Volatility Trading Digest - Strategy Edition
Volatility Trading Digest - Strategy Edition
Low Range Ideas
In the "Rankers and Scanner" section of our home page we feature the "Top 5 stock by implied volatility change."
Here are two interesting idea from the 52-week low implied volatility range section that look interesting.
Since both are quality companies with the low implied volatilities, this is an opportunity to use inexpensive long call spreads supplemented with short puts.
Takeover File
We have some new additions and update comments for the takeover file. While the investment bankers and lawyers are no doubt very busy working on these deals, their efforts are not yet reflected in unusual options activity.
Avon Products Inc. (AVP)
AVP has rejected the offer to buy the company made by Coty, the French fragrance and global beauty company, at 23.25. The low options volume suggests there have been no further recent developments.
The current Historical Volatility is 53.22 and 26.06 using the Parkinson's range method, with an Implied Volatility Index Mean of 43.74 down from 44.58 last week. The IV/HV ratio is .82 and 1.70 using the range method to calculate the HV. Friday's put-call ratio was bearish at 1.80 while the volume was 5,025 contracts traded compared to the 5-day average volume of 9,030 contracts.
Consider this long call spread with a short put combination.
There is good volatility edge in the May 21 put and if this drags out for a long time, it will likely expire worthless, providing the opportunity to sell another with June expiration. Use a close back below support at 20 as the SU (stop/unwind).
Human Genome Sciences Inc. (HGSI)
Human Genome's board of directors recently rejected GlaxoSmithKline's offer to acquire the company for 13 per share in cash, as they believe the offer price undervalues the company. Human Genome is currently evaluating alternatives regarding its future, including a potential sale. According the report, Glaxo has been invited to take part in the proceedings. So far, the options are not reflecting much enthusiasm for a higher price.
The current Historical Volatility is 201.11 and 41.63 using the Parkinson's range method, with an Implied Volatility Index Mean of 40.64 down from 44.98 last week. The IV/HV ratio is .20 and .98 using the range method to calculate the HV. Friday's put-call ratio was on the bullish/bearish line at .70, while the volume was 7,622 contracts traded compared to the 5-day average volume of 24,320 contracts.
This one could also be a long drawn out affair. In the meanwhile, consider this idea.
For this one there is no good place for the stop anywhere near the current price level, so the only real risk management technique is to limit the position size.
Ardea Biosciences, Inc. (RDEA)
AstraZeneca plc announced it has entered into an agreement to purchase RDEA for a cash value of approximately 1.26 billion or 32 per share. Both the AstraZeneca and Ardea boards have unanimously supported the deal expected to close in second or third quarter of 2012, subject to certain regulatory conditions, including approval by Ardea's shareholders.
Since it appears uncontested and there are very few options trading, we do not see an options opportunity for this one.
Amylin Pharmaceuticals, Inc. (AMLN)
Apparently AMLN does not want anything to do with
Bristol-Myers Squibb and is seeking an alternative buyer.
The current Historical Volatility is 135.48 and 43.36 using the Parkinson's range method, with an Implied Volatility Index Mean of 46.69 down from 80.81 last week. The IV/HV ratio is .34 and 1.07 using the range method to calculate the HV. Friday's put-call ratio was bullish at .70 while the volume was 6,750 contracts traded compared to the 5-day average volume of 18,420 contracts.
Here is another idea for those who may want to increase their positions.
Since it could take quite some time for this to be resolved there could be more opportunities to sell puts with high-implied volatility thereby reducing the cost of the spread. The risk is a close below 20 at the June expiration. In that event, be prepared to receive the stock by assignment.
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.
Summary
There was a significant improvement in the outlook for equities last week. The most noticeable was the long awaited upturn in market breadth. In addition, generally positive earnings reports are adding upside momentum and diminishing the chances for a near-term downturn in the major indexes.
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