Here is an update of the increasing implied volatility data ahead of Macy’s, Inc. earnings reports on?November 11 followed by a new trend continuation suggestion for China A-Shares ETF.
Since there have been several previous false starts it seems like a good idea to establish some parameters for the dollar index and interest rates before getting overly excited about the non-farm payroll report. In addition to the guidelines in the previous post?for interest rates and the dollar, if the equity market begins to recognize interest rates are going to continue higher watch for sector rotation into the beneficiaries such as banks and brokers. However, since this could become just another one of many previous rising interest rate scares some caution could be prudent.
“Among the safe courses, the safest of all is to doubt.” ? Spanish Proverb
High IV/HV Ratio Update
Here is an update to last week?s high IV/HV ratio example, the first alert that something unusual is happening as the options prices are being bid up to abnormal levels.
Macy’s, Inc. (M) down 2.08 or – 4.08% for week, the 3Q earnings report comes Wednesday morning before the opening with a consensus estimate of .53 per share on revenue of 6.12 bn.
In the past, there had been some chatter about activist pressure to spin off its real estate holdings into a REIT. Speculation about and update or an announcement along with the quarterly report about a possible spin-off may be responsible for advancing options implied volatility.
For the week, while the 30-day Implied Volatility Index Mean advanced from 48.78 to 52.54 the November 20 at-the-money 49 call and put implied volatility increased from 53.72 to 69.86 for an IV/HV ratio of 2.84 well into the red zone for traditional long calendar spreads. While the November 13 expiration options are even higher with an IV/HV ratio of 3.39. However, the options volume for both at-the-money expirations was light Friday.
Trend Continuation
China A-Shares ETF (ASHR) since one reason the Federal Reserve previously hesitated to raise interest rates was the declining Shanghai Composite Index the current uptrend should remove this concern. The uptrend now seems well enough defined to test the premise that it will continue higher and a long call spread not only has an opportunity for gain it will also help maintain focus on this important market before the December FOMC meeting.
The current Historical Volatility is 35.01 and only 12.73 using the Parkinson’s range method, with an Implied Volatility Index Mean?of 38.83 down from 42.47 the week before and likely to reach 30 if the uptrend continues. The 52-week high was 86.74 on July 8, 2015 while the low was 20.47 on November 20, 2014. The implied volatility/historical volatility ratio using the range method is 3.05 so option prices are expensive relative to the recent movement of the ETF. Last Friday?s option volume was 13,405 contracts traded compared to the 5-day average volume of 11,810.
Consider this long call spread idea.
Using the ask price for the buy and mid for the sell the call spread debit would be .97, about 32% of the distance between the strike prices. Use a close back below the upward sloping trendline now at 35 as the SU (stop/unwind).
The suggestion above uses Friday?s ask price for the buy and middle price for the sell presuming some price improvement is possible. Monday?s option prices will be somewhat different due to the time decay over the weekend and any price change.
Summary
Although the market response to the non-farm payroll report suggests the jobs gains were a game changer this is not the first time interest rates and the dollar spiked higher and then melted back down. Since manufacturing and exports remain weak and are not beneficiaries of a higher dollar and interest rates, establishing some parameters for interest rates and the dollar while watching for rotation into interest sensitive equity sectors will help maintain some objectivity.