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This issue of the Digest is a mixed bag with an alert update and other update suggestions from previous issues along with two new long ideas for the potential resumption of economic growth and then one update for the Takeover File. First, our usual market review.

Market Review

S&P 500 Index (SPX) 826.84. Since our last Market Review based upon January 30, 2009 closing numbers the net change in the SPX is +.96 points. It has now taken on a noticeable sideways range between 800 and 925 and the 800 support has held 5 times. We are now starting to question the anticipated Elliott 5th wave down for a new low below the November 21, 2008 key reversal low at 741.02. While we are still using a downside measuring objective of 690 from the October bearish continuation pattern the support at 800 is beginning to look like a real challenge for the bears.

S&P 500 Index IVXM 37.87. The Implied Volatility Index Mean (IVXM) decline for the two weeks was just .86. Along with the SPX it also appears to be going into a range, perhaps 37-42. This should create a good environment for income strategies using options.

US Dollar Index (DX) 86.11. Once again the DX continued higher and once again its momentum slowed as it added only .28 points in the past two weeks. It now appears that the upward sloping trend line from the December 18, 2008 low at 77.69 has not held the upward advance and DX has found some tough resistance at 86. Once again, as we have suggested in many issues of the Digest, stay focused on DX.

iShares Barclays 20+ Year Treasury Bond (TLT) 102.41. The objective of this ETF is to duplicate the price and yield performance of the long-term sector of the United States Treasury market as defined by the Barclays 20+ Year U.S. Treasury index. After trading lower to 101.06 on February 9, 2009, it rallied as high as 106.50 on February 11, 2009 and then settled back to 102.41 for a two week decline of 1.34 points. As long term money again seeks riskier asset classes TLT should continue declining and long terms interest rates will increase.

NYSE McClellan Summation Index. During the last two weeks our breadth indicator drifted lower without conviction, but consistent with the range that is developing in the major indexes. Now at 125.52 the decline for the period was 30.55.

Strategy

We remain cautious until the SPX retests and perhaps exceeds the November 21^st low in an Elliott 5^th wave down pattern. We continue to suggest that long positions be hedged with puts, collar or spreads. We now see many issues beginning to form trading ranges providing the opportunity to consider call credit spread at the top of the ranges. We would be more cautious with the put spreads on the lower end of the ranges until we reach the final bottom of the market. Since we think implied volatilities will remain fairly high for some time this could be the time to look for income strategies using covered calls, bear call spreads, butterflies and condors.

IVOLalerts™

In IVolatility Trading Digest™ Volume 9, Issue 3, Political Picks, dated January 19, 2009 we suggested looking for a potential top developing in the profit educational sector. Now we think the time has come to consider a trade.

Apollo Group Inc. (APOL) 81.45. When we included APOL as an alert in Issue 3, it was last trading at 89.22 and was up against resistance at 90. As several positive news articles were released APOL retested the 90 level and then crossed below the upward sloping trendline from the October 10, 2008 low at 48.30 forming a double top. Calculating the double top measuring objective we have 68 as the downside measuring objective. With a current Historical Volatility of 53 and a quite bearish put/call ratio of 2.75 consider this bear call credit spread.

• Sell APOL Mar 80 call OAQCP 6.15 IV 53.17 Delta -.5771
• Buy APOL Mar 85 call OAQCQ 3.70 IV 50.59 Delta .4264
  Credit 2.45 Position net delta -.1507

The credit indicated above is based upon Friday’s middle closing prices between the bid and ask. Considering time decay, the credit Tuesday should be about 2.44 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .15 for each point change in the stock price.

As an alternative consider this bear put spread.

• Buy APOL May 80 put OAQQP 9.10 IV 61.59 Delta -.4126
• Sell APOL May 75 put OAQQO 6.90 IV 63.36 Delta .3347
  Debit 2.20 Position net delta -.0779

The debit indicated above is based upon Friday’s middle closing prices between the bid and ask. Considering time decay, the debit Tuesday should be about 2.19 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .08 for each point change in the stock price.

Gold Update

Gold continues higher and has quietly taken out a previous resistance level turning us somewhat more positive towards the group

SPDR Gold Shares (GLD) 92.55. GLD has taken out the September 29, 2009 high at 92. Now the next challenge is the July 15, 2008 high at 97.50.

In IVolatility Trading Digest™ Volume 9, Issue 4, Refinery Time, dated January 26, 2009 we suggested a bearish call credit spread on Newmont Mining Corp. (NEM) 41.58 when it was 44.44 and about to test previous resistance at 45. It pulled back to 37 as expected, but has now resumed trading higher once again. While it will need to retest and surpass the 45 resistance level once again we do not suggested waiting any longer to close this spread. Here are the suggestions to close the previous trade.

• Buy NEM Mar 45 call NEMCI 1.585 IV 55.72 Delta -.3541 to close
• Sell NEM Mar 50 call NEMCJ .54 IV 54.31 Delta .1570 to close
  Debit 1.045 Position net delta -.1971

The debit indicated above is based upon Friday’s middle closing prices between the bid and ask. Considering time decay, the debit Tuesday should be about 1.00 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .20 for each point change in the stock price. The original credit for this suggestion was 1.90, but the actual price on the next Monday close was a credit of 1.65. A close for a debit of 1.00 would result in a gain of .65.

