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In this issue we are going to review the current status of the suggestions made as we were becoming cautiously more bullish in IVolatility Trading Digest™ Volume 8, Issue 14, Bottom Fishing, dated April 7, 2008. Then we are going to add some more suggestions that may not yet be fully participating in the upward momentum. But first a brief review of the market.

Market Review

S&P 500 Index (SPX) 1397.84. As we said last week, “it is becoming increasingly difficult to continue supporting the Head & Shoulders Top thesis with its the measuring objective down at 1225. The SPX continues to trade above the current downward sloping trend line and it now looks as if we should once again declare that the double bottom formed on March 17, 2008 at 1256.98 is the final bottom.” Those that say we are in a bear market rally will need to provide more supporting evidence as this market looks to be going higher.

The CBOE Volatility Index (VIX) 19.59 continues somewhat lower this week and is now just 1.31 points away from the low made on December 21, 2007 at 18.28 during a period when many market participants we focused on Holiday activities. By Friday the call volume was about 60,000 contracts declining from mid-week levels of over 100,000 contracts. The call open interest now about 700,000 contracts is declining. Rising call volume with open interest above 800,000 contracts has recently been a good leading indicator of short-term market declines. For now the VIX is supporting a further market increase.

The US Dollar Index (DX) 72.79 rose sharply this week trading as high as 73 and then closing Friday in the middle of its trading range at 72.79. Now back near the 73 level we should be watching closely for a close above 73.194, the pivot on the last short-term rally on March 24, 2208. A close above this level would set off a two point double bottom taking the DX back to the 75 level. This would most surely spell trouble for gold, silver and the commodity group including crude oil. It would be supportive for equities and we think they would then continue higher. So watch 73.194 and be prepared to reduce your positions in the commodity sensitive sectors if it continues higher.

Our market breadth indicator, the NYSE McClellan Summation Index accelerated just a bit adding 121.44 points, putting it above the zero line at 55.79. For now it looks as if it will continue going higher and further supporting the bull case.

Strategy

Bottom Fishing Review

Our solo fishing expedition that began on April 7, 2008 has produced some encouraging results and at least one big fish. Here is an update for all the suggestions made in IVolatility Trading Digest™ Volume 8, Issue 14, Bottom Fishing.

CBOE Volatility Index (VIX) 19.59. When we suggested this bear put spread the VIX was 22.45 and the long Jun 22 ½ put, short Jun 20 put had an indicated debit of .8250. The current indicated value is 1.325 for a three-week gain of 61%. The implied volatility of the long put rose from 31.19 to 82.63 while the implied volatility of the short put declined from 34.10 to 28.17. This is good confirmation of the more positive market sentiment. We now suggest taking profits on this position as it trades down toward the 18 level.

iShares Russell 2000 Index (IWM) 71.90. The IWM is up just .74 from 71.16, but it has made a clearly defined upward sloping trend line off of the March 17, 2008 low at 64.23. There is some resistance at 72.50 and it may take some additional time to clear this level, but it appears to be a triangle consolidation pattern that could breakout above 72.50 very shortly. The suggested bull call spread was long the Jun 74 call and short the Jun 78 call for a debit of 1.38. While the index is almost unchanged the implied volatilites of the calls have decline as would be expected when the market rises providing us with another a good example of the advantage of using spreads compared to a long call. The IV of Jun 74 declined form 25.53 to 20.93 while the IV of the short call declined from 23.34 to 18.42. The spread declined in value .19 or 14% in the three-week period. We think the IWM will continue higher and this spread will increase in value.

UltraShort QQQ Proshares (QID) 42.48. UltraShort QQQ ProShares seeks daily results corresponding to twice (200%) the inverse (opposite) of the daily performance of the NASDAQ-100 Index®. Despite the QID declining from 45.19 to 42.48 the long May 40 put actually declined in value from .80 to .75. This is a good example of the reason to use a spread compared to just long the put. The implied volatility declined from 45.43 to 41.38 and the time value also declined. Since the loss of time value will now be accelerating we suggest this position be closed by selling the May 40 put and booking the indicated loss of .05. We should make a note and keep this as a further reminder of the risk associated with buying a call or put outright.

JA Solar Holdings Co., Ltd. (JASO) 24.25. 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. We suggested the sale of the April 20 put for .55. Since the stock closed at 25.75 on the April expiration the puts expired worthless and we booked the .55 gain. Estimating the margin requirement at 166 this is a 33 % two-week gain.

China Medical Technologies, Inc. (CMED) 38.45 develops, manufactures, and markets medical devices for the treatment of solid cancers and benign tumors in the People's Republic of China. This stock did not behave as we expected declining below 40 and our stop/unwind. The stock was 45 and the long Jun 50/55 bull call spread (long the June 50 call short the June 55 call) declined in value from 1.25 to .35. We snagged our line on this one and now suggest closing the trade and booking the 72% loss.

Ctrip.com International Ltd. (CTRP) 60.61 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. When we suggested a long bull call spread, Jun 60/65 (long the June 60 call and short the June 65) the stock was 55.68 and the indicated debit was 1.55. Currently this spread is priced at 2.15 representing a 39% gain in three weeks. It is another reminder of the advantage to using spreads. As CTRP continued higher in price the implied volatility declined. For the long Jun 60 call the IV decline was from 57.43 to 54.36 while the IV for the Jun 65 call declined from 56.44 to 53.21. Since we were long one call and short the other they offset the decline in implied volatility and time decay while benefiting from the stock price increase all with a limited and define risk. This is like catching a big fish while bottom fishing.

