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Volatility Trading Digest: Strategies for Varying Volatilities

Strategy

The apathetic response to numerous fundamental developments last week could partly be attributed to seasonality, but a more likely explanation is the lack of clear vision for the global economy. Slower economic growth in the US and the many announced cuts in government spending in Europe are rekindling the inflation vs. deflation debate once again and creating hesitation. 

Since implied volatilities are not high by recent standards of the past two months, nor low compared to March or April, there is little reason searching for many volatility trades.

The markets seem to be suggesting they are half-empty or half full, depending upon ones perspective. Of course, we expect this to change in about two week’s time when the second quarter earnings reports begin.

IVOLopps

Earnings and Trend Continuation

In the meanwhile, here are two companies scheduled to report next week that are in serious down trends suggesting there could be problems with their business models.

Apollo Group Inc. (APOL)

Also known by its brand name, University of Phoenix, APOL provides undergraduate, graduate, and doctoral programs with a for-profit business and marketing model.

In this entry, we highlighted the sale of a June 55/45 call credit spread for a 5.87 credit. At the June expiration, the June 45 call closed in-the-money by 3.39, so the gain would have been reduced by about 3.50 presuming it had been closed before expiration.

Since the stock now appears to be accelerating lower going into earnings scheduled to be reported Wednesday after the close, and does not have any near term support, here is a bearish put spread to consider. The current Historical Volatility is 48.65.

Monsanto Co. (MON)

Here is another stock that recently gapped lower and appears to have no near term support. With a current Historical Volatility of 37.57, consider this bearish put spread.
 

There is good edge in the short put and the cost is just 24% of the distance between the strike prices. In this situation, you could consider using a close back above 50 as the SU (stop/unwind).