate of advance.

 

We continue suggesting relative strength stocks such as those in Digest Issue 38 "Options Relative Strength Top 15" especially since the VIX futures premium and options implied volatilities are back into their normal ranges. Additional bullish support comes from declining VIX futures volume that averaged 133,571 for the first three days of the week, but declined to just a preliminary 74,412 contracts by Friday with a corresponding decline in VIX options volume as the VIX nears the bottom of its recent range with no reason to expect another spike higher before year-end. The exception is the CBOE S&P 500 Skew Index (SKEW) 135.06, up 3.71 for the week, which we are calling opportunistic contrarian hedging activity due to available relatively inexpensive puts.

IVOLopps™

Best Calendar Spread

We begin with Friday's Best Calendar spread found in the Options Data Analysis and Rankers & Scanners sections of our home page.

Abercrombie & Fitch Co. (ANF) 35.81. This specialty retailer of casual apparel for men, women, and kids is also a regular on our Volatility Kings earnings list. Although their 3Q earnings report is not due to be released before November 21 the options implied volatility has already begun to rise and is already higher than it was before the 2Q report. Recent takeover activity in the retail sector could be the reason option prices are now higher than before their previous report.

First the options data,

The current Historical Volatility is 26.61and 26.67 using the Parkinson's range method, with an Implied Volatility Index Mean of 64.63, up from 48.01 last week for a number 2 ranked high IV/HV ratio of 2.42. Friday's put-call ratio was bullish at .6 while the volume was 31,598 contracts traded compared to the 5-day average volume of 21,300.

Here is Friday's Best Calendar Spread idea using mid prices between the bid and ask.

 

 

On the earnings report, the implied volatility of both options will decline but expect them to increase further before the report. However, since the position is short gamma there could be a loss on any large price move when they report earnings.

Now for an alternative calendar strategy introduced by Dan Sheridan in Digest Issue 39 "No Jobs Report" we are calling the "split window calendar."

 

 

Although the implied volatility of the Nov 16 call is lower than the Nov 22 call in the previous position, in the absence of a takeover announcement the implied volatility of Nov 16 call should not increase as fast as the Feb 36 call since it will expire before the earnings report. The plan is to close the position November 20, before the earnings report date to gain from time decay and avoid any large price move on the earnings announcement.

More Earnings Reports

Archer Daniels Midland Company (ADM) 39.93. With a $26 billon market capitalization, this food-processing giant scheduled to report Tuesday October 29 before the opening, has a .48 per share consensus estimate. Since the stock has been rising along with the implied volatility, making it our number 3-ranked high IV/HV ratio and our number 4-ranked IV change candidate, we expect to see both the stock price and implied volatility decline on the report.

Here are the options details,

The current Historical Volatility is 16.42 and 15.59 using the Parkinson's range method, with an Implied Volatility Index Mean of 34.26, up from 32.01 last week for a high IV/HV ratio of 2.09. Friday's put-call ratio at .7 was neutral while the volume was a whopping 57,492 contracts traded compared to the 5-day average volume of 22,710.

Here is another traditional calendar spread suggestion.

 

 

In this example, both options expire after the report date and while we expect to see a moderate price decline on the earnings report, since both will have remaining time value we expect to see a larger relative decline in the Nov 16 call thereby increasing the debit spread. However, a large stock price decline will create a loss.

Green Mountain Coffee Roasters, Inc. (GMCR) 61.78. While the stock price of this Volatility King coffee processor has been declining into the earnings report scheduled for November 20 after the close with a consensus estimate of .75 per share, it came in fourth place in our high IV/HV category Friday.

The current Historical Volatility is 43.07 and 45.78 using the Parkinson's range method, with an Implied Volatility Index Mean of 80.78, up from 63.63 last week for a high IV/HV ratio of 1.88. Friday's put-call ratio at 1.25 was bearish while the volume was 32,802 contracts traded compared to the 5-day average volume of 25,960.

Since the implied volatility is likely to continue higher until the earnings report, consider a long put straddle or strangle with the plan to sell it (or reverse it) just before the earnings report date.

TiVo Inc. (TIVO) 13.80 provides software and service technology that enables the distribution of video content on digital video recorders (DVRs), non-DVR set-top boxes (STB), computers, smart phones, and tablets.

With the number 5 ranked high IV/HV ratio on Friday at 1.87, and scheduled to report earnings November 29 after the close. The consensus estimate is .06 per share, while not included on our Volatility Kings list for 3Q we will be adding it since the implied volatility is now 50 having declined to 29 from 90 after the 2Q report.

The current Historical Volatility is 26.59 and 28.17 using the Parkinson's range method, with an Implied Volatility Index Mean of 49.71, up from 32.43 last week Friday's put-call ratio at 1.25 was bearish while the volume was 13,836 contracts traded compared to the 5-day average volume of 18.670 contracts.

Since it is advancing going into the report along with rising implied volatility consider a long call straddle or strangle with the plan to close it (or reverse it) just before the report.

Valero Energy Corporation (VLO) 39.44. This major refinery operator will report 3Q earnings this Tuesday before the opening with a consensus estimate of .42 per share. Declining crude oil prices may be the reason the stock is up from 34 in the last two weeks, but improving margins are unlikely to help 3Q earnings. In addition, a reoccurring seasonal advantage suggests it could continue advancing well into the spring of next year, so consider a longer-term bullish call spread.

First the options data,

The current Historical Volatility is 24.76 and 23.79 using the Parkinson's range method, with an Implied Volatility Index Mean of 34.29, up from 30.23 last week for an IV/HV ratio of 1.38. Friday's put-call ratio at .3 was right on the bullish line while the volume was 29,116 contracts traded compared to the 5-day average volume of 31,200.

 

 

With a good risk to reward ratio of almost 1 to 3, but without an implied volatility edge it does allow sufficient time to see if the seasonal advance that appears to be underway continues. Use a close back under support at 37.50 as the SU (stop/unwind).

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

 

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Summary

Without further political hindrance from Washington, chances are good the market advance will continue into year-end although another correction of say 3% remains a good possibility. In the meanwhile, stay long using strategies with stocks showing good relative strength and momentum until year-end.

 

Twitter Follow us on twitter for more ideas from our scanners and other developments.

 

In next week’s issue, we will again review all 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.

Comments:

Jack,

Hope all is well.

If going long--I assume there's a difference between:

a) "Correlation against the market" (a lower % is optimal)...

VERSUS

b) "Correlation 30D" (a higher % is optimal).

RIGHT?

thx. Bob

Posted by Bob on October 30, 2013 at 01:48 AM EDT

Bob,

Thanks for taking the time to ask the question.

Yes, you are right, a perfect correlation would be 1.0, so lower numbers of say .30 are not highly correlated to the market as defined by the S&P 500 Index, while numbers above .70 or so are highly correlated. As a standard we use 30 days, or 30D, to make the comparison, but other periods are also used as well for various purposes, for example when correlations begin changing one might want to investigate it using a shorter period until the change became well established.

Jack

Posted by Jacktrader on October 30, 2013 at 12:49 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".