Volatility Trading Digest - Tech Time & Takeover File
Volatility Trading Digest - Tech Time & Takeover File
While many advise avoiding the tech sector until September, some of the stocks are interesting now having experienced sharp declines in the last few months. This one is ranked number one in our IV/HV ratio scan this week.
Akamai Technologies Inc. (AKAM)
The company provides services for accelerating and improving the delivery of content and applications over the Internet.
Having made what appears to be a double bottom it turned higher on Friday as the volume expanded. The current Historical Volatility is 27.24 with an Implied Volatility Index Mean of 49.38, up from 48.30 last week, the IV/HV ratio is an attractive 1.81 and the put-call ratio at .28 is bullish. The option volume last Friday was 17,572 contracts compared to the 5-day average of 12,770 contracts.
Here is an interesting put sale as proxy long position.
With good volatility edge we suggest using a close back below, the last pivot at 29 as the SU (stop/unwind). Alternatively, if the stock is below 29 at the August expiration take it by assignment and sell calls against the long stock position.
NVIDIA Corporation (NVDA)
NVDA provides high performance computing, and mobile computing solutions for interactive graphics on various devices ranging from tablets and smart phones to notebooks and workstations.
Down from 25 in February it looks as if it has found a bottom at just under 15 and has now turned higher. The current Historical Volatility is 34.22 with an Implied Volatility Index Mean of 50.48, the IV/HV ratio is 1.48 and the put-call ratio at .29 is bullish. The option volume on Friday was 19,944 contracts compared to the 5-day average of 23,900 contracts.
Although it does not represent very much premium here once again is another put sale.
With a good volatility edge use a close below the last pivot at 13.62 as the SU (stop/unwind) or take the stock by assignment if it closes below the 14 strike price at the August expiration and then sell calls against the long stock position.
Takeover File
Next, here are three ideas in the takeover category to evaluate.
E*TRADE Financial Corporation (ETFC)
Online brokerage firm E*Trade experienced a two point advance on news the company will retain Morgan Stanley to conduct a review of strategic alternatives after rejecting a request by Citadel to hold a special shareholders meeting to consider putting the company up for sale. It appears Citadel partially accomplished its objective as the stock moved higher. However, this battle has been going on for some time as Citadel looks for a way out of this company.
After reaching 12.50, it gapped 2 points higher on the recent Morgan Stanley news. The current Historical Volatility is 54.53 with an Implied Volatility Index Mean of 46.78, up from 41.58 last week, the IV/HV ratio is .86, but the historical volatility most likely be returning to the 25-30 range in the near future. The IV change was ranked number five in our IV advance list on Friday, up 6.62 or 16.49%. The put-call ratio at .43 is bullish. The option volume on Friday was 36,162 contracts compared to the 5-day average of 21,610 contracts with more than 2,000 options trades in three call series.
Once again, we look at a put sale as a proxy long strategy.
This put strike is much closer to the current stock price so probability of being assigned the stock at the August expiration is considerably higher. However, we think this battle by Citadel to sell the company will continue for a long time thereby keeping the implied volatility elevated and providing the opportunity to sell calls against any long position resulting from receiving stock by assignment.
MedcoHealth Solutions Inc. (MHS)
The company provides pharmacy services for private and public employers, health plans, labor unions, government agencies.
Express Scripts Inc. (ESRX)
ESRX who also provides a range of pharmacy benefit management (PBM) services, has made an offer to acquire MHS for 28.80 in cash and .81 shares of ESRX for each MHS share. At the current price, it values MHS at 75.21. However there is a great deal of skepticism the combination with be approved by the Federal Trade Commission as reflected in the price of MHS.
From 55 the stock gapped higher on the takeover announcement. The current Historical Volatility is 44.85, but should settle in the 30 range in the near future. The Implied Volatility Index Mean is 23.32, down from 30.32 last week. The IV/HV ratio is .86, but we expect to see the historical volatility decline and the implied volatility increase as the drama unfolds over the next few months. The 3.0 put-call ratio is bearish most likely from put activity. The option volume on Friday was 22,365 contracts compared to the 5-day average of 18,810 contracts.
While we do not have an opinion on the chances of the deal being approved, we do think it will take a long time to be resolved and will therefore provide many option trading opportunities. Once again, we suggest starting with a put sale.
In the event the stock closes below the strike price on the August expiration, take the stock by assignment and then being selling out-of-the money calls against the long stock position.
Clorox Corporation (CLX)
CLX provides a wide range of consumer branded products from cleaning to water filtration and food. Carl Icahn has offered 80 to buy the company while encouraging them to seek alternative bids.
Twice the stock has recently gapped higher on the Icahn buyout offer activity. The current Historical Volatility is 29.72, with an Implied Volatility Index Mean of 20.66, down from 23.94 last week. The IV/HV ratio is .70 while the put-call ratio is bullish at .3. The option volume on Friday was 25,313 contracts compared to the 5-day average of 21,850 contracts.
With both the implied and historical volatility, low this suggestion takes a different approach for a change since we think it will be another long drawn out affair.
This bull call spread is reasonably priced, but without a volatility edge, as a direction trade relying upon Carl Icahnís group to realize the value of this company. Use a close back below the 71 support area as the SU (stop/unwind).
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
Unless there is a political compromise reached on the US borrowing limit before the markets open on Monday, we are expecting a large equity market decline on Monday. It could then be followed by an equally large gain when there is news of an agreement. For those experienced picking intraday lows it could be a trader's delight.
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