Volatility Trading Digest - Short Idea, Increasing Implied Volatility, and a Possible Trend Change
Volatility Trading Digest - Short Idea, Increasing Implied Volatility, and a Possible Trend Change
Short Idea
Consistent with the strategy outlined last Wednesday in Digest Issue 1 here is a short idea to add into the portfolio mix.
Sears Holdings Corporation (SHLD)
With retail operations in the US and Canada, they reported same store sales dropped 5.2% during the first two months of the fourth quarter as the stock declined from 45. While some may think all of the bad news is already in the stock, remember what Fred C. Kelly said in 1932 and later popularized by Jesse Livermore:
With retail operations in the US and Canada, they reported same store sales dropped 5.2% during the first two months of the fourth quarter as the stock declined from 45. While some may think all of the bad news is already in the stock, remember what Fred C. Kelly said in 1932 and later popularized by Jesse Livermore:
"A stock is never too high to buy if conditions are right; never too low to sell if affairs are turning from bad to worse."
Fourth quarter earnings are scheduled to be released on February 23, with a consensus estimate of .68 per share that is likely now too high.
The current Historical Volatility is 97.83 and 58.70 using the Parkinson's range method, with an Implied Volatility Index Mean of 95.40, up from 91.70 last week. The IV/HV ratio is .98 and 1.63 using the range method to calculate the HV. The put-call ratio is bearish at 1.60. There were 24,530 contracts traded Friday compared to the 5-day average of 21,520 contracts.
Here is a put spread idea.
With a slight volatility edge, use a close back above the gap at 37.90 as the SU (stop/unwind).
Increasing Implied Volatility
As number 5 on this week's regular list of increasing implied volatility, here is a company in the shale oil sector attracting attention after several recent joint venture announcements. An UBS analyst included this company along with four others as having similar characteristics as those making recent deals. The speculation was confirmed Friday with increasing options implied volatility and volume.
Southwestern Energy Co. (SWN)
The current Historical Volatility is 32.50 and 28.97 using the Parkinson's range method, with an Implied Volatility Index Mean of 42.58, up from 36.22 last week. The IV/HV ratio is 1.31 and 1.47 using the range method to calculate the HV. The put-call ratio is very bullish at .13, with almost 8 times more calls than puts traded on Friday on volume of 43,640 contracts compared to the 5-day average of 16,520 contracts.
Think about this call spread with a short put combination.
Use a close back below the last pivot at 31.90 as the SU (stop/unwind).
Possible Trend Change
Amazon.com Inc. (AMZN)
Holiday sales have been mixed and the disparity between discounters and high-end stores has furthered the divergence between retailers. Despite the overall pressure, Amazon seems to have benefited from declining sales seen at competitor Barnes and Noble. Scheduled to report fourth quarter earnings on January 24 after the close, the consensus estimate is .17 per share.
Barnes & Noble's holiday sales of their Simple Touch Nook reader missed expectations and Amazon's Kindle Fire is eating into the Nook market. Barnes & Noble shares fell 17%, hitting an 8-month low on Friday, just as Amazon may have made a bottom.
The current Historical Volatility is 38.68 and 32.98 using the Parkinson's range method, with an Implied Volatility Index Mean of 42.18, up from 41.73 last week. The IV/HV ratio is 1.09 and 1.28 using the range method to calculate the HV. Fridayís put-call ratio is at .50 is bullish with the 123,797 contracts traded compared the 5-day average volume of 69,220 contracts.
Implied volatility has historically edged higher into earnings, so this strategy should take advantage of a pre-earnings rally. Consider this attractively priced call spread.
With a slight implied volatility edge, use a close below 166.97 as the stop level to 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.
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
Last week the market traded in a narrow range with low volume while watching the euro decline. Since earning reports will start next week, attention will likely shift from Europe to earnings estimates for 2012.
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