Sector Investing

[ReturntoSender]

VOLATILITY ALERT: Fear Remains Low Despite Drop in Stock Prices
By Jody Osborne, Optionetics.com
7/2/2004 7:00:00 PM

http://www.optionetics.com/articles/article_full.asp?idNo=10664

Overall Market Volatility: The FOMC did indeed raise rates by 25-basis points this past week, with the Fed stating they are content to use “measured” hikes in the future. This news took stocks higher following the announcement on Wednesday, but it has been downhill since then. Disappointing economic news has created selling and traders were not in the mood to hold stocks over a three-day weekend. The Dow ($INDU) fell 0.86 percent for the week, closing at 10,282.83. The S&P 500 ($SPX) declined 0.80 percent to 1,134.43. The Nasdaq ($COMPQ) gave up 0.93 percent to 2,006.66, but did hold above the 2K level. Volume didn’t pick up as much as expected following the Fed announcement and many traders were already out of town when Friday’s employment report was released. Economic data the end of the week was below expectations and though this drops the odds of larger rate hikes, the news also had a bearish affect on stocks. However, second quarter earnings season is just around the corner and this could provide a boost for stocks in July. The fear indices didn’t move a whole lot this past week, with the CBOE Market Volatility Index ($VIX) closing at 15.08, a decline of just 0.72 percent. The Nasdaq Volatility Index ($VXN) came off last week’s lows, rising 4.91 percent to 19.89. Nonetheless, there is not a lot of fear in the market place right now.

HIGH VOLATILITY RANKING 07-02-04

SYMBOL
COMPANY

CMX
Caremark RX

CZN
Citizens Utilities Co

MFE
McAfee Inc

KWK
Quicksilver Resources

MVL
Marvel Enterprises Inc

APOL
Apollo Group Inc

JPM
J.P. Morgan Chase

SNDK
SanDisk Corp

PSFT
PeopleSoft Inc

SINA
Sina Corp


High Volatility: Shares of SNDK are approaching support at the $20 level. This storage disk maker has a 52-week low at $19, with the stock closing Friday at $20.93. With the company announcing earnings on July 14, the front month IV has spiked much higher than farther out options. In fact, the July 20 put has IV near 75, with the Jan05 20 put sporting IV at just 58. This is a nice skew and traders might want to take advantage of this skew by entering a put calendar spread. The stock could easily consolidated near 20 for the next few months and this means a calendar spread could bring in some nice profits. Of course, the risk is that the stock moves sharply in one direction or the other, leaving the trade with a loss. However, if the stock does stay near 20 the next few months, we could pay off the long option by selling front month puts on SNDK.

LOW VOLATILITY RANKING 07-02-04

SYMBOL
COMPANY

XMSR
XM Satellite Radio

CCL
Carnival Corp

AXP
American Express

RDC
Rowan Companies

STM
STMicroelectronics

MEDI
MedImmune Inc

G
Gillette Company

TLT
iShares Lehman 20+ Yr Treas

KBH
KB Homes

IMCL
ImClone Systems


Low Volatility: XMSR shares have rallied sharply the last few weeks, rising from $22.50 a share to their closing price Friday at $27.83. Volume has increased during the rally, a sign that the gains should continue. However, when a stock moves straight up, it tends to see some retracement. With IV low on XMSR options, traders might want to look at using strangles or straddles on XMSR. The stock has shown a lot of volatility this past year, easily moving $5 or more in a month’s time. Astute strangle traders can even get in and out of trades to profit from moves in both directions. The company will not announce earnings until mid-August, so as this time approaches, the IV for the stock’s options should increase.


Jody Osborne
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Jody's Forum