Volatility Trading Digest - Oil & US Dollar Again

Volatility Trading Digest - Oil & US Dollar Again

The current condition seems like a movie we have already seen. Crude oil closes above $100 a barrel, the US dollar is declining along with the emerging market equities. Checking the charts we see it was February 19, 2008 that cash crude oil closed above $100. Now just three years and eleven days later, last Wednesday March 2, 2011, crude oil again crossed back above $100 closing at $102.23. The peak in 2008 came on July 11 at $145.66. In the event we are about to experience a rerun of the 2008 movie, we suggest increasing crude oil and commodity position sizes.

United States Oil (USO)
USO gapped open higher on February 22, 2011 and the daily trading ranges expanded on the news from Libya. Using the Parkinson's range method, we calculate the 10-day Historical Volatility at 27.83 with the Implied Volatility Index Mean at 42.51, for an IV/HV ratio of 1.53. The put-call ratio at .4 is bullish.

Consider this long call spread with a weekly short put sale.
 

By using a near term expiration put as the put sale we increase the edge and sell time premium, however it will be priced a good bit lower on Monday due to the loss of time premium. Use a close back below 40 as the SU (stop/unwind).

Next continuing on the higher crude oil theme here is another way to increase sector exposure.

SandRidge Energy, Inc. (SD)
SD is an independent natural gas and oil company in the US exploring, developing and producing oil and in the West Texas Overthrust, Permian Basin, Oklahoma, and Kansas.

We last suggested SD when it was 7.79 and the Implied Volatility Index Mean was 49.79. Consider adding this shorter dated combination to the June suggestion here.

The current Historical Volatility is 55.49, with an Implied Volatility Index Mean at 52.48, for and IV/HV ratio of .95 and a bullish .30 put-call ratio.

While there is no volatility edge it does increase the directional exposure with the combination of a synthetic long and a short call. Use a close below the recent gap at 9 as the SU (stop/unwind).

Presuming crude continues higher the oil service sector will also benefit, here are two interesting ideas.

Weatherford International Ltd. (WFT)
Geneva based WFT is one of the world's leading providers of equipment and services used for the drilling, completion and production of oil and natural gas wells.

Last Tuesday the company announced it would be restating earnings from 2007 to 2010 due to tax accounting problems. The stock gapped lower the next day, closing off 2.38. For those who like to buy pullbacks on stocks in favorable sectors this could represent an opportunity.

Due to the gap lower, the current Parkinson's 10-day Historical Volatility is 54.98. We expect it will decline back into the 40 area unless there are further accounting announcements. The Implied Volatility Index Mean is 42.52 for an IV/HV ratio of .77. The put-call ratio is bullish at .39.

Set the SU (stop/unwind) at a close below last Wednesday's low of 19.56.

Hercules Offshore, Inc. (HERO)
HERO provides shallow-water drilling and marine services to the oil and natural gas exploration and production industry in the U.S. Gulf of Mexico and internationally.

The stock recently gapped up and then continued higher on news that is was buying for $100 million, offshore drilling rigs from Seahawk Drilling, which announced it was seeking bankruptcy protection. One analyst said it could significantly improve its competitive position. Since then, the stock has continued higher and the daily trading ranges have expanded.

They are expected to announce earnings on Wednesday March 9, 2011 before the opening and since the stock has risen quickly, there is a chance it will sell off on the earnings announcement.

The current Historical Volatility is 77.93 and rising while the Implied Volatility Index Mean is 74.98, for an IV/HV ratio of .96. The put-call ratio is bullish at .30. While it may be advisable to wait until the earnings are announced here is a suggestion for those who prefer to establish the position before the announcement.

This is a directional position assuming the stock continues higher after the earnings announcement. Use a close below 5 as the SU (stop/unwind).

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