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While lower gasoline and jet fuel prices benefits airlines, restaurants and selected retail they appear overbought and could see somewhat lower prices as they retest Friday breakout levels. Generally, option volume and liquidity in the restaurant group is less than desirable, but we do have one idea for Starbucks Corporation (SBUX) and then another completely unrelated to energy prices for TASER International Inc. (TASR) and finally one more for the expected crude oil oversold bounce United States Oil ETF (USO). First, a brief market comment along with related indicators.
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S&P 500 Index (SPX) 2067.56 for the week the advance was an additional 4.06 points or .2% even thought the entire energy sector was considerably lower. For several weeks we have been looking for a retest of the breakout above the September 19 high at 2019.26 and weakness in the energy sector could be just enough for a short-term pull back led by the overbought beneficiaries of lower crude oil prices. Powershares QQQ (QQQ) 106.01 up 2.14 points and 2.06% for the week the relative outperformance continues with more technology and fewer energy related stocks. For now, there is no sign of attempting to retest the breakout back above 100.56 made on September 19 now just a fading memory along with the unfilled breakaway gap. CBOE Volatility Index® (VIX) 13.33 up .43 for the week but up noticeably 1.26 Friday on the slight 5.27 decline of the S&P 500 Index although volume was relatively light Friday. 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.
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The day weighting applies 60% to December and 40% to January for a 14.66% premium shown above. Our alternative volume-weighted average between December and January, regularly found in the Options Data Analysis section on our homepage, is slightly lower at 13.95%. Premiums for a normal term structure are 10% to 20%, while premiums above 15% appear to suggest a lack of enthusiasm for VIX hedging. Premiums less than 10% suggest caution and negative premiums are unsustainable suggesting an oversold condition. Last week, the premiums were all above 15% every day except for Friday at 13.95%, back in the normal zone. |
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Lower Energy Cost WinnersIncluded in the groups benefitting from lower energy costs are transports such as airlines, railroads, and package delivery that all look overbought. Large retail operators are expecting more discretionary spending while saving money on distribution costs. For example, last week the best sector was Consumer Discretionary Select Sector SPDR ETF (XLY) 71.81, also called the cyclical group. Restaurants are also in this category, but most do not have enough volume and liquidity for active options strategies with one possible exception. Starbucks Corporation (SBUX) 81.21 although exposed to declining currency exchange rates from considerable international operations it should benefit from more discretionary spending. Having broken out above previous highs and subject to a short-term overbought pull back that could occur this week, here is a long idea to consider. The current Historical Volatility is 14.05 and 13.05 using the Parkinson’s range method, with an Implied Volatility Index Mean of 16.42 down from 16.80 the week before. The 52-week high was 30.30 on January 23, 2014 while the low was 13.66 on August 20, 2014. The implied volatility/historical volatility ratio using the range method is 1.26 meaning option prices are about right relative to the recent movement of the stock. At .41, the put-call ratio is moderately bullish. Friday’s option volume was good at 25,341 contracts traded compared to the 5-day average volume of 20,890 so the bid/ask spreads appear reasonable. Consider this January call spread with enough time to allow for any short-term pull back.
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Using the ask price for the buy and middle for the sell, the debit is .87, about 35% of the distance between the strike prices. Use a close back below 79 which is also below the short-term upward sloping trendline from the October 16 low of 70.77 as the SU (stop/unwind). TASER International Inc. (TASR) 21.48 supplies AXON body-worn video cameras with EVIDENCE.com, a cloud-based storage and management system used by law enforcement to facilitate recording interactions between officers and the public. According to Zacks, EVIDENCE.com & video revenues were up 21.5% to $4.3 million in the third quarter of 2014 with bookings of $15.3 million up 163.8% year over year. The current Historical Volatility is 46.70 and 48.54 using the Parkinson’s range method, with an Implied Volatility Index Mean of 50.93 up from 49.32 the week before. The 52-week high was 75.66 on October 15, 2014 while the low was 39.10 on May 23, 2014. The implied volatility/historical volatility ratio using the range method is 1.05 meaning option prices are inexpensive relative to the recent movement of the stock. At .28, the put-call ratio is bullish. Friday’s option volume was 3,272 contracts traded compared to the 5-day average volume of 11,170 contracts so be careful placing orders as trading is thin.
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Using the ask price for the buy and middle for the sell, the debit is .55, about 27.5% of the distance between the strike prices. Use a close back below 20 which is below the short-term upward sloping trendline from the October 15 low of 13.631 as the SU (stop/unwind). Oversold Crude OilUnited States Oil ETF (USO) 25.58 for those who decided to wait out the OPEC meeting and did not implement the long January 28/26 put spread suggested in Digest Issue 45 “US Dollar & Crude Oil” here is a short-term suggestion conditioned upon a bounce up from the current oversold condition that could occur sometime this week. Look for a key reversal or outside range day on high volume. The current Historical Volatility is 33.54 and 20.46 using the Parkinson’s range method, with an Implied Volatility Index Mean of 33.31 up from 32.74 the week before. The 52-week high was 35.35 on November 25, 2014 while the low was 13.19 on June 11, 2014. The implied volatility/historical volatility ratio using the range method is 1.63 meaning the option prices are high relative to the movement of the ETF. The put-call ratio at 2.80 is bearish reflecting considerable hedging activity. In the past year, the ratio exceeded 3 six times. Friday’s option volume was a staggering 286,824 contracts traded compared to the 5-day average volume of 204,600 contracts so there is good liquidity as reflected in the reasonable bid/ask spreads. On the expected oversold rebound, consider this January risk reversal.
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Using the ask price for the buy and middle for the sell, the debit is .59 as it hedges both changes in implied volatility and time decay with the equivalent of a 100 share position at the current ETF price. This is a short-term trade, once opened, look for the next reversal for a close that could come within just a few days. Although overwhelmed by selling this year, based upon the seasonal pattern for the last 5 years, prices in December are usually firmer, followed by lows that should occur in January. The suggestions above use closing ask prices for the buys and middle prices for the sells presuming some price improvement from indicted prices is possible for liquid stocks. Monday’s option prices will be somewhat different due to the time decay over the weekend and any price change.
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Next week’s issue will review our indicators and look at the record of some seasonal tendencies that usually occur this time of the year.
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Finding Previous Issues and Our Reader Response Request |
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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. Another way to find them is the Table of Contents link in the blog section of our website.
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 us to look at a specific stock, ETF or futures contract, 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. |
After Thursday’s OPEC announcement that production levels will remain unchanged and Friday’s selling in relatively thin after Thanksgiving market conditions crude oil and the many related exploration and production as well as oil service stocks appear oversold. Accordingly, chances are good for a short-term counter trend reversal in the near future, perhaps even this week.
Be cautious about reaching conclusions about Friday’s thin trade, as the energy group appears to have collapsed while those benefitting from lower prices rocketed higher since both could reverse somewhat this week. In addition, keep mind there are several important seasonal tendencies to consider going into yearend including equity prices crude oil and the euro, detailed next week.