In the meanwhile, we suggest keeping the Yamana Gold, Inc. (AUY) 8.99 credit call ratio backspread (short Apr 8 call and long 2 Apr 10 calls) with a .075 credit, open as the upside opportunity in this sector for a potential further rise in gold prices.

Short Crude Oil Update

United States Oil (USO) 25.60. This ETF reflects the spot price of West Texas Intermediate (WTI) light, sweet crude oil.

Once again, we see no reason to unwind the now remaining USO bear put position, which is long the April 35 put and short the April 29 put with a debit of 3.10 and a current mark-to-market value of 5.05.

Once again however, we do suggest lowering the SU (stop/unwind), this time to a close above 30 ½ which is just above the previous January 20, 2009 high at 30.20. We are expecting crude to start rising with the spring buildup season and when it does, USO will have to close above 30.20 and then we suggest unwinding the remaining bear put spread position. We will then do a final accounting of all the USO positions when this last one is finally closed.

New Long Suggestions

iShares FTSE/Xinhua China 25 Index (FXI) 26.81. While the FXI has a similar range pattern as the US indexes the fundamentals are more favorable and China is quickly implementing a $585 billion economic stimulus program for machinery, construction and infrastructure. We think it is likely that China will continue growing at higher rates than the OCED countries and that their growth rate will likely resume once again. We think it is about time to get long China once again. With a current Historical Volatility of 62 and declining consider this put sale.

• Sell FXI Mar 25 put FXIOY 1.10 IV 57.76 Delta .3159

The credit indicated above is based upon Friday’s middle closing prices between the bid and ask. Considering time decay, the credit Tuesday should be about 1.03 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .32 for each point change in the stock price.

Use a close below the January 23, 2009 low of 23.42 as the SU (stop/unwind).

Companhia Vale do Rio Doce (RIO) 16.10. If China is successful in restarting its economy then Brazilian mining giant RIO will be one of the beneficiaries. With excellent timing before the markets declined last summer RIO raised $11.5 billion in a secondary stock offering. The recent rise in the Baltic Capsize bulk shipping freight rate index further supports speculation that China is once again ordering iron ore. RIO broke out above the previous resistance at 15 and then pulled back and found support at this level. We think a long strategy is worth considering. The current Historical Volatility is 87 and rapidly declining and the put/call ratio is a very bullish .4 with 3 times as many calls bought compared to puts.

Consider this synthetic long idea with reasonable edge as an alternative for a long stock position.

• Buy RIO Jun 16 call RXOFQ 2.645 IV 72.13 Delta .5895
• Sell RIO Mar 15 put RXOOC 1.02 IV 77.70 Delta .3393
  Debit 1.625 Position net delta .9288

The debit indicated above is based upon Friday’s middle closing prices between the bid and ask. Considering time decay, the debit Tuesday should be about 1.65 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .93 for each point change in the stock price.

A close back below 15 would be the place to place the SU (stop/unwind) and then sell the long Jun 16 call.

Takeover File Update

In IVolatility Trading Digest™ Volume 9, Issue 5, Takeover File Update, dated February 2, 2009 we made two suggestions for Wyeth (WYE) 43.42 in response to the takeover offer made by Pfizer Inc. (PFE) 14.58.

The first was a call ratio backspread that would benefit from any increase in implied volatility and the second was a synthetic long.

Many articles have recently appeared about this deal, some are positive, some have doubts about the ability of PFE to get the financing and some doubt the benefits of the acquisition. We will leave the fundamentals to those more qualified and focus our attention on option strategies. It is likely this deal will take a long time to be completed and may offer some opportunities for income strategies if the implied volatility of the WYE options rise. With an Implied Volatility Index Mean (IVXM) at 19.87 selling strategies are not very attractive. We looked at some possible butterfly spreads, condors and even cover calls, but concluded they are not very attractive from a volatility perspective. Although the 10 day Historical Volatility has declined to 12.55 and is lower than the implied volatility we do not think it is sufficient for selling some combinations. There would need to be some additional uncertainty added to this deal in order for the implied volatility to rise. We did find one call credit spread that has some edge and offer it as another idea to be added to the two previous suggestions.

• Sell WYE Mar 42 ½ call WYECV 1.625 IV 20.24 Delta -.6471
• Buy WYE Mar 45 call WYECI .325 IV 16.18 Delta .2524
  Credit 1.30 Position net delta -.3947

The credit indicated above is based upon Friday’s middle closing prices between the bid and ask. Considering time decay, the credit Tuesday should be about 1.29 if the stock price remains unchanged. Use the position net delta shown above to adjust for any stock price change or about .39 for each point change in the stock price.

We think this deal will most likely take a considerable time to be completed and we think it is unlikely anything will happen between now and the March expiration that would cause WYE to rise very much further. The terms of the deal are $33 in cash and .985 shares of PFE. This values the offer at $47.36 or a 9% discount from the current prices of both companies.

In the event WYE closes lower than 40, thereby closing the gap created from the deal announcement we would use this as the SU (stop/unwind) level.

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. If you would like to receive the Digest by e-mail let us know at Support@IVolatility.com.