« December 2008 »
SunMonTueWedThuFriSat
 
2
3
4
5
6
7
9
10
11
12
13
14
16
17
18
19
20
21
23
24
25
26
27
28
29
30
31
   
       
Today


IVolatility Trading Digest™


Volume 8, Issue 46
Auto Plan

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

To add comments or to ask questions please click here (or use the blog "COMMENTS" link at the very bottom of the blog page).

This week we expect to see the big three US automakers in the news again as they present their plan to Congress on Tuesday December 2, 2008. The drama should be intense as the bailout and non-bailout supporters battle to gain the upper hand.

The Speaker of the US House of Representatives recently said,

“Unless they show us a plan, we cannot show them the money.”

Will the automakers take this opportunity to show us something “really green”? Or will they delay in the hopes of getting a better deal under the new President?

Obama indicated that his administration would help the carmakers by saying,

“We should help the auto industry, but what we should expect is that any additional money that we put into the auto industry, any help that we provide is designed to assure a long-term sustainable auto industry and not just kicking the can down the road,” he stated.

Last week options trading activity in the automakers picked up as the stocks began rising in anticipation of the news. We found one interesting suggestion to consider in the auto group. We also expand upon our home page Stock Trend Analysis selection, then offer a value idea in the technology sector and update the continuing short crude oil trade. First, a brief market review.

Market Review

S&P 500 Index (SPX) 896.24. After rising 96.21 during a low volume partial trading week we feel like we have been looking at the wrong side of the market once again. Have we seen the low for this market cycle or will a return to normal trading volume expose further weakness and more selling? The impending auto drama will certainly play a role in answering the question.

S&P 500 Index IVX 52.40. The Implied Volatility Index Mean (IVXM) declined 16.40 as equities traded higher all week, although volume was light. Interestingly we have now a well-defined divergence between the lower low in the SPX on November 21, 2008 not being confirmed by a higher high in the IVX Mean. The divergence is a positive for the bulls. This week could be decisive when volume returns to levels that are more normal.

US Dollar Index (DX) 86.53. The dollar declined down to touch the upward sloping trend line and then rebounded last Friday for a 1.66 net decline on the week. Its next move will be carefully watched, especially from the gold and commodity perspective. In the meanwhile the Japanese Yen is resting right on its upward sloping trend line.

TED Spread 2.18. Bloomberg’s TED spread rose .03 again last week, not very helpful for the financial stocks. We think the TED needs to decline to the 1.40 - 1.45 range before we begin to see more positive sentiment for the banking and financial sectors.

NYSE McClellan Summation Index. Since equities traded higher all last week we would expect to see our market breadth indicator improve as well and we were not disappointed. It increased 136.85 to 1362.16 confirming the higher market once again and creating a second positive divergence, as it did not decline below the 1500 mark on this lower NYSE down leg, compared to a low reading of 1514 on the October decline.

Strategy

There is no clear short-term trend and whipsaw risk is increasing. Tax loss selling should be completed soon so there is likely to be less downward selling pressure, but last week’s volume was light so we are reserving judgment as to the likely short-term direction.

IVOLopps™

With attention on the automakers, we found one interesting suggestion from a volatility perspective to consider. This idea should not be considered as an endorsement from a fundamental perspective, but only as a short-term trading opportunity.

Ford Motor Co. (F) 2.69. Up substantially from the low near one, with a current Historical Volatility of 151 consider this put sale for the equivalent of a partial long position.

With abnormally high Implied Volatility of 223, the sale of a one lot would be the equivalent of a 31 share long position. The credit indicated above is based upon Friday’s middle closing prices between the bid and ask. Considering time decay, the credit Monday should be about .71 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .31 for each point change in the stock price.

We consider this a short-term trade and we suggest booking a gain by buying back the put on any good news taking the stock price higher. On the downside, we suggest using a close under 2 as the SU (stop/unwind). We do not suggest keeping the short put in anticipation of assignment since there is probably no fundamental value in the stock.

Stock Trend Analysis

As a regular feature in the Rankers & Scanners section on our home page we show the results from the Stock Sentiment Ranker based upon the short- term market trend, the Historical Volatility term structure, call/put ratio, exponential moving average, 14 day RSI (relative strength index), and the 21 day Chaikin Money Flow. Here is last Friday’s selection from the home page.

Meredith Corp. (MDP) 16.14. Des Moines, IA based MDP is a media and marketing company with two segments, publishing and broadcasting. They publish Better Homes and Gardens, Family Circle, the Ladies’ Home Journal and other special interest magazines.

In the current market environment, divided yield is probably a better selection criterion than price to earnings ratios. At the current annual rate of .86 the dividend yield is 5.5% and looks to be sustainable as the payout ratio is just 32%. The current book value at 17.35 in more than the current stock price and with a low debt to equity ratio of .78 this company has favorable fundamentals.

The current Historical Volatility is 90 and the Implied Volatility Index Mean is 73 making a Type II high volatility opportunity since the longer-term volatility forecast is about 40.

Consider this covered call suggestion but be advised the options are thinly traded so it make take some patience.

