Volatility Based Option Trading Idea

Here is an interesting suggested trade based on the Implied Volatility versus Historical Volatility ratio (IV/HV ratio). Make sure you do your own research when entering into any trade to see if it makes sense for you.

Here is an idea in the number four place from our complimentary regular Top 5 IV/HV ratio list.

InterDigital, Inc. (IDCC)
The company designs and developments digital wireless technology and has created an extensive patent portfolio. The stock price has been in a downtrend from July after there was speculation they were considering the sale of patents.

We last offered a put sale suggestion for an October 45 put that would have since expired since the stock closed at 47.65 on the October expiration. Here is a replacement idea.

The current Historical Volatility is 57.19, while the Parkinson’s range Historical Volatility is 61.84. The Implied Volatility Index Mean is 107.59, up from 96.71 last week, for an IV/HV ratio of 1.88, but 1.74 using the range method. The put-call ratio at .25, means there were 4 times more calls traded on Friday than puts, while the call open interest exceeds the put open interest by more than 2 times. Friday’s option volume was 19,684 contracts compared to the 5-day average of 15,900.

If it closes below 40 at the December expiration, we suggest taking the stock by assignment and then selling calls against the long stock position. Our previous forecast of declining implied volatility was not correct, remaining high and ranked number four in this week’s Top 5 with an IV/HV ratio of 1.88.

RT Options Scanner Results

We ran our Scanner and found some interesting ideas that we have grouped into two categories based upon the put call ratios. The first are bullish with low put-call ratios, or a high number of calls traded compared to puts. All had several call series with more than 2K calls traded on Friday.

Although we remain near term cautious here is the bullish group.

Some of these will make interesting put sales, especially those trending higher like GLW and YHOO.

Here is the bearish group with high put-call ratios.

FMCN reported .59 per share earnings on November 17.

HPQ, in an uptrend and scheduled to report Q4 earnings Monday after the close. The consensus estimate is 1.13 per share with a whisper estimate of 1.14 per share. Puts are most likely being purchased to hedge long stock positions.

JEF is scheduled to report Q4 earnings on December 20. The consensus is .23 per share. The high put-call ratio, along with the high-implied volatility reflects the stock price decline reported to be related to concerns about their holdings of European sovereign debt.

Put spreads are one alternative strategy to consider using for this group.

The suggestions above are based upon last Friday’s closing prices using the mid price between the bid and ask. On Monday, the option prices will be somewhat different due to the time decay over the weekend and any price change.


Just when equities were making some upward momentum, they were whacked once again by the sovereign debt news from Europe. We expect the S&P 500 Index will now continue lower and attempt to find support below 1163.

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