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Today


IVolatility Trading Digest™


Volume 13, Issue 48
Good News is Good News

Good News is Good News - 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).

 

Good News is Good NewsFinally, the equity market took good employment news reported Friday as good news for the economy and ended a four-day price decline. Interestingly, since it sold down and reversed up on last month's report as well we wonder if the market would have turned higher even if the employment numbers reported were less than expected. For now, we accept the popular interpretation that the employment gain was good enough, but not so good as to frighten bond market.

In this issue after updating the market numbers and a brief strategy comment we introduce our Actionable Options review and then look at the VIX futures premium and how it indicated the minor correction was about to reverse. Next, we have some Volatility Kings™ updates followed by a detailed look at Campbell Soup Company (CPB) as a potential takeover candidate from an options perspective.

 

Review Notes Clip ArtS&P 500 Index (SPX) 1805.09. The decline for the week was .72 points but that was after rebounding from a 26.72-point or 1.48% decline by Wednesday down to 1779.09 testing support at 1775.22. At first, the decline looked like it could have been early December profit taking, and that was true for some individual issues, but it appears it was just another prelude to the employment report since the volume remained moderate all week. Of continuing concern is lagging market breadth. By the end of the week, professional hedgers had slightly reduced their long out-of-the money puts as the CBOE S&P 500 Skew Index (SKEW) 128.01 was down from 130.82 the week before.

 

In the next week or so volume should begin to start winding down for the holidays so we can expect to see fewer market moving events, with the exception of those that need to be announced or completed before year end. For example, Linn Co, LLC (LNCO) 31.16 and Berry Petroleum Co. (BRY) 49.94 shareholders will vote on their proposed merger December 16. Another could be the potential takeover of Campbell Soup Company (CPB) see below.

Actionable Options

We are in the process of testing a new service called Actionable Options based upon intraday data from our RT Options Scanner. In addition to our tweets during the day, the plan is to post scan results in the IVolatility News section on our home page about an hour before the close each day. We will be scanning for both call and put high option volume activity along with increasing implied volatility and will include a few other comments about specific issues as suggestions for further research and possible action before the market closes each day. Here is the first test run of Actionable Options posted Friday. Give it a look and do send us your comments and suggestions. If you think this could be useful information to have before the market closes every day let us know.

VIX Futures Premium

Now we turn our attention to the VIX Futures premium during this last correction.

 

 

Previously when the futures curve was flat as represented by the premium going negative it has been a signal that the decline is almost finished. In addition, since last month’s employment report triggered a reversal up it seemed likely it could do so again.

Volatility Kings™

Typically, we produce our list of companies having a tendency to experience increasing options implied volatility as their quarterly reporting dates approach at the first of each quarter. However, for good number the implied volatility has already increased by the time we list them. This issue can be resolved by watching when they reach the low point of their range after reporting. Here are two examples of Volatility Kings™ that appeared in this week's scan results.

 

 

After their last reports the options implied volatility for both declined to the levels shown above as IV Min Ex and have begun to rise again. Using the previous quarters implied volatility maximum as a guide we expect to see the options IV of Green Mountain rise to 82 from 38 an increase of 2.16 times. For Netflix the comparable numbers are 70 from 35, an increase of 2 times.

While we are updating here is one that is just about to report that should have been on our last list.

 

 

While the implied index mean IVXM at 59 shown above has almost reached its full potential based upon last quarter, the near term December at-the-money call options are trading with an implied volatility of 76.41 while the puts are 75.09 suggesting perhaps a short straddle or a calendar spread in anticipation of the December 12 earnings report.

Takeover File

Although the takeover file has few new additions for quite some time now, here may be one that brings it back to life.

Campbell Soup Company (CPB) 42.43.

The soupmaker's shares were up 2.33, or 5.8% Friday the largest point gain in five years, according to the Wall Street Journal. Previously the shares had been down 6.2% after their November 19 earnings report at a nine-month low as they have been losing market share to Progresso and General Mills Inc.

Friday's option volume of 52,007 contracts compared to the one-week average of 12,950 contracts along with an 11.31 point or 63.95% increase in implied volatility suggests the soup pot may be bubbling.

From an options perspective there needs to be increasing volume with increasing implied volatility in several strike prices and expirations along with a sensible story such as the H.J.Heinz Co. takeover by Berkshire Hathaway and 3G Capital in May, which adds credibility that a similar offer may be underway here. Here are some selected Friday option numbers to consider.

 

 

Using our Advanced Historical Data service, we dig even deeper.

Here is the one month volatility chart showing the 30-day Implied Volatility in orange with the annualized rate of change 30-day Historical Volatility in blue.

 

 

Now for the Options Volume Chart showing the spike in call volume in blue

 

 

Finally, the Put/ Call ratio chart.

 

 

When the ratio is above .7 as illustrated by the sold horizontal blue line, it is bearish. Alternatively, the horizontal orange line at .3 is bullish. Although subject to rapid change, the ratio on Friday at about .15 is extremely bullish.

If a picture is worth a thousand words then these should suffice to conclude as of Friday options participants thought something is up at Campbell and perhaps there will even be an announcement over the weekend limiting further opportunities.

Presuming there are no announcements before Monday and the stock price does not retrace Friday’s gains here is a bull call spread to consider.

 

 

If there is an offer made it is likely to be more than 46 so our spread will do well, in the meanwhile we are giving it enough time to see if there is an offer working while partially hedging both time decay and implied volatility changes. Use a close back below 39 as the SU (stop/unwind).

The suggestion above uses 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

The S&P 500 Index advanced on the news of employment gains that were good enough but not so good as to cause a bond market selloff. In the meanwhile, equity market breadth continues to lag but upside momentum is still likely to carry the index to up toward 1825 before 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.

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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".