Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

To add comments or to ask questions please click here (or use the blog "COMMENTS" link at the very bottom of the blog page).

October is over; the bulls can celebrate once again since the bear has been killed once again. October has marked the bottom of all eleven post World War II bear markets and there is little reason to doubt this one will prove to be any different. While any meaningful recovery may still take some time chances are we have made the bottom.

“The worse a situation becomes the less it takes to turn it around and the bigger the upside.”
– George Soros

From an options perspective the bottoming of the equity market provides an unusual opportunity since the options implied volatilities that have risen to abnormally high levels will start declining as the market turns higher. This usually provides many opportunities to sell options on good quality stocks having high options volatilities that are now declining.

Because there are still a number of concerns including the US elections, the upcoming G-20 meeting, economic stimulus proposals, a homeowner’s bailout plan, and earnings estimate reductions, we think the best approach is to use good quality stocks paying good dividends.

After the market review section we offer some suggestions to consider. Most were taken from the Top 200 stocks by volume/open interest found on our front page. Ideally, we prefer the ones that have already reported third quarter earnings and can maintain their current dividends.

Market Review

S&P 500 Index (SPX) 968.75. For the week the SPX gained 91.98 points after making a small double bottom from the low of 845.27 on Tuesday the 28th. Last week we doubted the October 10, 2008 low at 839.80 would hold but it appears to have held. For now we will use 1100 as the upside measuring objective from this new small double bottom.

CBOE Volatility Index ( VIX) 59.89. On a close-to-close basis the VIX was 19.24 lower for the week. For the entire week we saw lower daily highs and lower daily lows including Monday’s high of 81.65. Since this defines a downtrend the VIX action is encouraging for the SPX.

US Dollar Index (DX) 85.63. The US Dollar declined just .81 for the week after a surprising mid week of decline of almost 5 points from a high of 87.88 to 83.10 before recovering on Friday. Chances are it will now remain in this 83-88 range until after the US elections.

TED Spread 2.65. TED was almost unchanged last week declining just .02. Even though LIBOR declined almost a full percentage point for the week the decline was matched by lower Treasury Bill yields. The TED spread is difference between the 90-day LIBOR (London Inter-bank Offer Rate) and the equivalent term Treasury Bills. In normal market conditions this spread is about 50 to 75 basis points or .50% to .75%. Since the US Government guarantees Treasury Bills and Eurodollar deposits have bank risk the TED spread give us a way to measure the current perceived risk in the Eurodollar market.

NYSE McClellan Summation Index. Our market breadth indicator made an inflection point and turned higher last week confirming the change in direction of the broader market. Now reading -1.441.69 it gained 54.60 points for the week providing more encouragement for the bulls.

Strategy

Now that October is over and there is a reasonable chance we have seen the low for this bear market we can once again suggest selling option combinations such as covered calls, cash covered puts, and perhaps even straddles and strangles to take advantage of declining options volatility. Do the fundamental research, looking for good quality stocks that can maintain their dividends and are least likely to have their earnings estimates reduced.

IVOLopps™

Suggestions

There are many options opportunities now available. Here are just a few of the many ideas we found. They are all dividend paying stocks. In the first group are covered calls for those who prefer to buy the stock and then sell options in order to benefit from the dividends while enhancing the yield by selling premium. In addition, since some investors may be precluded from selling cash covered puts by account restrictions using covered calls is a way to sell attractive options premium. In the second group are the cash covered put sale suggestions.

The “O Price” in column 7 are the options prices as of Friday. Remember Monday’s prices will be slightly less due to time decay. Column 8 “IV” is the Implied Volatility in percentage for the specific option while “F-IV” in column 9 is a Forecasted Implied Volatility. Column 10 “Decline” represents the potential estimated total percent point decline in implied volatility, but not necessarily before the specific suggested option expires. The suggestions have been ranked in order of their greatest potential decline in Implied Volatility.

Covered Calls

Cash Cover Put Sales

Short Crude Oil Update

United States Oil (USO) 55.59. This ETF reflects the spot price of West Texas Intermediate (WTI) light, sweet crude oil. Last week USO increased 2.59 while the Implied Volatility Index Mean declined 4.73 to 78 from 82.73. The mid price of our existing long November 60, short November 55 bear put spread declined to 2.85 from 3.30 the previous week. Our current position cost is a credit or net gain of 6.10 or $610 since the initial combination suggestion four weeks ago. Crude oil prices turned up with the weaker dollar at mid week. Since the dollar rebounded again on Friday we do not see any reason to unwind this spread just yet. We do suggest lowering the SU (stop/unwind) to a close above 60, from the previous level of 62.

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.