Volatility Trading Digest - Earnings Reports Galore
Volatility Trading Digest - Earnings Reports Galore
Strategy
Last week we mentioned the seasonal January tailwind that was expected to continue through the end of the month unless interrupted by another negative European event. Although the rather low volume uptrend continues, we are now seeing hedging signs from the professional money managers. For example, consider the CBOE S&P 500 Skew Index (SKEW), is now at the upper end of its range since it began trading on February 24, 2011. When out-of-the money S&P 500 Index puts are purchased for downside protection, the SKEW is designed to increase.
In addition, here is the current VIX futures premium reading.
The table below shows the VIX cash compared to the next two futures contracts as well as our calculation of Larry McMillan's day-weighted average between the first and second months.
The day weighting applied 85 to the February contract and 15% to March resulting in the average premium of 3.88 or 21.21% shown above. An alternative volume weighting between February and March results in a 23.21% premium.
For this short-term indicator the premium to the cash is a SPX sell signal suggesting professional expectations for the cash to increase toward the futures price. Last week the premium was 14.51%. In the past premiums above 20% have been reliable signs of increasing hedging activity using the VIX futures.
Further the S&P 500 Index (SPX) put-call ratio, now 2.12, up from 1.70 the previous week, adds another indicator in the caution column.
While adding to selective long positions perhaps some hedging is now prudent.
Options Industry Data
Last Thursday during the Interactive Brokers conference call Thomas Peterffy, Chairman and CEO, reported globally exchange-traded options volume increased in 2011 by 18.9% to 7.88 billion contracts.
Separately, the Options Clearing Corporation reports their average daily options volume in 2011 was 18.1 million contracts compared to 15.5 million in 2010, an increase of 17%.
Reorganization File
This one is more of a long-term investment idea.
Williams Companies, Inc. (WMB)
Having closed the spinoff of their exploration and production company it is now one of the leading energy infrastructure companies in North America with 15,000 miles of interstate gas pipelines, 1,000 miles or NGL pipelines along with 10,000 miles of oil and gas gathering pipelines. It also owns the general partner and a 73% interest in the Williams Partners L.P (WPZ). Having just increased their dividend to .25875 per share their plan is to increase the dividend every quarter. As a result, the share price should be supported by the increasing dividend.
The current Historical Volatility is 65.73 and 22.42 using the Parkinson's range method, with an Implied Volatility Index Mean of 23.75, down from 26.20 last week. The IV/HV ratio is .36 and 1.33 using the range method to calculate the HV. Friday the put-call ratio was on the bearish line at .70 with options volume of 4,176 contracts compared to the 5-day average of 21,410 contracts.
Look at this long call short put combination.
The short May 25 put is below the last pivot when the stock started trading ex-spinoff on January 3. In the event the stock closes below 25 at the May expiration, plan to take the stock by assignment and sell calls. In that event, the basis would be 25.15.
Summary
This week, the second for earnings reports should be full of excitement as many trend setting companies is several important sectors will report earnings and the major indices are likely to continue trending higher on relatively low volume.
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