Volatility Trading Digest - Bell Ringer
Volatility Trading Digest - Bell Ringer
Those who have been following our comments in the Digest for the last few weeks know one of the reasons we have been urging caution and more hedging was due to the deteriorating breadth or the number of advancing issued compared to the declining issues on the New York Stock Exchange. Last week it changed and for the first week in the last ten, breadth improved. This is a bell ringer.
Along with the improving breadth, the major indexes also advanced enough to begin questioning the potential Head & Shoulders Top that we have been watching. We have more in the strategy section below along with two updates, a best trend suggestion, two new longs and several more in the takeover file update.
Strategy
S&P 500 Index (SPX)
While declining near the April 10 support low at 1357.38 it did not close below before rebounding. Now back above 1400 it begins to looks as if the once potential complex Head & Shoulders Top pattern could be morphing into a symmetrical triangle continuation pattern. While we still need to see a close above the April 2 high at 1422.38 to rule out the Head & Shoulders Top pattern entirely, it now looks less likely.
NYSE McClellan Summation Index
With a gain of 53.87 points, the first in ten weeks, this is our bell ringer for improving market breadth, a necessary condition for the market to continue advancing. Click on the link above and look at this important breadth indicator.
Next, our VIX futures premium indicator increased only slightly to 15.75% from last week at 14.85% as the day weighting applied 60% to May and 40% to June. Our alternative volume weighting between May and June resulted in a 15.51% premium.
For this short-term indicator the premium to the cash is a SPX sell signal suggesting professional expectations for the cash to increase toward the futures price. In the past premiums in excess of 20%, have usually preceded corrections, although not a precise timing tool it does appear to be a good way to measure professional hedging sentiment. We consider the current readings to be about neutral.
Since equities appear to be improving and maybe about to resume their uptrend from last October we suggest removing any remaining hedges and start adding long positions once again.
Apple Inc. (AAPL)
After reporting better than expected 2Q earnings on Tuesday April 24, it closed up 30.02 for the week.
Our follow the leader calendar spread suggestion in Digest Issue 17 was a loser since calendars short the near-term option will be losers if the underlying makes a large move. Compounding the loss amount was the high priced underlying stock.
Following the plan, we closed it Friday and booked the 10.20 loss.
Sears Holdings Corporation (SHLD)
The ratio backspread idea suggested in earlier needs adjusting. Although the stock declined as expected it now looks as if may attempt to turn higher going into the 1Q earnings report scheduled for May 24. On the last earnings report, the implied volatility index mean was near 110 and there is a good chance it will reach these levels once again. Accordingly, we will convert our ratio backspread into a long straddle with the plan to sell it before the report release. Here is the conversion trade.
We buy 1 June 65 put to close and buy 2 June 55 calls to open resulting in a new 2 lot long June 55 strangle position since we still have the original 2 long June 55 puts from the ratio backspread.
Stock Trend Analysis Suggestion
Direct from the "Options Data Analysis" and the "Rankers & Scanners" sections on our home page Friday we offer this "Stock Trend Analysis" suggestion as a regular feature for your consideration. The selection criteria include an Exponential Moving Average, Relative Strength Index and the Chaikin Money Flow indictor and more.
PulteGroup, Inc. (PHM)
Using our stock trend analysis methodology, this homebuilder scored a 75% bullish rank on Friday.
Accordingly consider this long call short put combination as a trend continuation idea.
The implied volatilities of the calls are near the 45.89 Historical Volatility of the underlying, but there is good volatility edge in the short put shown above at 58.18. Use a close below the recent pivot at 8.25 as the SU (stop/unwind).
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