Volatility Trading Digest - Strategy & Quarterly Earnings Report Ideas
Volatility Trading Digest - Strategy & Quarterly Earnings Report Ideas
Strategy
In the first post of the year, we showed long-term trendline with weekly data. Here is the current chart using daily data showing the current uptrend and the upward sloping trendline (USTL) from the October 3 low. If the current advance can continue above 1375, the long-term trend from the March 2009 low will resume.
Since equities have a seasonal tailwind in January, we expect the current trend to continue unless interrupted by another negative European event. Accordingly, we suggest considering long positions in sectors that have already exceeded their October highs, such as homebuilders. We have included a suggestion below.
Monsanto Co. (MON)
Two weeks ago we suggested a short call ladder, short one in-the-money call and long two out-of-the money calls with different strike prices. Since reporting earnings and sales that exceeded expectations and management's previous guidance the stock advanced 6.92 points by the close on Friday the first day it made a lower high and lower low. We sent a tweet on Friday during the day suggesting the position be closed.
Initially the position was booked with a .59 credit and the Friday closing trades added another 2.28 credit for a total gain of 2.87 (or 2.81 allowing for commissions on each of the six trades). Since the initial trade was a long call spread with an additional long call, the margin requirement was low producing a very attractive return on investment.
Quarterly Earnings Report Idea
Here is one of the more perceptive comments.
"Successful investing is anticipating the anticipations of others."
John Maynard Keynes
With this quotation above in mind, here is another suggestion for an upcoming earnings report.
EI DuPont de Nemours & Co. (DD)
E. I. du Pont de Nemours and Company (DuPont) classified, as a chemical company is active in science and technology worldwide.
We were attracted to DD since it is the second largest seed maker in the agriculture sector after acquiring Pioneer Hi-Bred in 1999 and its recent offer to buy Denmark's Danisco A/S thus moving into specialized areas like biofuels and food enzymes.
They are scheduled to report fourth quarter earnings on January 24 before the open, with consensus estimates of .33 per share.
Based upon Monsanto's sales report from Latin America and other regions, we think Pioneer Hi-Bred will also report better than expected numbers. In addition, since US auto sale are showing signs of improvement we think this is another positive that will increase the chances for a better than expected sales and earnings report.
Since the stock has already risen from 43 along with the market, we suggest putting on the trade now even though they report is not due until next week. We expect some may begin anticipating the report sometime this week.
The current Historical Volatility is 25.30 and 20.69 using the Parkinson's range method, with an Implied Volatility Index Mean of 23.58, down from 23.89 last week. The IV/HV ratio is .93 and 1.14 using the range method to calculate the HV. The put-call ratio at .70 is bearish, but considerable hedging is most likely before the earnings report. Friday's options volume was 10,420 contracts traded compared to the 5-day average of 16,490.
Consider this call spread put combination.
Use a close back down below support at 46 as the SU (stop/unwind).
Trending
Assuming it continues, here is one in the trending category.
SPDR Homebuilders (XHB)
After breaking out above resistance at 17, this ETF is in a well-defined uptrend from the October 4 low at 10.21. The three upward sloping trendline touches the November 25 low at 14.96 and then the December 19 low at 15.88. Currently it would need to close below 17.25 to break this trendline.
From a fundamental perspective, it seems unlikely the homebuilders would be in an uptrend, but since we know it is better to trade what we see, not what we think, here is a long call, short put combination to consider.
The current Historical Volatility is 31.20 and 24.19 using the Parkinson's range method, with an Implied Volatility Index Mean of 30.74, down from 31.74 last week. The IV/HV ratio is .99 and 1.27 using the range method to calculate the HV. The put-call ratio is bearish at 1.05. Friday's options volume was 6,924 contracts traded compared to the 5-day average of 18,270.
This is a relatively low cost way to test the continuing homebuilder trend. Use a close below the trendline at the 17 support as the SU (stop/unwind).
Trend in Doubt
Now consider one that has just closed below its upward sloping trendline off its October 4 low.
United States Oil Fund (USO)
The oil markets have remained buoyed, as fears over Iranian geo-political risk and an embargo have caused a risk premium in the crude oil marketplace. However, the overall fundamentals are beginning to look suspect, after weaker than expected inventory data released on Wednesday by the Department of Energy.
According to the DOE, crude oil inventories increased 5.0 million barrels from the previous week, compared to expectations of a 1 million barrel increase. Total demand for petroleum products over the last four-weeks averaged 18.4 million barrels per day, down by 6.5 percent compared to the same period last year. Inventories are currently at the high end of the current 5-year range for this time of year according to the Department of Energy.
The Historical Volatility is 28.86 and 18.25 using the Parkinson's range method, with an Implied Volatility Index Mean of 31.96, down from 33.23 last week. The IV/HV ratio is 1.11 and 1.75 using the range method to calculate the HV. Friday's put-call ratio is at 1.25 is bearish, with volume at 90,062 contracts compared to the 5-day average of 84,800 contracts.
USO was unable to break above resistance at 40, and has retraced back near support at 37.30, coinciding with the 200-day moving average. A close below the 200-day moving average would indicate a retracement back to 35.00.
Consider this put spread idea.
With a decent edge in the short put, use a stop if the USO closes back above 40.
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
Despite lingering concerns about more negative news from Europe, equities are again showing signs of improvement as January's upside momentum increases.
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