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When our technical indicators say the market should be going lower but it turns higher we begin questioning our indicator. For the S&P 500 Index the operative technical indicator was the Head and Shoulders Top from last October with the downside measuring objective at 1225. However, when the financial news is negative but the market is going higher we should be paying close attention. We may have to settle for 1256.98 and the double bottom made on March 17, 2008. Earning reports will begin this week so maybe this positive bias is temporary and the downside will resume. On the other hand, there is a chance that we have seen the bottom in the US equity market. If so, we need to start revising our strategy and start looking toward the long side once again. In this Digest we are going to review some option trading strategies and suggest some specific ideas to use for the market turning higher. This could still be an early call so we advise caution however, we think now is the time to start doing some bottom fishing.

Market Review

The CBOE Volatility Index (VIX) 22.45 did not hold the 25 level and continued lower telling us that the call buyers were no longer interested. With earning announcements about to begin you would think there would be more call buying, instead call buying actually declined. From the market perspective this is a positive since recently the call buyers have been buying just before the declines.

The US Dollar Index (DX) 72.02 made another attempt to turn higher only to reverse again to the downside by the end of the week. This time the commodity group did not respond and recovered some of last week’s losses. We continue to think this is the single best indicator to watch for the commodity-related groups.

This last week our market breadth indicator, the NYSE McClellan Summation Index improved 225.70 points, one of the best gains in a long time providing us with the first sign that the market sentiment is changing despite the continuation of bad news. With a reading of –285.47 we are now beginning to doubt that it will turn down once again adding another positive for the market

Strategy

With the possibility that the equity market is now making a turn then we suggest a portfolio review. Reduce positions that have downside bias, especially long positions in any of the Ultra Short ETFs, and begin looking for those sectors and stocks that have maintained the best relative strength over the past several months. Since we do not know for sure this is the bottom of the market we suggest limiting risk by using out-of-the-money call options or even better, out-of-the money bull call spreads with several months until expiration. If this is the market bottom then these positions with relatively low initial delta will rapidly increase as they go in-the- money. This will do two things, first it will maintain focus on the potential market bottom and secondly, if this is not the bottom the amount at risk will have been minimized. The emphasis here is to minimize the risk until a clear uptrend is apparent and can be confirmed.

IVOLopps™

CBOE Volatility Index (VIX) 22.45. If the market has made the low then the VIX will most likely continue declining back toward the 20 level. With a somewhat irrelevant 30-day Historical Volatility of 123.91, but a more relevant 10-day Historical Volatility of 66.05 consider this put spread for a continued decline in the VIX.

Trade Plan

Since we would not expect to see a rapid decline we have allowed sufficient time by using June puts. With a risk/ reward ratio of 3 this position should work if the market has made a bottom. In the event it reverses and trades back above 25 we suggest unwinding it.

iShares Russell 2000 Index (IWM) 71.16

In IVolatility Trading Digest™ Volume 8, Issue 4, Rogue Trader, dated January 28, 2008 we suggested a June 70/62 bear put spread with a debit of 3.05. The current value of the spread is 2.155 representing a loss of .895. Since we are now changing direction we suggest closing this put spread, book the loss and then replace it will the a bull call spread. With a current Historical Volatility of 32.66 consider this suggestion.

Trade Plan

With a good risk/ reward ratio of 2.9 this position should do well if we have seen the market bottom. From the July 9, 2008 high at 85.28 to the March 10, 2008 low of 64.50, the decline was 24%. We think there is a good chance that this was the bottom. In the event it does turn lower once again we suggest using the last pivot of 65 as the SU (stop/unwind).

Recently in IVolatility Trading Digest™ Volume 8, Issue 10, Ides of March, dated March 10, 2008 we suggested rolling out a IWM put spread and a QID call spread to the April option series. For the IWM it was the Apr 67/62 put spread with a debit of 1.975. The current indicated market value is .28 for a loss of 1.695. For the QID Apr 54/60 call spread the debit was 2.025 and the current market is .125 for a loss of 1.90. We now suggest closing both of these positions and booking these losses. Then consider this replacement for the QID.

UltraShort QQQ Proshares (QID) 45.19. UltraShort QQQ ProShares seeks daily results corresponding to twice (200%) the inverse (opposite) of the daily performance of the NASDAQ-100 Index®.

Trade Plan

DR: The QID is inversely leveraged 2 times to the NASDAQ – 100 Index. This downside direction trade that would represent and increase in the NASDAQ – 100 index. Because it is leveraged to the Index it requires close attention.

SU: The put should be sold if the QID closes above 47 once again.

