We have a brief market comment followed by alternative energy ideas for?FuelCell Energy Inc.?(FCEL) and?Plug Power Inc.?(PLUG).
Market Review
S&P 500 Index?(SPX) After breaking out to new highs the week before last it made a brief retreat on the Ukrainian news last Monday and then quickly recovered to spend the rest of the week well above the important 1850 level.
Last week we remarked the lagging?SPDR Dow Jones Industrial Average?(DIA) and?iShares Dow Jones Transportation Average Index?(IYT) were reasons to remain cautious. However, last Friday the Transports cleared the previous January 23 high of 135.93 removing one of the laggards leaving just the Industrials to go and they are less than 1% away from closing above the December 31 high of 165.51 greatly diminishing our previous concern.
CBOE Volatility Index??(VIX) VIX made a brief spike above 16.00 last Monday on the Ukrainian news and then quickly returned to the 14 level leaving an island reversal while the VIX Futures premium ended the week at 10.94% right at the bottom of the normal range almost unchanged from the week before.
As of Friday, most important indexes have no overhead resistance so there seems little reason to conclude the equity market cannot continue higher, presuming no interruption from unfolding events in Ukraine, not reflected in the markets. For now, it also appears there is no further risk of the dreaded, and some say long overdue 10% correction, but it will come at some point so we will continue to heed the warning signs when given acknowledging the cost in terms of performance vs. remaining long and simply accepting the downside risk.
Fuel Cell Crazy?
Last week’s breakouts in the long dormant fuel cell sector that we noted by the increasing call volume and implied volatility in last week’s?Actionable Options??brings back memories of the dot.com era along with assertions it may be different this time. If so, it would truly be a significant development worthy of increased attention. However, it could also just be an early warning of speculative folly reminiscent of that previous time.
With that in mind, here are two ways to test the proposition using the current high-implied options volatility for some edge.
FuelCell Energy Inc.?(FCEL) FuelCell one of several small companies working on promising fuel cells, came in number one with the greatest implied volatility advance in our Top 5 ranker results Friday.
Here are the option details,
The current?Historical Volatility?is 97.66 and 74.14 using the?Parkinson’s range method, with an?Implied Volatility Index Mean?of 183.52, up from 104.99 the week before. The 52-week high was 196.20 on June 5, 2013 while the low was 45.93 on March 14, 2013. The?put-call ratio?at .25 is in bullish territory with 4 times more calls traded than puts. The implied volatility ratio compared to the range historical volatility at 2.47 suggests options are expensive. Friday’s volume was high at 47,813 contracts traded compared to the 5-day average volume of 51,060 contracts.
Using this low cost risk reversal provides some implied volatility edge while testing the proposition that the potential flag pattern could mark the middle of the up move. Use a close back below the last pivot at 2.75 as the?SU?(stop/unwind). Missing the stop means a long stock position at 3.45 that could quickly go back down to 1.50.
Next, we have the second highest ranked stock with the greatest implied volatility advance Friday.
Plug Power Inc.?(PLUG) 8.27. This hydrogen fuel cell maker may have started the frenzy last week with the announcement it will be expanding its fuel cell charging stations now in three Wall-Mart distribution centers to all nine centers prompting an analyst upgrade followed by a 3.9 million share stock offering on Thursday.
The current?Historical Volatility?is 139.18 and 116.73 using the?Parkinson’s range method, with an?Implied Volatility Index Meanof 152.39, up from 102.14 the week before. The 52-week high was 309.46 on August 23, 2013 while the low was 98.48 on February 24, 2014. The?put-call ratio?at .52 is in bullish territory as there were 1.9 times more calls traded than puts. The implied volatility ratio compared to the range historical volatility at 1.31 suggests options are somewhat expensive. Friday?s volume was a whopping 194,415 contracts traded compared to the 5-day average volume of 161,303 contracts.
Consider this call spread risk reversal idea.
The short put has a good volatility edge but with a lot of time decay, it should be about .10 lower, or .43 before any price change at the opening. Use the pivot under the stock offering at 6 as the?SU?(stop/unwind).
The suggestions above use the closing middle price between the Friday bid and ask. Monday option prices will be somewhat different due to the time decay over the long weekend and any price change.
Summary
The advancing DJ Transportation Index & Dow Jones Industrial Index has greatly reduced the chances for a Head & Shoulder Top. In addition, several of the other important widely followed indexes including the S&P 500 continue trending higher with no overhead resistance. Unless sidetracked by unexpected events from Ukraine equities are most likely to continue higher this week.