« August 2008 »

IVolatility Trading Digest™

Volume 8, Issue 31
Top 5

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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One of the regular features found on our home page in the Rankers and Scanners section is the Top 5 and bottom scan results from our Advanced Ranker. If you want a fast and easy source for good option trading ideas this is for you.

After a brief market review and strategy comment we will provide some additional details, review a few Top 5 stocks and offer some suggestions about how they could may be included in an options trading portfolio.

Market Review

US Dollar Index (DX) 77.18. For the second time in as many weeks the DX was the main feature last week. With another rise of 1.33 it is now starting to look overbought. From a classical bar chart technical analysis perspective we have reached the upside minimum measuring objective of 76.87 from the double bottom formed by the March 17, 2008 and July 15, 2008 lows. The next resistance is the December 20, 2007 high at 77.85 and this is likely to be the place where the DX will pause and make a correction. If so, the correction could give some relief to the oil and gas, gold and the commodities that have been under some pressure from the rising dollar. The rapidly rising US Dollar Index reflects the perception of economic weakness spreading to major trading countries and the narrowing of the US trade deficit that will likely result from a slowing US economy and the now declining cost of crude oil.


With the continued DX strength the focus should be on the beneficiaries of lower oil, gas and commodity prices. Airlines and chemical companies are a good place to be looking. The dollar ETF is an easy way to get aboard the dollar train. Look at the PowerShares DB US Dollar Index Bullish (UUP) 23.93. Last week in IVolatility Trading Digest™ Volume 8, Issue 30, Beijing Olympics, dated August 11, 2008 we suggested a bull call spread for UUP.

Europeans looking for relatively inexpensive strategic acquisitions should now be more anxious to get deals done while they still have a currency advantage. In the meanwhile with M&A activity the upward momentum continues in the biotechnology sector.


Looking at the Top 5

In the Options Data Analysis section in the center of our home page we regularly feature two graphs. One is our Stock Trend Analysis, the second is the Best Calendar Spread. The details for each suggestion are then provided in the Rankers and Scanners section below. On Friday we featured two financials, Capital One Financial Corp. (COF) 43.95 and Zions Bancorp (ZION) 27.98. If you think the financials have bottomed and will not come back down to retest the lows then you may want to include these on your list of candidates for further research. Just above the Stock Trend Analysis you will find the link to the “Top 5 stocks by implied volatility change.”

In the first group are the “Top and bottom 5 stocks ranked by IV Index Mean vs 30 D HV.” These are the most expensive and least expensive options based upon the relationship between the options Implied Volatility (IV) compared to the Historical Volatility of the stock for the previous 30 days (HV). The ratio in the right column indicates how many times the Implied Volatility exceeds the Historical Volatility, with ratios above 1 considered expensive, while ratios below 1 are considered inexpensive. The data input used for the scan is the “Top 200 stocks by options volume”. Using our Advanced Ranker you can perform scans using other data sets such as “Top 200 stocks by options open interest”, S&P 500 stocks or other groups.

We are going to look in greater detail at a few of the Top 5 stocks included in the group of the most expensive options relative the underlying stocks with the thought of finding options that we can sell to take advantage of the higher option prices.

Huntsman Corp. (HUN) 14.26, is in the number one place with an IV Index / HV ratio of 2.00. Salt Lake City based HUN manufactures and markets specialty chemical products worldwide such as polyurethanes and coatings. Last year Hexion Specialty Chemicals and the hedge fund Apollo offered to buy HUN for 28. In June Hexion sued to terminate the merger claiming credit crunch issues. A court date has been set for September 8, 2008 so we can expect the implied volatility to remain high until a settlement is reached. In the meanwhile, declining crude oil and natural gas prices along with recent product price increases should help their profitability.

We previously offered suggestions for HUN in and IVolatility Trading Digest™ Volume 8, Issue 22, Contango, dated June 2, 2008, IVolatility Trading Digest™ Volume 8, Issue 26, Right Side, dated June 30, 2008, and again in IVolatility Trading Digest™ Volume 8, Issue 29, Biotech Encore, dated August 4, 2008.

