« June 2017 »

IVolatility Trading Digest™

Volume 17 Issue 25
Supermarket Swoon [Charts]

Supermarket Swoon [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Although supermarket and consumer staple stocks had a rough week the rest of the market seemed less concerned by Amazon's announced purchase of Whole Foods Market. Indeed since most of the broad market indicators we follow remain bullish rather than repeat them we are going to focus on the oversold crude oil sector and volatility opportunities for Oracle Corp. (ORCL) ahead of their earnings report Wednesday and oversold The Kroger Co. (KR).

Review NotesS&P 500 Index (SPX) 2433.15 inched 1.38 points or .06% higher for the week in a narrow trading range after making new closing high Tuesday at 2440.35. Both the upward sloping trendline USTL from the November 4 low at 2,083.79 and the 50-day moving average converge at 2393 to provide solid support.

StrategyAlthough rotation activity slowed somewhat energy and crude oil remained under pressure while technology and semiconductors are likley to find support their 50-day moving averages especially since the consumer staples sector also came under pressure. One leading indictor to watch next week is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) 88.15 that turned lower Thursday ending the week down only .17 but diverging from the SPX.

Crude Oil Update

Crude OilWTI Light Sweet Crude Oil (CL) 44.74 basis July futures declined 1.09 or -2.38% for the week making it three weeks lower during the season when it usually advances. Now oversold by most measures it remains uncertain when it may turn higher . When the next bounce comes it's likely to be limited to resistance at the downward sloping trendline around 52 shown last week in Digest Issue 24 "Rotation Hammer [Charts]."

From the Disaggregated Commitments of Traders - Options and Futures Combined report as of June 13 "Managed Money," the group that best correlates with crude oil price changes and arguably the most important, increased their long position +4,279 contracts but increased their shorts -30,121 for a net position decrease of 25,772 representing 6.78% of the of the open interest down from 7.65% last week.

Although apparently oversold prices are not likely to turn higher until "Managed Money" decides they have pushed them as low as they can go and begin covering their shorts while adding longs. From this chart it looks like their net long position could approach 4% of the open interest before prices find meaningful support


In the meanwhile, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) September long call spread and short put combination idea in Digest Issue 24 "Rotation Hammer [Charts]" 31.65, down .96 or -2.94% for the week will likely turn higher before the futures on any counter-trend really that could come at any time.

Volatility Ideas

With the upside limited until 2Q earnings reports begin next month and with "Algo Rotators" attempting to compensate, here are two ideas based primarily on volatility.

The first an upcoming earnings report.

Oracle Corp. (ORCL) 45.09 +.41 Friday and +.06 for the week are scheduled to report 4Q earnings Wednesday after the close with a consensus estimate of .78 and whisper estimate of .80 on revenue of 10.46 billion. Last quarter the stock gapped higher on the report and some are expecting a repeat performance.

The volatility chart shows why it was the number one ranked high IV/HV ratio selection this week. The options volume spikes in the second chart corresponds with the previous quarterly reports when the implied volatility dropped (orange lines) and the historical volatility (blue lines) spiked. Expect a similar pattern Thursday.


The current Historical Volatility of 10.39 and 11.19 using the Parkinson's range method, with an Implied Volatility Index Mean of 21.82, the implied volatility /historical volatility ratio using the range method is 1.95 so option prices are relatively expensive compared to the recent movement of the stock while the implied volatility is likely to decline on the report like the previous quarters shown above. Friday’s option volume was 35,480 contracts traded compared to the 5-day average volume of 43,890. Consider this long call spread with a short put.


Using the ask price for the buy and middle for the sell, the call spread debit is .34 about and 34% of the distance between the strike prices. Adding the short put at the bid price of .47 produces a credit of .13. The risk is a sudden decline below 43 and assignment if it closes below 43 at the July 21 expiration.

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This next one appears oversold and likely to bounce soon.

The Kroger Co. (KR) 22.29 declined 2.27 Friday after Amazon announced an offer to buy Whole Foods Market after declining 6.62 the previous day after reporting earnings and reducing forward guidance due to competitive pricing pressure. For the week the decline totaled 8.49 points or -27.58%, the type normally associated with a high growth tech company that misses its revenue forecast or a biotech that fails to receive an expected FDA approval for a development stage drug. For a well run profitable category leader it seems too much despite increasing competition.

The challenge becomes one of timing. While it will likely take awhile to find a new equilibrium price the implied volatility should start declining soon so the near term July options with implied volatility around 42 are better than October with implied volatility around 34. Further since implied volatility is expected to decline the position should have negative vega or short more options than long, like ORCL above.

The charts below help tell the story.


Ranked number two for implied volatility change Friday, with a Historical Volatility of 69.65 (blue line in the top chart) and 30.05 using the Parkinson's range method, with an Implied Volatility Index Mean of 41.51 (orange line) , the implied volatility /historical volatility ratio using the range method is 1.38 so option prices are about right for this implied volatility compared to the recent movement of the stock while implied volatility is likely to decline back toward 20, it could take awhile. Friday’s option volume was 157,974 contracts traded compared to the 5-day average volume of 65,270. Here is another long call spread with a short put, short more options than long.


Using the ask price for the buy and middle for the sell, the call spread debit is .32 about and 16% of the distance between the strike prices. Adding the short put at the bid price of .55 shows a .23 credit. Unlike ORCL above that will likely be a binary event on their report date, for KR use a close below 21 the SU (stop/unwind) or be prepared for assignment converting the trade into a long-term value investment.

The suggestions above are based on the ask price for the buy and middle price for the sell presuming some price improvement is possible. Monday’s option prices will be somewhat different due to the time decay over the weekend and any stock price change.


With the possible exception of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) our market indicators remain positive even though tech and semiconductors pulled back to their 50- day moving averages. Since June is one of the seasonally weaker months followed by July one of the seasonally better months our indicators continue suggesting there are few reasons to consider hedging since bulls have it right as the "Algo Rotators" move from sector to sector seeking alpha.

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Actionable Options™

We now offer daily trading ideas from our RT Options Scanner before the close in the IVolatility News section of our home page based upon active calls and puts with increasing implied volatility and volume.

"The best volatility charts in the business."

Next week we will fire up the rankers and scanners once again looking to more volatility ideas in the current low volatility environment.

Finding Previous Issues and Our Reader Response Request

PreviousIssuesAll 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 source is the Table of Contents link found in the lower right side of the IVolatility Trading Digest section on the home page of our website.

CommentAs 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 at Support@IVolatility.com or use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com website. 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".