We suspect underinvestment was the order of the day at yearend waiting the outcome of fiscal cliff wrangling in Washington DC. Accordingly, here are two new long ideas.
iShares Russell 2000 Index (IWM)
Having already broken out above the September 14 high of 86.96, consider this trend continuation combination.
The current Historical Volatility is 13.81 and 11.19 using the Parkinson’s range method, with an Implied Volatility Index Mean of 15.19 down from 23.00 last week. The IV/HV ratio is 1.10 and 1.36, using the range method to calculate the HV. The put-call ratio was in bearish territory at 2.00, but this a hedging favorite so high put-call ratios are the norm. Friday’s volume was 387,488 contracts traded compared to the 5-day average volume of 648,660.
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The put volatility edge offsets the lack of edge in call spread. Use a close back below the recent pivot at 82 as the SU (stop/unwind).
iShares FTSE China 25 Index Fund (FXI)
Here an idea we mentioned in December as it broke out above 38 on remarks by the new Communist Party leader Xi Jinping. In a well-defined uptrend from the September 5 low at 32 and with good options volume, it is a good way to participate in any further uptrend.
The current Historical Volatility is 18.19 and only 9.62 using the Parkinson’s range method, with an Implied Volatility Index Mean of 19.46 down from 23.49 last week. The IV/HV ratio is 1.07 and 2.03, using the range method to calculate the HV. Friday, the put-call ratio was just barely bullish at .68 with 39,253 contracts traded compared to the 5-day average volume of 78,130.
Here is another long call spread with a short put combination to consider.
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With a slight put volatility edge use a close back below the 40 support level as the SU (stop/unwind).
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.
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Summary
With an agreement from Washington DC on the fiscal cliff, along with indications that Federal Reserve has begun talking about ending more bond purchases, the markets are anticipating a stronger economy on the horizon, so the transportation index broke out of its yearlong range to the upside along with other important broad based indexes. For those who may still be underinvested now is the time to open new long positions.