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European leaders will now meet twice, first on Sunday and then again Wednesday, in an effort to find a comprehensive strategy to solve the debt crisis that began in Greece. Several issues remain to be resolved including how much to reduce Greek debt. In the meanwhile, the US is in the middle of the third quarter earnings report season so both promise to keep volatility high for the near future, creating an interesting selection of trading ideas. After a few brief strategy comments, we offer several earnings report and volatility trade suggestions.
Strategy
With the details of the European rescue plan still being negotiated over the weekend including the "haircut", we expect some details will be released after the scheduled meeting on Wednesday, but think volatility will remain high until the G20 summit meeting in Cannes on November 3-4, as it seems like this is going to be the real deadline date.
As for the S&P 500 Index (SPX) 1238.25, with the breakout above the August 31 resistance high at 1230.71, it now appears less likely there will be another decline to retest 1100 as a part of a potential developing Head & Shoulders bottom pattern. However, we note the S&P 500 Index will often exceed support and resistance areas only to quickly return to them. Accordingly, unless there are some positive developments reported from Europe soon we could still see the retest.
For the VIX futures, the day weighting applied 85% to the November contract and 15% to December resulting in the average premium of .04 or .13%, compared to 4.07% last week in Digest Issue 40. For this short-term indicator the premium to the cash is a SPX sell signal suggesting professional expectations for the cash to increase toward the futures price.
Because volatility is likely to remain elevated for some time, we suggest using option strategies that benefit from higher volatility, those combinations that have more short options, such as ratio spreads, short straddles and strangles, and put sales as long proxies.
On a relative basis, since the technology group has been doing better than the broad market averages we suggest it could be the time to consider some if the tech stocks, as they seem to have the seasonal advantage giving them a boost. We have one idea below.
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