The credit indicated above is based upon Friday’s middle closing prices between the bid and ask. Considering time decay, the credit Monday should be about 1.12 if the stock price remains unchanged. Because the options are thinly traded, a credit around 1.00 would be a good price for the option assuming an unchanged stock price. Use the position net delta shown above to adjust for any stock price change or about .43 for each point change in the stock price.

If the stock goes higher and is called away at the January expiration the return on investment would be 15.6% in about six weeks using a basis in the stock at 15.14.

In the event the stock remains under 17 ½ at the January expiration you will collect the next .215 dividend paid later in the month and with a basis in the stock of 15.14 the annualized yield would be 5.7%. In addition, there would be another opportunity to further reduce your basis by selling another call option against the long stock, perhaps the March or June 17 ½.

Since this company is conservatively managed and has been in business since 1902, it will likely to continue paying dividends at the current rate, making this a good covered call candidate.

Value

Since we are beginning to see some quality stocks approach, and in some cases, rise above their downtrend lines and we think is about time to start looking at some world class companies offering good value at current prices.

Intel Corporation (INTC) 13.80. Intel Corporation makes and markets integrated circuits for computing and communications industries worldwide. Its microprocessor products, including multi-core processors, quad-core microprocessors, 32-bit architecture microprocessors, and 64-bit architecture microprocessors.

The current quarterly dividend rate is .14 for an annual rate of .56 or 4.0%. With a debt to equity ratio of just .61, $2 per share in cash and a book value of $7 per share INTC offers good value even when considering production and sales cutbacks they will be facing in the short term.

With a current Historical Volatility of 79 and with the Implied Volatility Index Mean at 61 with a long-term forecast of 40 consider one of these alternatives.

The credit indicated above is based upon Friday’s middle closing prices between the bid and ask. Considering time decay, the credit Monday should be about .73 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .30 for each point change in the stock price. With considerable options volume the bid/ask spreads are very close thereby facilitating options trading strategies.

The sale of a put could be the first step in a covered call strategy. If the stock is below the sold strike price at the expiration of the put in January then the stock will be assigned and then calls can be sold against the long stock.

For those more interested in a longer-term strategy to take advantage of the current higher implied volatility then perhaps this covered call idea would be the way to go.

The credit indicated above is based upon Friday’s middle closing prices between the bid and ask. Considering time decay, the credit Monday should be about 1.463 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .48 for each point change in the stock price.

With the credit from the call sale and including the February dividend payment if the stock is called away at the April expiration at 15 the return on investment will be 23% or at a 59% annual rate. If the stock is still below 15 in April then there will be another opportunity to sell another call, and collect another dividend further reducing the cost basis in the stock.

Short Crude Oil Update

United States Oil (USO) 42.09. This ETF reflects the spot price of West Texas Intermediate (WTI) light, sweet crude oil.

We last suggested a USO bear put spread in IVolatility Trading Digest™ Volume 8, Issue 43, Change is Coming, dated November 10, 2008, when it was 50.04.

Our cost position was a credit or net gain of 6.10 or $610 dollars and now since the November 60/55 bear put spread has expired we add another $362.50 credit. The November bear put spread was bought for 1.375 and settled for 5.00. Therefore our new adjusted basis is now a credit $972.50.

In addition, we retain the long Dec 50 put/short Dec 44 bear put spread that we suggested in Issue 43. For this spread our debit cost was 2.65 and it is currently valued at 4.40.

Since USO continues working on the downside, we suggest adding one more bear put spread. With a current Historical Volatility of 85 and with the Implied Volatility Index Mean at 78 consider adding this spread.

The Debit indicated above is based upon Friday’s middle closing prices between the bid and ask. Considering time decay, the debit Monday should be about 1.48 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .13 for each point change in the stock price.

Now we suggest reducing the SU (stop/unwind) and setting it at a close above 45.

Previous Issues and Reader Response Request

All previous issues of the Digest can be found by using the small calendar at the top right of the first page of any Digest Issue. Click on any underlined date to see the selected issue. As usual we encourage you to let us know what you think about how we are doing and what you would like to see in future issues. Send us your questions or comments, or if you would like for us to take a look at a specific stock or ETF just let us know. Use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com Website. If you would like to receive the Digest by e-mail let us know at Support@IVolatility.com.

Comments:


Permalink



IVolatility Trading DigestTM Disclaimer
IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter constitutes a recommendation to buy or sell any security. Before entering a position check to see how prices compare to those used in the digest, as the prices are likely to change on the next trading day. Our personnel or independent contractors may own positions and/or trade in the securities mentioned. We are not compensated in any way for publishing information about companies in the digest. Make sure to due your fundamental and technical analysis homework along with a realistic evaluation of position size before considering a commitment.

Our purpose is to offer some ideas that will help you make money using IVolatility. We will also use some other tools that are easily available with an Internet connection. Not a lot of complicated math formulas but good trade management. In addition to Volatility we use fundamental and technical analysis tools to increase the probability of success and reduce risk. We prepare a written trade plan defining why the trade is being made, what we call the "DR" (determining rationale) and the Stop/unwind, called the "SU".