We offer a tally of our closed November positions, then a new add-on idea using previously assigned stock followed by a conditional hedge suggestion.
Scoreboard
For November, we closed some positions early based upon the trade plans, so by expiration there were only three open trades remaining. For the final tally we closed seven resulting in a 269 loss, the largest was a 164 loss with largest gain of 136, all based upon one lot position sizes.
The expiration of our Amarin Corporation plc (AMRN) short November 13 call with a short 10 put, suggested in Digest Issue 42 is included in the results tally above. Originally assigned from a short October 12 put, the long stock was cover for the short November 13 call. Since both sides expired, the stock basis is now 9.90.
Ranked number four on Friday for high IV/HV (implied volatility/historical volatility) ratio due to continuing uncertainty about the final status of its FDA approved Vascepa, a treatment for high levels of triglycerides and without a specific date for a further announcement, the IV should remain elevated. Keep in mind high IV suggests the potential for a large stock move in either direction.
Here are the updated option details.
The current Historical Volatility is 59.59 and 60.52 using the Parkinson’s range method, with an Implied Volatility Index Mean of 126.94, up from 117.99 last week. The IV/HV ratio is 2.13 and 2.10 using the range method to calculate the HV. Friday’s put-call ratio was bullish at .50, with volume at 68,587 contracts traded compared to the 5-day average volume of 32,060. See the volume chart below.
Look at the volatility chart showing the relationship between the implied and historical volatility as well as the volume.
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?The continuing wide spread between the IV in orange and HV in blue represents the potential for the stock to move, however without a specific date this relationship could continue for some time and since we are long stock from the October assignment we can continue to sell both sides while waiting for the next FDA announcement.
Consider this replacement strangle.
Although the implied volatility declined slightly Friday, it is still high and the November options will soon rapidly lose time value. In the event the stock closes below 10 at the December expiration, our position will then be long 200 shares of stock with a basis of 8.19 per share. If the stock remains in the range between 10 and 12 then the second strangle will expire worthless, reducing our basis in the first 100 shares of stock to 7.37.
Conditional Hedge
iShares Russell 2000 Index (IWM)
With a slightly higher implied volatility than the SPX here is a hedge suggestion conditioned upon they key reversal rally extending and based upon IWM closing back above 79. We usually don?t offer conditional suggestions, but the rally could be completed quickly and we want to be prepared in the event it trades higher and rolls over this week. The premiums will need adjusting, but here is a suggestion using Friday closing prices.
Use a close back above 82 as the SU (stop/unwind). Ideally, the debit premium should be about 30% of the strike price width.
Both 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
Equities are currently oversold and Friday’s key reversals suggest they will see higher highs Monday and there is a good chance a short-term counter trend rally could be underway.