Volatility Trading Digest: Where There Is Smoke, There Are Mirrors
Last week the financial news was dominated by smoke and mirrors along with some jawboning in an effort to refinance the Greek sovereign debt at interest rates lower than warranted by the risk assumed. However, the bond market vigilantes are on the job and not buying the story as yields on 10-year Greek sovereign debt reached 7.58%, 450 basis points over German Bunds.
"Increased borrowing must be matched by increased ability to repay. Otherwise we aren’t expanding the economy we’re merely puffing it up."
Henry C. Alexander (CEO JP Morgan & Company and Morgan Guaranty Trust 1950-1967)
Here are a few options ideas that do not seem overly concerned about the Greek sovereign debt problems.
Once Again Long Euro
Once again, the euro declined and tested 132 before rebounding on Friday to form a potential small double bottom. Now if it closes above 135.55 setting off the pattern it will suggest a minimum measuring objective at 138.55. For that possibility, here is a euro long call spread idea.
CurrencyShares Euro Trust (FXE) The Historical Volatility is now 9.57
Gold is one sector that reflected concern about Greece’s debit problems as prices rose to their 2010 highs on what was called safe-haven buying. Further it was reported that exchange traded funds backed by gold substantially increased their exposure last week. There is a chance these flows may be reversed if a credible solution to the Greek problem is announced, but more smoke and mirrors along with more jawboning will not do it. Here are two option ideas using junior gold miners.
Yamana Gold, Inc. (AUY) With a current Historical Volatility of 31.22 and with an Implied Volatility Mean Index of 40.36, up from 38.09 last week and with good options volume and open interest, it’s interesting to consider this longer-term bull call spread using January 2012 calls.
Taseko Mines Ltd. (TGB) This Canadian copper producer has one of the largest undeveloped copper and gold deposits in Canada.
With a current Historical Volatility of 41.22 and an Implied Volatility Index Mean of 54.51 and because this one has less options volume and open interest, an interesting idea is to use a somewhat different strategy called a covered combination also known as a "Mombo-Combo."
It works like this: Buy 100 shares of stock and then:
All of the 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.
While the bond market continues to struggle with the ramifications of refinancing Greek sovereign debt issues, the equity markets appear to be less concerned as it continues higher, although there are now some signs of increased safe-haven gold buying.
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