iShares MSCI Japan Index (EWJ)
In a well-defined uptrend from the November 14 low of 8.75, EWJ could continue higher as the economic fundamentals improve in Japan from the implementation of widely announced monetary stimulus actions by the Bank of Japan.
The current Historical Volatility is 14.83 and 8.14 using the Parkinson’s range method, with an Implied Volatility Index Mean of 17.11, down from 18.62 last week. The IV/HV ratio is 1.15 and 2.10 using the range method to calculate the HV. Friday’s put-call ratio at .50 was bullish while the volume was 9,329 contracts traded compared to the 5-day average volume of 10,050.
Consider this synthetic long combination.
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Based upon the historical volatility EWJ moves slowly, but when considering the current uptrend we think it could reach 12 by the June options expiration in 103 days, in the meanwhile this combination hedges both time decay and volatility risk as shown above in the Theta and Vega columns, while allowing enough time to reach the price objective. Use a close back below the last pivot at 9.90 as the SU (stop/unwind).
American International Group, Inc. (AIG)
Here is another one in the uptrend category with improving fundamentals that is also a reported favorite of several long hedge funds.
The current Historical Volatility is 24.44 and 22.57 using the Parkinson’s range method, with an Implied Volatility Index Mean of 23.18 down from 25.45 last week. The IV/HV ratio is .95 and 1.03 using the range method to calculate the HV. Friday’s put-call ratio at .45 was bullish while the volume was 106,697 contracts traded compared to the 5-day average volume of 57,350.
Consider this long call spread.
Since the is no volatility edge gained by selling either the April or May 37 put there is no reason to use the margin, which would reduce the estimated return on investment if it reaches the 44 price objective by May expiration based upon the slope of the current trendline that began November 14 at 30.64. Use a close back below the last pivot at 37 that would also be below the current upward sloping trendline as the SU (stop/unwind).
High IV/HV Ratio
In the “Rankers and Scanner” section of our home page we feature the “Top 5 stocks by implied volatility change”. Click on the link and you are taken to the Advanced Ranker Sample of the top and bottom 5 stock in four categories. For ideas, we often look at the Top 5 stocks based on IV Index Mean vs.30D HV.
High IV/HV ratios are the first alert that something unusual is happening as options prices are being bid up to abnormal levels. From there a little more investigation will usually provide the answer as to the likely direction.
Here is an idea from the number one highest ranked IV/HV ratio scan on Friday.
InterOil Corporation (IOC)
This Papua New Guinea integrated oil and gas company engaged in the exploration, appraisal, and development of crude oil and natural gas has appeared on our radar screens many times in the past with high-implied volatility. Since the next earnings report is scheduled for May 29, this is not the most likely reason for the elevated implied volatility.
Since the current price is now near the center of its 52-week range it seems to be a good Iron Condor candidate since it is not trending.
First the option vital statistics.
The current Historical Volatility is 46.89 and 53.92 using the Parkinson’s range method, with an Implied Volatility Index Mean of 101.02 down from 107.45 last week. The IV/HV ratio is 2.15, the highest in our Friday scan and 1.87 using the range method to calculate the HV. Friday’s put-call ratio at .78 just bearish while the volume was 27,039 contracts traded compared to the 5-day average volume of 14,770.
Here is the short call spread at the top of the range, at resistance.
Next, the short put spread near the bottom, but at support.
Using the 30-day historical volatility, we calculate a one standard deviation to be 63.97 and 91.42 just about right. The risk is 2.67, the width of one of the spreads or 5.00, less the 2.43 credit received. On the presumption is closes within the range at the April expiration we will retain the 2.43 credit received. While the margin requirement is large at 1,665 it still represents a 15% gain in 40 days.
All of the suggestions above use the closing middle price between the Friday bid and ask. Monday, the option prices will be somewhat different due to the time decay over the weekend and any price change.
Summary
The breakout to the upside last Tuesday resolved the open question about the near term direction for equities. Now since there is no overhead resistance where they should encounter a lot of selling, the path seems to be onward and upward for the near term.