Volatility Trading Digest - Waiting for QE2 Trading Ideas
Volatility Trading Digest - Waiting for QE2 Trading Ideas
Since there is a developing divergence in the advance-decline line along with the high SPX put-call ratio mentioned above, we suggest adding some SPX or IWM hedging until the Fed announces its intentions.
Last week we wrote the precious metals sell off was most likely the result of apprehension about an announcement coming from the G20 finance ministers meeting. The more serious alternative was profit taking. Since gold and silver quickly rebounded, we have concluded it was a temporary G20 correction and not profit taking. Accordingly, we suggest adding to precious metals positions as they have seasonal strength as well as the dollar weakness working in their favor.
Our indicators are mixed reflecting the current uncertain market condition. The VIX futures premium has declined, but the SPX put call ratio mentioned above, is at the highest level in six months. Consequently, a carefully chosen combination of shorts and longs appears to be the best match for Monday.
iShares Russell 2000 Index (IWM)
The current Historical Volatility is 19.19 and the Implied Volatility Index Mean is 27.81 with an IV/HV ratio of 1.45 and a bearish put-call ratio of 1.5. Consider this put vertical spread as a short-term hedge.
Use a close back above 72 as the SU (stop/unwind).
This ETF is a unit investment trust designed to correspond to the performance, before fees and expenses, of the Nasdaq-100 index. The fund holds all the stocks in the Nasdaq-100 index, which consists of the largest non-financial securities listed on the Nasdaq Stock Market.
The current Historical Volatility is 13.75 with the Implied Volatility Index Mean at 20.48 for an IV/HV ratio of 1.49 and a bearish put-call ratio of 1.4 indicating considerable hedging activity.
With good edge use a close below the upward sloping trendline or about 51 as the SU (stop/unwind).
Silver Wheaton Corp. (SLW)
With a current Historical Volatility of 38.16 and an Implied Volatility Index Mean of 48.75 for an IV/HV ratio of 1.28 and a bullish put-call ratio of .3, consider adding this short put.
Use a close back below the last pivot at 25.35 as the SU (stop/unwind).
is an alternative energy company offering grid interconnection solutions as well as licensed wind energy designs and electrical systems based on power electronic systems and high temperature superconductor wires that dramatically improve the efficiency, reliability and quality of electricity during its generation, transmission and distribution.
The company is scheduled to report earnings on Tuesday before the opening. The consensus estimate is .28 compared to last year at .19. The stock has been declining from 38.88 reached on October 13 in what appears to be selling on the expectation that it will not meet the estimate.
With a current Historical Volatility of 37.46 and an Implied Volatility Index Mean of 57.84 for an IV/HV ratio of 1.54 and a very bearish put-call ratio of 9, or nine times more puts than calls, consider this call credit spread.
We suggest unwinding or closing the position after the report is released as the implied volatility is likely to decline. There is some upside risk as the position will be short above 35 so manage the position size accordingly.
All of 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.
The financial markets are currently reflecting unusual uncertainty while waiting for the QE2 announcement from the Federal Reserve on Wednesday. Since our indicators are mixed, we suggest a strategy using a combination of selected shorts and longs.
About Ivolatility
View Ivolatility's post archive >
