Volatility Inspired Trading Strategy

Looking for a short term trading opportunity? The following article recommends one based on the current volatility in the stock. As with any other trade, make sure you do your due diligence first. Don’t just take him at his word. Check it out for yourself and make sure it fits your trading style before jumping in.

The energy sector experienced extreme volatility as the broader markets gyrated over the past three weeks. LNG Producers have also been benefited by the recent large draws in distillate fuel as reported by the US Department of Energy.

On November 14, InterOil Corp. reported a third quarter loss of .44 per share on sales of 278.5 million, missing estimates by .36. Analysts expected a loss of .08 per share on sales of 329.7 million.

The downdraft in price after the earnings report and the recent snap back from 45.52 to 55.64, created a surge in implied volatility. The bounce began after the company signed an agreement with Gunvor Singapore Pte. Ltd. to supply 1 million tons liquefied natural gas a year.

The price has fluctuated between a 52-week high of 81.92 and a 52-week low of 31.18 and has been range bound for the past 7 trading sessions above the 200-day moving average near 48, and below the 50-day moving average at 59. There is strong resistance near 65 while support is around 40.

The current Historical Volatility is 86.56 and 82.52 using the Parkinson’s range method, with an Implied Volatility Index Mean of 133.19, up from 128.04 last week. The IV/HV ratio is 1.54 and 1.61 using the range method to calculate the HV. The put-call ratio is extremely bullish at .20.

Notice the implied volatility shown in orange in this chart while the Historical Volatility is blue.

As shown above, it looks as if the implied volatility could soon return to 75 and eventually even drop further toward 50.

An Iron Condor is a sale of a call spread combined with a sale of a put spread. The objective is to take advantage of the high-implied volatility, when a stock is in a defined trading range.

First the call spread.

Next the put spread.

When combined the two credits total 1.24.

The risk is $3.76, which is the difference between the strike prices of the sold spread ($70-65 or $40-$35) and the premium. This would occur if InterOil closed above 70 or below 35 at expiration of the December contract, just 10 trading days away.

All of 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.


After an impressive advance in the major equity indexes last week from the coordinated central bank efforts to lower interbank lending costs in Europe the sovereign debt crisis remains unresolved. If equities continue to advance from the levels obtained last week they will be encouraging leading indicators.

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