Volatility Trading Digest - Strategy Ideas
Volatility Trading Digest - Strategy Ideas
Strategy
Until we begin to see a sustained improvement in market breadth, we continue to suggest hedging and/or short positions. For now, the active pattern is a bear flag flying at half-mast implying the decline will continue to at least 1244, and perhaps lower.
In the meanwhile, we realize there are still opportunities available for those who are prepared to take the risk. As for bear markets here is a quote worth mulling over.
"For those properly prepared in advance, a bear market in stocks is not a
calamity but an opportunity." John Templeton
calamity but an opportunity." John Templeton
Strange as it Seems
This is our contrarian idea section, and here is one from our complementary Top 5 ranker scan that presented as a regular feature in the "Rankers and Scanner" section of our home page. On Friday, this one ranked number three in the high IV/HV ratio scan at 2.00. High IV/HV ratios are the first alert that something unusual is happening as the options prices are being bid up to abnormal levels.
InterOil Corp. (IOC)
IOC is an integrated oil and gas company in Papua New Guinea, engaged in the exploration, and development of crude oil and natural gas. It has three onshore exploration licenses covering approximately 3.9 million acres in the Eastern Papuan Basin, northwest of Port Moresby, Papua New Guinea. The company also engages in the refining, and retailing petroleum products. In addition, they are attempting to build an LNG export terminal.
With the recent confirmation of a large gas discovery along with a better than expected earnings report on May 14, the stock has since gained 12.48 points. News that the company is making deals with Korean and Japanese importers of LNG, currently priced around $18 per mcf compared to Friday's New York Mercantile Exchange closing price of $2.43 per mcf, is also supporting the stock price.
We have featured this one in past, most recently last December in Digest Issue 47 when we suggested an iron condor to take advantage of the then high IV/HV ratio when the Implied Volatility Index Mean was 133.19.
The current Historical Volatility is 43.98 and 54.71 using the Parkinson's range method, with an Implied Volatility Index Mean of 87.91 down from 95.15 last week. The IV/HV ratio is 2.00 and 1.61 using the range method to calculate the HV. The put-call ratio is extremely bullish at .30 with Friday's volume of 16,404 contracts traded compared to the 5-day average volume of 25,480 contracts.
While there appears to be good support at 60 going back more than a year, it did trade as low as 34.05 last October 4 when the market declined, so there is certainly some risk along with the long-term fundamental opportunity.
Here are three put sale ideas with various degrees of risk depending upon the distance from to the current stock price.
Unless the plan is to take the stock by assignment in the event it closes below the strike prices shown above use a close below the support price of 60 as the SU (stop/unwind).
The suggestions above are based upon last Friday's closing prices using the mid price between the bid and ask. On Monday, the option prices will be somewhat different due to the time decay over the weekend and any price change.
Summary
The equity markets are responding to deteriorating fundamentals in the US as well as the continuing torrent of negative news from Greece and Spain creating speculation about what a breakup of the euro currency would mean for the global economy. US equity markets appear headed lower, perhaps as low as 1200 for the S&P 500 Index.
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