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As we would expect takeover activity offers many options opportunities and there was a lot of news to consider in this group last week. We are going to review and update some of the active stocks and add a few more to the list. First a short review of our market indicators.

Market Review

S&P 500 Index (SPX ) 1360.03. The SPX closed the week almost where it began. After trading down toward the 1325 level it came back on Friday to close down just .65 on the week. Over the near term we expect the SPX to decline further and reach the downside measuring objective at 1300 from the complex Head & Shoulders Top created by the May 19, 2008 high of 1440.24. We continue to have the view that the SPX is making a larger bottoming pattern and the current decline is a part of that developing pattern. With the expected decline back down to 1300 the SPX would have the look of a large Head & Shoulders Bottom.

The CBOE Volatility Index (VIX) 21.22. By the end of the week the VIX had lost its upside momentum and closed lower. On Thursday the call open interest had risen to 950K and ended the week at about 850K which is still in the caution zone indicating the SPX could see more near term selling pressure.

The US Dollar Index (DX) 74.15. The most important news in the markets last week came from the US Dollar Index. After immediately reversing the prior week’s weakness it traded higher every day and did not continue back down toward 71 as we had expected. The strength is noteworthy since it has now closed above the 74 level that it crossed on February 28,2008 while going lower. Using classical bar charting techniques we can estimate an upside measuring objective by drawing a dotted line from the double bottom low on March 17, 2008 at 70.70 and the low on April 22, 2008 at 71.19 and adding the measured height to the breakout above 73 to get 75.50. See the US Dollar Index chart below showing the estimated upside measuring objective (MO).

NYSE McClellan Summation Index. Our market breadth indicator accelerated to the downside with a decline of 268.75 points ending the week, at -14.77 and once again below the zero line. The weakness in this indicator would seem to confirm the view that we could see some additional market weakness in the near term.

Strategy

If the US Dollar Index continues higher as we suggest in the section above we could expect to see selling in the commodity related groups that have benefited from the dollar weakness. We suggest caution for oil, gas, agriculture and other overbought sectors.

IVOLopps™

In IVolatility Trading Digest™ Volume 8, Issue 19, Yahoo! Redux, dated May 12, 2008 we did an extensive update of the previously suggested YHOO positions. Here is a new one to consider.

Yahoo! Inc. (YHOO) 23.47. It now looks as if Microsoft has no further interest in a deal for Yahoo but the situation has become complicated by the pressure being applied to the Yahoo management by Carl Icahn and the hedge funds that are holding large positions of both stock and options. In response Yahoo made an ad deal with Google and the stock declined.

Call open interest continues to rise so and we do not think the story has ended. We suggest using the current weakness to add another position based on a lower stock price. With the current Historical Volatility at 67.08 consider this longer-term bull call spread.

• Buy YHOO Oct 25 call YHQJE 1.92 IV 44.27 Delta .4716
• Sell YHOO Oct 27 ½ call YHQJY 1.065 IV 42.18 Delta -.3190
  Debit .855 Position net delta .1526

We suggest selling calls against long stock that you may have been assigned from short puts and we would attempt to time the sales to days when the stock is rising on news of the latest developments. We will do another position summary in the future when it appears a settlement has been made with the Icahn group.

Have Another Bud

Our last visit with BUD was in IVolatility Trading Digest™ Volume 8, Issue 21, Crude Oil Bubble, dated May 26, 2008. We suggested keeping the long December 55 calendar spread -long the December 55 call and short the June 60 call.

Anheuser-Busch Companies Inc. (BUD) 61.12. The rumored bid by InBev SA that was first reported by the Financial Times and was subsequently announced on Wednesday June 11, 2008 seems to be making everybody nervous. BUD does not want to be acquired and has approached Modelo in Mexico about buying a controlling interest perhaps thinking it would deter InBev. At the same time InBev is talking to Modelo about selling them BUD’s existing equity stake in Modelo if they are successful and then making a distribution agreement for Modelo brands outside of North America. It is complicated since nobody wants to be acquired but in the final analysis the shareholders will decide and it may come down to the price. At the moment the advantage goes to InBev with its premium priced Euro.

