Market Strategy
Be cautious about reaching conclusions about Friday’s thin trade, as the energy group appears to have collapsed while those benefiting from lower prices rocketed higher since both could reverse somewhat this week. In addition, keep mind there are several important seasonal tendencies to consider going into year-end including equity prices crude oil and the euro, detailed next week.
Lower Energy Cost Winners
Included in the groups benefiting from lower energy costs are transports such as airlines, railroads, and package delivery that all look overbought. Large retail operators are expecting more discretionary spending while saving money on distribution costs. For example, last week the best sector was Consumer Discretionary Select Sector SPDR ETF (XLY), also called the cyclical group. Restaurants are also in this category, but most do not have enough volume and liquidity for active options strategies with one possible exception.
Starbucks Corporation (SBUX) although exposed to declining currency exchange rates from considerable international operations it should benefit from more discretionary spending. Having broken out above previous highs and subject to a short-term overbought pull back that could occur this week, here is a long idea to consider.
The current Historical Volatility is 14.05 and 13.05 using the Parkinson’s range method, with an Implied Volatility Index Mean of 16.42 down from 16.80 the week before. The 52-week high was 30.30 on January 23, 2014 while the low was 13.66 on August 20, 2014. The implied volatility/historical volatility ratio using the range method is 1.26 meaning option prices are about right relative to the recent movement of the stock. At .41, the put-call ratio is moderately bullish. Friday’s option volume was good at 25,341 contracts traded compared to the 5-day average volume of 20,890 so the bid/ask spreads appear reasonable.
Consider this January call spread with enough time to allow for any short-term pull back.
Using the ask price for the buy and middle for the sell, the debit is .87, about 35% of the distance between the strike prices. Use a close back below 79 which is also below the short-term upward sloping trendline from the October 16 low of 70.77 as the SU (stop/unwind).
TASER International Inc. (TASR) 21.48 supplies AXON body-worn video cameras with EVIDENCE.com, a cloud-based storage and management system used by law enforcement to facilitate recording interactions between officers and the public. According to Zacks, EVIDENCE.com & video revenues were up 21.5% to $4.3 million in the third quarter of 2014 with bookings of $15.3 million up 163.8% year over year.
The current Historical Volatility is 46.70 and 48.54 using the Parkinson’s range method, with an Implied Volatility Index Mean of 50.93 up from 49.32 the week before. The 52-week high was 75.66 on October 15, 2014 while the low was 39.10 on May 23, 2014. The implied volatility/historical volatility ratio using the range method is 1.05 meaning option prices are inexpensive relative to the recent movement of the stock. At .28, the put-call ratio is bullish. Friday’s option volume was 3,272 contracts traded compared to the 5-day average volume of 11,170 contracts so be careful placing orders as trading is thin.
Using the ask price for the buy and middle for the sell, the debit is .55, about 27.5% of the distance between the strike prices. Use a close back below 20 which is below the short-term upward sloping trendline from the October 15 low of 13.631 as the SU (stop/unwind).