Mirant Corp. (MIR) 40.02 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. On April 4, 2008 the stock closed at 36.87 and the Jun 32 ½ put that we suggested selling was 1.075. Now the stock is above 40 and the current price of the put is .125. The implied volatility declined from 43.13 to 34.37 as the price increased. In this case we were short volatility and we expected it to decline. We now suggest closing this trade and booking the .95 gain representing a 32% three-week gain based upon a margin requirement of 300. Here is another pretty big fish ready to fry.

IVOLopps™

The Ones That Got Away

Many good fishing stories include tales about the ones that got away. With the benefit of hindsight and some “woulda”, “coulda”, “shoulda” here are a few more suggestions that are likely to continue higher with an improving market.

Baidu.com, Inc. (BIDU) 363.69. This rapidly growing company offers a Chinese language search platform, consisting of Web sites and online application software with a network of third-party Web sites and software applications.

When we last suggested BIDU in IVolatility Trading Digest™ Volume 7, Issue 40, Mortgage Disaster, dated November 19, 2007 it was 314.99. It then traded up as high as 481 and down as low as 201. We suggested a long bull call spread, long the March 310 call and short the March 320 call with a debit of 3.65. While previous BIDU suggestions produced good returns this one was a looser if held to the March expiration as the stock closed at 240. Since we did not specify a specific stop/unwind we are going to book the loss for the record and make a note to include more stop/unwind levels for the suggestions.

Now with a more positive tone to the US equity market Chinese stocks are quickly responding and there is a good chance they will attempt to make new highs before the summer Olympics in August.

Trade Plan

DR: Strength in US equities is being translated into strength in the Chinese equity market. This company is a leader in the Chinese language search business competing with Google while sentiment appears to be improving for the group and momentum traders may not yet be long in large numbers.

SU: We suggest unwinding or closing this spread on a close below 300.

With a current Historical Volatility of 88.30 consider this bull call spread.

• Buy BIDU Sept 370 call BPJIN 54.40 IV 60.05 Delta .5708
• Sell BIDU Sept 380 call BPJIP 50.10 IV 59.73 Delta -.5427
  Debit 4.30 Position net delta .0281

The differences between the strike prices define the maximum spread value or 10 points. With a cost of 4.30 the maximum gain is 5.70 providing a good reward to risk ratio of 1.40 for a position with defined and limited downside risk. In addition, one of the real advantages of using spreads is we are just buying the difference between the two strike prices allowing many of us to participate in the higher priced stocks that would otherwise not be affordable.

Google Inc. (GOOG) 544.06. Mountain View, California based GOOG provides targeted advertising and Internet search solutions, as well as Intranet solutions. The April 17, 2008 earnings report caused the stock to gap up 86 points. A popular understanding is that all gaps are quickly filled, but this is not correct. There is no requirement for a breakaway gap to be filled. So the question is, will this gap be filled by the stock pulling back toward 450 or is it a breakaway gap and will it continue higher from here? Since the stock has been in a decline from 700 in December we are leaning towards the breakaway view. We do think it could pull back somewhat but there is a good chance it will not pull back enough to fill the gap.

Trade Plan

DR: Improving market sentiment with a good earnings report propelled this stock higher. While we do not think the gap will be filled we are aware it could pull back in the near term. The momentum crowd abandoned this stock in December but could return with analyst upgrades if it now continues higher. This appears to be a risk worth taking on a company with the strongest brand and best technology in the business.

SU: In the event we are wrong about the gap and the stock closes below 500 the spread should be unwound or closed pending the resolution of the gap question.

With a current Historical Volatility of 65.74 consider this bull call spread.

• Buy GOOG Sep 560 call GOPIZ 44.10 IV 34.87 Delta .5146
• Sell GOOG Sep 570 call GOPIQ 39.85 IV 34.73 Delta -.4824
  Debit 4.25 Position net delta .0322

With a maximum value of 10 and a cost of 4.25 this spread has a defined and limited risk with a reward to risk ratio of 1.35 while allowing us to participate in the move of a very high priced stock.

China Mobile Limited (CHL) 87.10. Rapidly growing and profitable Hong Kong based CHL provides mobile telecommunications and related services primarily in China and Hong Kong. It is reported to be the largest mobile provider in the world while serving a region with low mobile phone penetration rates. Many analysts and investors see the opportunity for continued rapid growth.

Trade Plan

DR: Improving market sentiment quickly turned CHL higher, now up 34% from the March 17, 2008 low at 65.01, but now just 11% below its December high at 96.45. Because it is widely held and represents a large percentage of the China indexes and China related portfolios it could be used as a surrogate for a China position and the Chinese market looks to be going higher.

SU: The support level is 80 and we suggest unwinding or closing the position in the event the stock closed below this level.

With a current Historical Volatility of 47.32 take a look at this bull call spread.

• Buy CHL Sep 90 call CHLIR 7.15 IV 37.61 Delta .4993
• Sell CHL Sep 95 call CHLIS 5.25 IV 37.11 Delta -.4074
  Debit 1.90 Position net delta .0919

The maximum spread value is 5 points and the gain is limited to 3.10. The risk is defined and limited to 1.90 making a good reward to risk ratio of 1.63.

For now the fishing is expected to continue being good.

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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