Here is a very unusual suggestion for an outright purchase of a put. With a current Historical Volatility of 61.78 consider this out-of-the money put.

• Buy May 40 put QIDQN .80 IV 45.43 Delta -.1910

Best Relative Strength Chinese Stocks

Consistent with the market turn and relative strength theme here are some stocks in the China sector that are showing good relative strength.

JA Solar Holdings Co., Ltd. (JASO) 22.93. Ningjin, China based JA Solar manufactures and sells monocrystalline solar cells in China. It sells primarily through sales and marketing personnel to solar module manufacturers, who assemble and integrate its solar cells into modules and systems that convert sunlight into electricity. JA SO also has customers in Germany, Sweden, Spain, South Korea, and the United States.

Trade Plan

DR: JA Solar is a Chinese solar manufacturer benefiting from high oil prices. An industry concern has been polysilicon availability and a Collins Stewart LLC analyst noted recently that the company has secured supply agreements to fulfill all of its wafer needs through 2010. JA Solar says it will increase production form 175 megawatts worth of generating capacity to 425 megawatts of capacity by the end of this year. At 21 cents per watt they claim to be more cost effective than their competitors. The stock recently split 3:1 on February 8, 2008.

SU: In the event the stock is assigned then sell calls against the long stock. A close under the recent pivot at 12 would be cause for concern and a position adjustment or liquidation should be considered.

With a current Historical Volatility of 101.65 consider this put sale currently 2.93 points below the stock price.

• Sell JASO Apr 20 put QJPPD .55 IV 93.06 Delta .2056

China Medical Technologies, Inc. (CMED) 45.00 develops, manufactures, and markets medical devices for the treatment of solid cancers and benign tumors in the People's Republic of China.

With a current Historical Volatility of 75.63 consider this bull call spread.

Trade Plan

DR: With the market turning this is a relative strength Chinese stock.

SU: A close below 40 would be the signal to unwind.

• Buy Jun 50 call QCYFJ 2.425 IV 50.33 Delta .3778
• Sell Jun 55 call QCYFK 1.175 IV 48.45 Delta -.2243
  Debit 1.25 Position net delta .1535

Ctrip.com International Ltd. (CTRP) 55.68 provides travel-related services including hotel reservation, air-ticketing, packaged-tour services, as well as Internet advertising in China with a 52% market share of the travel agency business. With the Olympics on the horizon business is good.

Trade Plan

DR: Growing e-commerce company in a growing market that seems to be accelerating. There is a defined upward sloping trendline from the January low at 40.

SU: A close below the last pivot at 50 would be an indication that there is a concern and the spread should be unwound.

With the current Historical Volatility at 67.96 consider this suggestion.

• Buy CTRP Jun 60 call QCTFL 4.30 IV 57.43 Delta .4492
• Sell CTPR Jun 65 call QCTFM 2.75 IV 56.44 Delta -.3295
  Debit 1.55 Position net delta .1197

Takeover File Update

Mirant Corp. (MIR) 36.87 this unregulated electric utility generates electricity in the United States, the Philippines and the Caribbean. Last May J.P. Morgan Chase offered MIR to private investors. Since the financial market problems raised questions about financing any proposed deal the company dropped the sale plan but decided instead to buy back about 43% of the outstanding stock. Now selling at about 10 times forward earnings with a PEG ratio of .7. This stock came in number 2 on the “Top 5 stocks based on IV Index Mean vs. 30D HV” list, number 5 on the “Top 5 stocks with greatest IV change from yesterday” list and number 12 on the “Top 200 stocks by volume/open interest” ranking. With a current Historical Volatility of 22.62 and a good positive volatility spread consider this put sale.

Trade Plan

DR: Good fundamental value. Since 25% of the stock is held by recognized hedge fund activists they have a large stock buyback plan. Their next earnings report is due on May 8, 2008.

SU: A Close below the recent double bottom at 34 would be the signal that there is a problem requiring a review of the position. Unless there was a change in fundamentals or market conditions take the stock by assignment, and then sell calls against the long stock as the result of a close below 32 ½ on options expiration.

• Sell MIR Jun 32 ½ put MIRRZ 1.075 IV 43.13 Delta .2276

With good edge it appears this stock is unlikely to trade down to the strike price before expiration.

Previous Issues and Reader Response Request

All previous issues of the Digest can be found by using the small calendar at the top right of the first page of any Digest Issue. Click on any underlined date to see the selected issue. As usual we encourage you to let us know what you think about how we are doing and what you would like to see in future issues. Send us your questions or comments, or if you would like for us to take a look at a specific stock or ETF just let us know. Use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com Website.

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