Volatility Trading Digest - Focus on Quarterly Earnings
Volatility Trading Digest - Focus on Quarterly Earnings
For the last several weeks, as we have been trying to keep pace with the debt negotiations in Europe while our trade suggestions have been neurotically battered back and forth from "risk-on" one day to "risk-off" the next, as volatility remains high creating challenges and some opportunities. Since it appears, any comprehensive solution to the Greece debt crisis is still a long way away, this week we will turn our attention to some ideas for the upcoming earnings reports. After a brief strategy comment, we have one update, a new seasonal trend proposal and then five earnings report ideas.
Strategy
S&P 500 Index (SPX)
The positive news from Europe that had created the potential flag pattern in our last Digest was quickly destroyed as it became obvious any optimism about a debt settlement plan for Greece in the near future is misplaced. The G-20 summit meeting in Cannes, last Thursday and Friday was nothing more than a photo op. As a result, we will again designate as the active pattern the measuring objective from the previous range breakout, which is the vertical height of the range it broke away from or about 156 points, up to 1387.
However, the one important thing to remember about November is that October, the month with the notorious record of being the weakest of the year, is now over. Seasonally both November and December are favorable for equities and one can make the case for a small developing upward sloping trendline from the October 4 low at 1074.77. Since we have an upside objective from the range at 1387 the only obstacle is resistance in the 1350 area. Of course, this ignores any further dollar strength from euro weakness and the seemingly intractable European debt problem that causes additional trouble for equities.
As for our VIX futures premium indicator, the day weighting applied 35% to the November contract and 65% to December resulting in the average premium of .23 or .77%. Last week in Digest Issue 42, the premium was 5.87% and a reversal followed. However, recently reversals have been associated with higher readings, both positive and negative.
Here is an update that belongs in the "Coulda, Shoulda, Woulda" category to a suggestion in the Quarterly Earnings section from two weeks ago.
ARM Holdings plc (ARMH)
UK based ARMH designs and licenses high performance, low-cost, power-efficient RISC microprocessors and related technology and software.
While we often suggest using a long call spread in combination with a put sale, wot weeks ago our suggestion was limited to the sale of a November 24 put. Now since ARMH broke out to the upside on Friday and since this is the season for tech stocks, we suggest adding a long call spread, although admittedly late.
The current Historical Volatility is 49.51 and 35.84 using the Parkinson's range method, with an Implied Volatility Index Mean of 48.97, up from 44.62 last week. The IV/HV ratio is .99 and 1.37 using the range method, with the put-call ratio very bullish at .25. Friday's option volume was 25,715 contracts compared to the 5-day average of 8,830 contracts.
Although this spread does not have a volatility edge, it offers further participation in the seasonal tech trade and when combined with the put sale in Digest 41 makes a good combination.
Seasonal Trend
SPDR Gold Shares (GLD)
With the seasonal advantage underway for gold, there is now a definable uptrend from the October 20 low of 156.05, touching the November 1 low at 165.61. Ideally, we would like to see another point on the trendline but with the seasonal help we are satisfied to enter the trade now, using a close back below the November 1 low at 165.01 as the SU (stop/unwind).
The current Historical Volatility is 21.48, and 17.81 using the range method, with an Implied Volatility Index Mean of 25.29, up from 23.14 last week. The IV/HV ratio is 1.18 and 1.42 using the range method, while the put-call ratio is bearish at .70, however since this ETF is used for hedging other gold positions higher put volumes should be expected. Friday's options volume was 217,275 contracts compared to the 5-day average of 231,920 contracts.
Consider this January call spread.
While there is no volatility edge, there is also no volatility disadvantage, which often occurs with long call spreads, while it does provide a relatively low cost seasonal opportunity in the gold sector.
Summary
Although still vulnerable to further setbacks from the European debt negotiations that could cause more euro weakness, the equity market is now showing an upside bias that could continue until the end of the year.
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