The existing June 60 call of the above mentioned calendar spread will most likely be in-the-money at the June options expiration on Friday. Here is a suggested trade to roll out of the short June call and into a July call. The current Historical Volatility is 34.27.

• Buy BUD Jun 60 call BUDFL 1.625 (to close) IV 26.23 Delta .6949
• Sell BUD Jul 55 call BUDGK 6.850 (to open) IV 35.98 Delta -.8444
  Credit 5.225.

Since the debit for the original calendar spread was 2.20 this adjustment results in net credit of 3.025.

Here is the new adjusted position at the current prices:

Long BUD Dec 55 call BUDLK 7.950 IV 23.56 Delta .7787
Short BUD Jul 55 call BUDGK 6.850 IV 36.98 Delta -.8444
Position net delta -.0657

In the takeover file it seems nobody wants to go quietly making the process long and often drawn out, but creating many options opportunities. The only concern is keeping up with the news and keeping the records of the trades.

Miner News Next we take a look at an interesting development in the mining sector. However, if the US Dollar Index continues rising it could diminish enthusiasm for the group. On Tuesday of last week RIO announced plans to for a public equity offering to raise up to $15 billion to be used for strategic acquisitions and financial flexibility. The reports from Brazil indicate the likely strategic targets to be Anglo American PLC (AAUK), Freeport-McMoran Copper & Gold (FCX) or Aloca Inc. (AA).

Companhia Vale do Rio Doce (RIO) 34.57. Rio de Janeiro based RIO operates as a diversified metals and mining company worldwide. It produces and exports iron ores and pellets to the steel industry, as well as manganese ores, iron alloys, and metallurgical ore. They also produce nickel, copper, platinum-group metals, such as platinum, palladium, rhodium, ruthenium, and iridium; precious metals, including gold and silver; coal; and other non-ferrous minerals. In addition, their operations include bauxite mining, alumina refining, and aluminum metal smelting operations.

Anglo American PLC ADR (AAUK) 31.38. Anglo mines coal, copper, nickel, iron ore and platinum in 40 countries with nearly half of the profits coming from South Africa. Recent activity includes a deal with the Chinese in a coal mining venture. It also owns 45% of De Beers, the world’s largest diamond mining firm. Anglo’s developing relationships with the Chinese makes it somewhat unique. With a current Historical Volatility of 42.14 take a look at this put sale.

• Sell AAUK Jul 30 put QEBSF 1.175 IV 47.21 Delta .3467

Freeport-McMoRan Copper & Gold Inc. (FCX) 123.30. Freeport-McMoRan, engages in the exploration, mining, and production of copper, gold, and silver. It holds interests in the Grasberg open pit and the Deep Ore Zone mines in Indonesia. The company also owns interests in the Grasberg block cave, Kucing Liar, Deep Mill Level Zone, Ertsberg Stockwork Zone, Mill Level Zone, Big Gossan, Dom open pit, and Dom block cave. In addition, it smelts and refines copper concentrates, and markets refined copper products.

With a Historical Volatility at 43.61 consider this put sale:

• Sell FCX Jul 110 put FCXSB 3.40 IV 57.61 Delta .2373

FCX seems to have responded to the RIO strategic acquisition news and may be the most likely target according to some analysts. This position has good edge and the 110 level is a well-defined support area.

Alcoa Inc. (AA) 39.46. Pittsburgh based Alcoa is the last large independent aluminum producer. The company has bauxite mining interests in Australia, Brazil, Guinea, Jamaica, and Suriname. It also has a joint venture with China International Trust and Investment Company to produce aluminum rolled products in China.

Analysts think the prospects for aluminum are bright and the company could be valued at $60 a share on a takeover. With a Historical Volatility of 53.48 here are two put sale candidates.

• Sell AA Jul 40 put AASH 2.950 IV 54.69 Delta .4931
  Or
• Sell AA Jul 35 put AASG .90 IV 54.94 Delta .2132

While the 35 put looks safe there is no edge in either position. An alternative would be a long dated bull call spread.

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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