Trending suggestions for PowerShares DB US Dollar Bullish ETF (UUP) and WisdomTree Japan Hedged Equity ETF?(DXJ).
Strategy Ideas
While equities are following the expected seasonal pattern of strength into year-end, the US dollar and crude oil are obviously not with the dollar overbought while crude oil is oversold. Does this suggest they should be faded?
Following the advice of Joe Ross, a well-known commodity trader and educator who said in a recent interview he goes with the fundamental strength when it conflicts with the seasonal since it means the strong trend has overcome the resistance of the seasonal tendency the odds favor staying with the trends.
While being aware an overbought dollar and oversold crude oil could reverse at any time, although crude oil’s oversold bounce suggested last week?was feeble indeed, we suggest following the advice of Joe Ross and go with the trend. Accordingly, use January USO put spreads along with these two additional ideas, both in well-defined uptrends.
PowerShares DB US Dollar Bullish ETF (UUP) presuming the dollar continues higher consider this slow moving ETF that should continue trending higher.
Here is the options data.
The current Historical Volatility is 7.45 and 4.43 using the Parkinson’s range method, with an Implied Volatility Index Mean of 7.75 up from 7.32 the week before. The 52-week high was 8.34 on November 5, 2014 while the low was 3.75 on July 28, 2014. The implied volatility/historical volatility ratio using the range method is 1.75 meaning option prices are high relative to the recent movement of the stock. Friday’s option volume was 10,118 contracts traded compared to the 5-day average volume of 11,000 with very narrow bid/ask spreads.
Here is a longer-term call spread to consider.
Using the ask price for the buy and middle for the sell, the debit is .20, about 20% of the distance between the strike prices. Use a close back below 23.25 which is also below the short-term upward sloping trendline as the SU (stop/unwind).
If the dollar continues higher, then the Japanese yen is most likely declining and the lower yen makes Japanese exporters more competitive against Chinese and South Korean exporters. The currency-hedged equity ETF provides an opportunity to participate in advancing Japanese equities without currency loss risk.
WisdomTree Japan Hedged Equity ETF (DXJ) includes the large exporters like Toyota, Canon, Honda, Nissan and Denso along with others.
Here is another trend continuation call spread idea.
The current Historical Volatility is 23.45 and only 8.92 using the Parkinson’s range method, with an Implied Volatility Index Meanof 21.11 down from 21.54 the week before. The 52-week high was 29.72 on February 3, 2014 while the low was 12.05 on August 28, 2014. The implied volatility/historical volatility ratio using the range method is 2.63, so option prices are high relative to the recent movement of the stock. At .15, the put-call ratio is quite bullish. Friday’s option volume was 78,087 contracts traded compared to the 5-day average volume of 52,850, so liquidity is good.
Using the ask price for the buy and middle for the sell, the debit is .59, about 30% of the distance between the strike prices. Use a close back below 56 into the gap as the SU (stop/unwind).
The suggestions above use closing ask prices for the buys and middle prices for the sells presuming some price improvement from indicted prices is possible for liquid stocks. Monday’s option prices will be somewhat different due to the time decay over the weekend and any price change.