Volatility Trading Digest - Gold Breakdown & Takeover File
Volatility Trading Digest - Gold Breakdown & Takeover File
Gold Breakdown
Although we should have made a short suggestion for gold last week, we remember Jesse Livermore's advice that it is never too late to sell something that is going down. With that thought in mind, consider this put spread.
SPDR Gold Shares (GLD)
After several previous suggestions while GLD was trending higher, we now return for the downside. Last week it was not clear it would close below the upward sloping trendline, although it did close below it on Thursday September 15, creating a noticeable gap that rang the bell, it rebounded and then tracked the trendline line higher until last Thursday when it made a large gap lower, only to be followed by another on Friday. Now many technical analysts are referring to the double top formation that was set off on Thursday. Using the December futures contract we estimate the minimum downside-measuring objective from the double top at 1490 or about 149 for GLD.
Since there is still some distance to go, consider this put spread idea.
The current Historical Volatility is 35.28, and 21.34 using the range method, with an Implied Volatility Index Mean of 36.82, up from 27.02 last week. We estimate the normal IV range is 15-20. The IV/HV ratio is 1.04, but 1.73 using the range method, while the put-call ratio is bearish at 1.13, however since this ETF is used for hedging other gold positions higher put volumes like those seen recently should be expected. Friday's options big volume was 865,949 contracts compared to the 5-day average of 422,140 contracts.
Use a close back above the second gap at 170 as the SU (stop/unwind).
Takeover File
We have two interesting developments in the takeover file.
Yahoo! Inc. (YHOO)
YHOO is a digital media company in the process of reorganizing or perhaps being sold.
Up .72 on Friday, it was accompanied by unusual call option volume as 18 strike prices had call volume in excess of 2,000 each while the total options volume reached 334,706 contracts compared to the 5-day average of 164,110 contracts.
The current Historical Volatility is 46.89, while the Parkinson's range Historical Volatility is 39.80. The Implied Volatility Index Mean is 74.07, up from 59.20 last week, for an IV/HV ratio of 1.58, but 1.86 using the range method. On Friday there were 11 times more calls traded than puts, while the call open interest exceeds the put open interest by more than 2 times.
Here is the same spread combination we suggested in Digest Issue 35 with updated prices and implied volatility numbers. This combination still looks attractive.
Use a close back below the last pivot at 12.45 as the SU (stop/unwind) or be prepared to take the stock by assignment in the event it closes below 14 on the October. If so, then the plan is to sell calls against the stock position. If the October put expires out-of-the-money then sell the November 14 put and then once again in December reducing the call spread cost each time.
Range Resources Corporation (RRC)
RRC is an independent natural gas exploration and development company with gas properties in the Appalachian and southwestern regions of the US. The company produces tight-gas, shale, coal bed methane, and conventional natural gas and oil production in Pennsylvania, Virginia, Ohio, and West Virginia.
On September 19, rumors circulated through the markets that Royal Dutch Shell was interested in the company as the stock increased 2.39 on increased volume. However, in an interview with the Financial Times on Thursday, Peter Voser, Shellís chief executive, seem to pour cold water on the idea. He said Shell would not play much of a role in any further consolidation of gas reserves and they had 40 trillion cubic feet of gas reserves in the US and Canada and it was time to deliver it.
Then on Friday Bloomberg reported that a Pennsylvania appeals court ruling posed questions regarding ownership of all natural gas found within the Marcellus shale formation. The stock declined 7.57 points as the options implied volatility increased 18.41% placing it number four on out of five on our list of largest implied volatility increases.
The current Historical Volatility is 58.82, while the Parkinson's range Historical Volatility is 65.60. The Implied Volatility Index Mean is 86.08, up from 45.86 last week, for an IV/HV ratio of 1.46 but 1.31 using the range method. At .90, the put call- ratio is bearish. Friday's options volume was 14,519 contracts compared to the 5-day average of 19,160 contracts.
Consider this October strangle combination and an out-of-the-money call spread to reduce upside risk just in case Shell does make a play for the company. Strangles are volatility trades , but are complicated since they require some management and are better suited for those who can watch them and make adjustments. In addition, this one has four legs so commission costs need to be considered.
With the short put at 55 be prepared to take stock by assignment if the stock is below 55 on expiration. On the upside the breakeven is just above 75 so this becomes 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
While the S&P 500 Index found support last Friday above 1,100, this week the direction will once again most likely be determined by events in Europe. Our VIX futures day- weighted premium indicator currently suggests the support will hold.
About Ivolatility
IVolatility.com is based upon the concept of providing affordable options analytics over the internet. We provide options volatility data arranged and interpreted in a manner that creates predictive qualities. Over the years we evolved into the premier provider of analytics, tools and data all delivered over the internet. IVolatility.com clients are represented in all segments of the global derivatives market. More than half of the top 30 options market makers and US options brokers use IVolatility.com financial data services. In addition, IVolatility.com clients include 3 out of 5 of the largest US banking institutions and more than half of the top 50 investment banks. We offer solutions at every level, from beginner to expert professionals at institutional firms and hedge funds.
View Ivolatility's post archive >
