Volatility Trading Digest - A Mixed Bag of Trading Ideas
Volatility Trading Digest - A Mixed Bag of Trading Ideas
Here are three interesting ideas we found using our RT Options Scanner, all with active options trading on Friday.
SunPower Corporation (SPWRA)
SunPower designs and manufactures high-efficiency silicon solar cells and solar panels based on an all-back contact cell design which they claim produces more power per square foot compared to conventional solar cells.
They just reported non-GAAP earnings of 1.36 while expectations were 1.05 and raised 2011 guidance to 2.00 ñ 2.20. Revenues were up 71% to 937.1 million. Using the 12-month trailing earnings the price to earnings ratio is 9.9 and the forward ratio using the low end of their new guidance is 9 times.
Friday the stock gapped higher closing up .61 and there is a chance it will pull back and close the gap, but since there was a lot of media coverage on the report and upgrade, the gap may not be closed.
The current Historical Volatility is 53.29 with an Implied Volatility Index Mean or 48.63, for an IV/HV ratio of .90 and a very bullish put-call ratio of .18. After reporting, the implied volatility declined from 56.14 and we estimate it will return to about 44, the low on December 22, 2010. The increased historical volatility is due to the price rise going into the earnings report along with the gap up on Friday when there were three call strike prices with volume in excess of 2K contracts each. Here is a call spread combination to evaluate.
In the event the stock trades down into the gap, use a close below 16 as the SU (stop/unwind).
The current Historical Volatility is 68.18 with an Implied Volatility Index Mean of 49.09, down from 60.83 before reporting last week. We forecast implied volatility will continue declining down toward the 40 level. The IV/HV ratio is .72, the put-call ratio is .5 and there were seven call strikes with more than 2K contracts traded Friday. With 264,695 total contracts traded it ranked in the top 10 for options volume.
We suspect it may take awhile for it to break out above 25 but there appears to be sold support at 22.50 so consider this put sale idea.
Since we expect the implied volatility to continue declining the June put was selected since it has a higher Vega at .0494 compared to .0179 for the March 22.50 put. Watch the 22.50 support level but be prepared to take in the stock by assignment if it should close below 22.50 at the June expiration.
AK Steel Holding Corporation (AKS)
Ohio based AKS produces flat-rolled carbon, stainless and electrical steel products, as well as carbon and stainless tubular steel products, for automotive, appliance, construction and manufacturing markets.
After reporting a loss of .49 on January 25, the stock has rebounded from 14 to close above the pre-announcement high of 17.29 on January 6. We think the most likely explanation is based upon expectations of an improving US economy and greater capacity utilization that should translate into greater future earnings for cyclical companies with high fixed costs, such as those in the steel industry.
The current Historical Volatility is 47.83 with an Implied Volatility Index Mean of 48.34, up from 43.30 last week. The IV/HV ratio is 1.01 and the put-call ratio is very bullish at .25. On Friday both the March 17 and 18 calls were active with 8823 March 18 call contracts traded. Consider this longer-term bullish call strategy with a short-term component.
While this combination will require some attention due to the short March put being close to the money it has a combined delta at this price of .67 or the equivalent of long position with 67 shares of stock. In the event the stock closes below 17 at the March expiration be prepared to take the stock by assignment and then sell calls against the long stock position.
This next suggestion is about one we have made in previous issues and comes from the category we call IV Range. In this example at the upper end of its 52-week range, but now declining, it is a good set up for selling options. At number four on the Top 5 rank for IV Index Mean Range, found on our home page, here is what got our attention. The current Implied Volatility Index Mean is 60.39, while the 52-week range is 72.85/38.89.
SandRidge Energy, Inc. (SD)
SD is an independent natural gas and oil company in the United States exploring, developing and producing oil and in the West Texas Overthrust and Permian Basin.
The current Historical Volatility is 34.29 with an Implied Index Volatility Mean of 60.39, up from 56.84, but down 2.03 on Friday. The IV/HV ratio is attractive at 1.76 and the put-call ratio is bullish reading of .4. The implied volatility appears to be rolling over and it could go back down to the 50 level. Based upon this we want a short volatility trade and a put sale will give us long direction and short volatility, however since there is a seasonal consideration to consider for oil producing companies we will have selected a near term option.
There is good support at 8 so this level can be used as the SU (stop/unwind). The alternative is to take the stock by assignment in the event it closes below 8 at the March expiration. In that event, the implied volatility will most likely be attractive enough to sell calls against the long stock.
Allis-Chalmers Energy, Inc. (ALY)
ALY is a Houston-based oilfield services company providing services and equipment to oil and natural gas exploration and production companies, domestically in Texas, Louisiana, New Mexico, Oklahoma, Arkansas, offshore in the Gulf of Mexico, and internationally in Argentina, Brazil and Mexico. They provide directional drilling services, casing and tubing services, underbalanced drilling, production and workover services with coiled tubing units, rental of drill pipe and blowout prevention equipment.
On August 12, 2010, the entered into a merger agreement with Seawell, a subsidiary of Seadrill Ltd., both listed in Oslo, Norway. Under the agreement, Allis-Chalmers stockholders will have the right to elect USD 4.25 in cash or 1.15 Seawell common shares for each share of Allis-Chalmers common stock.
Based upon Seawells' Friday closing price of 35.40 krone on Oslo Stock Exchange the deal is valued at $7.18 using .1762 krone to the US dollar.
A special meeting to approve the merger will be held on Wednesday, February 23, 2011 in Houston and this is the reason for the high levels of put implied volatility.
The current Historical Volatility is 39.85 with an Implied Volatility Index Mean of 24.38, down from 37.03 last week. The IV/HV ratio is .61 and the put-call ratio is a very bearish 3.5 reflecting the protective put buying as the implied volatility of the puts are much higher as shown below.
The options volume is thin so the prices above reflect Fridayís offer for the long buy leg and bid for the short sell leg.
All of the suggestions above, except for PCS and ALY are based upon last Fridayís closing prices using the mid price between the bid and ask. On Tuesday, the option prices will be somewhat different due to the time decay over the long weekend and any price change.
For equities, the technical condition continues to be best described as in an orderly low volatility uptrend without any significant near term overhead resistance. Unless rocked by unforeseen exogenous events we expect equities to keep trending higher.
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