The IVolatility.com volatility chart below from Advanced Historical Data shows the positive volatility spread, or the positive relationship between the Implied Volatility and the Historical Volatility from an option seller’s perspective.

The current Historical Volatility of 53 is blue and the gold Implied Volatility Index of 105 clearly shows the positive volatility spread and is about twice the value as indicated by our Top 5 Advanced Ranker scan.

With a Call/Put ratio of 3.39 (three times more calls traded than puts) here are two more suggestions, the first is out-of-the-money while the second is in-the-money.

Comparing the Implied Volatility of the these options, both of which are in excess of 100, to the Historical Volatility of the stock at 53 shows the positive volatility spread and the advantage, or edge, for the option sellers. If there is a settlement with Hexion and Apollo the Implied Volatility of the options will decline regardless of the settlement terms. In the unlikely event it is necessary for the dispute to be resolved by the courts this matter could drag out for a long time and the Implied Volatilities will remain high.

Numbers 3 and 4

Next we look at two technology companies, the third and fourth ranked entries in our Top 5 scan.

Rambus Inc. (RMBS) 15.99. Third ranked RMBS with an IV Index / HV ratio of 1.39 designs and licenses chip interface technologies and architectures used in digital electronics products. Down from 26 in late March it continues reporting losses. The stock is very sensitive to its litigation pipeline and they are always waiting-for-court-decisions regarding patent infringement lawsuits. A recent restructuring announcement that they plan to cut 90 jobs resulting is annual savings of $17 million is one likely cause for the Call/Put volume ratio to be in excess of 3 as call volume has recently risen substantially. With now declining Implied Volatility consider this semiconductor turnaround with a current Historical Volatility of 58.

For those who may not be able to sell cash covered puts consider this covered call idea.

In the event the stock continues to decline use a SU (Stop/ Unwind) on a close below the last pivot at 15.

Marvell Technology Group Ltd. (MRVL) 15.88. Fourth ranked MRVL also with an IV Index / HV ratio of 1.39, also a semiconductor company engages in designing, developing, and marketing analog, mixed-signal, and digital signal processing, and embedded microprocessor integrated circuits. This stock is up from around 11 in March and is being called a turnaround story further into their plan. They are scheduled to report second quarter earnings on August 28, 2008 and analysts are expecting them to beat expectations and raise guidance. While the Implied Volatility has risen the call open interest is three times larger than the put open interest. With a current Historical Volatility of 40 and a positive volatility spread consider this put sale with good edge.

Use the most recent pivot at 14 as the SU (Stop/Unwind).

Call – Put Ratio Search

Once again we offer a suggestion from the IVolatility.com RT Options Scanner.

The concept here is to find underlying securities that have high call/put ratios, that is many more calls being traded than puts. Some caution is needed to make sure there is adequate total volume being traded so the high ratio has significance. The result is based upon a single day volume so it is important to look at the call/put ratio chart for several months to make the current trading activity relevant to the recent past. The call/put charts are found in the Advanced Historical Data section accessed from the home page.

VeriFone Holdings Inc. (PAY) 16.00. Reported to be the world’s leading point-of-sale technology company are planning to file restated financial statements with on SEC on Tuesday August 19, 2008. This stock is down from almost 50 in early December 2007 when they announced inventory valuation and accounting irregularities. With a positive volatility spread between the Implied Volatility Index Mean of 89 and the Historical Volatility of 52 and with a recent high Call/Put volume ratio of 5.8 consider this put sale for the SEC financial statement filing event on Tuesday.

This option has good edge, but be prepared to take in stock and then sell calls against the assigned long stock in the event it declines and closes below 15 on the September options expiration. With a reasonable valuation of about 12 times earnings the long-term prospects for this company would seem to justify this price.

Previous Issues and 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. 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 for us to take a look at a specific stock or ETF just let us know. Use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com Website.



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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".