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After working for three weeks to build up the hedges we are beginning to feel they may not be necessary.  The financials now seem to be supporting the equity market so we are changing our view and unwinding our financial sector hedge and closing a few other positions that have time decay or negative Theta.  For now, we will keep the hedge on the long US Treasury bond with TBT and on the S&P 500 Index with the SPY and the VIX.  After the market review, we have suggestions for a few adjustments and a new spread idea with positive Theta.
Market Review S&P 500 Index (SPX) 919.14.  With a gain of 32.14 points or 3.6% SPX shows no signs that it is about to turn lower any time soon.  While the upside trendline has been broken and we continue to expect a retest of the market low it now appears that SPX and many other equities are trading in a range that may continue for awhile.  If this is the current character of the market we can expect to see  options implied volatility continue to decline.    S&P 500 Index Implied Volatility (IVXM). After opening higher both of our volatility measures reversed and closed below 30.  By the end of the week, the VIX was lower by 3.71 at 28.92 and our Implied Volatility Index Mean closed at 25.83 off 2.95.  A continuing decline in implied volatility could also be signaling a range bound market.  US Dollar Index (DX) 79.23.  The US Dollar continued lower after attempting to rally off the 80 support level from the summer of 2007.  On Friday, it made a noticeable decline and closed the week well below 80. The next support looks to be down in the 78 area.  The PowerShares DB US Dollar Index Bearish (UDN) 26.94 ETF could be considered as a hedging tool since the options volume has now increased, but it is still light so liquidity continues to be an issue.  Currently DX looks oversold, but we will offer some idea in future issues.   CurrencyShares Japanese Yen Trust (FXY) 104.39.  As we expected the Yen reversed just above the 105 level and we suspect Bank of Japan intervention was responsible. They may have set their targets at 105 on the upside and 100 on the downside.  If it stays in this range, it will lose its significance as an indicator once again.  iShares Barclays 20+ Year Treasury Bond (TLT) 94.17.  After trading as low as 90.23 last Thursday, TLT made a sudden reversal from this apparent oversold condition.  Chances are this was is an oversold rally and it will turn lower once again resuming the downtrend.  NYSE McClellan Summation Index 1058.00.  The rate of decline in our breadth indicator slowed again this week to just -18.41 ending at 1058.00.  It still remains above 1000 reflecting the range bound sideways trading we now see in many NYSE listed stocks.
Strategy Although the SPX remains below the upward sloping trendline, it appears to be attempting to turn higher once again. Many individual equities appear to be in a sideways trading pattern and this could continue for some time. We are lifting our hedging in the financials, but will keep them in place in the SPX and VIX for now. The continued weakness in the US Dollar is helping to support crude oil, and the commodities including gold, however the gold equities are now overbought. While we are still expecting a retest of the March lows, it looks as if it will be delayed for now. With the weaker dollar supporting raw materials, oil, oil services and agriculture related stocks some additional long positions are likely to do well in these sectors. If we are right about this range bound market, look for options strategies with positive time decay for example, short puts, calendar spreads credit spreads and condors.
Portfolio Adjustments In IVolatility Trading Digest™ Volume 9, Issue 18, Getting the Hedge Ready, dated May 11, 2009 we offered a hedging suggestion based upon the premise that the financial sector would lead a market correction.  Since this has not occurred and many stocks including the financials appear to be in a range we suggest unwinding this call spread hedge that currently has positive time value, or theta before it turns into negative time value in about two weeks.   Direxion Financial Bear 3X Shares (FAZ) 4.70.
On Friday, the mid price for this spread was a credit (Cr) of .875 as shown in the “Price” column above.  Adjusting for time decay the estimated price on Monday should be unchanged as shown above in the “E Price” column.  Use the deltas for each leg to adjust for the change in prices of the underlying or use the net spread delta for spread orders.  Selling this spread three times to close as shown in the “O/C” column above will reverse our existing long spreads resulting in a small gain or loss depending upon the closing prices on Monday. In IVolatility Trading Digest™ Volume 9, Issue 13, Big Money, dated April 6, 2009 we suggested two Calendar Spreads on Wells Fargo & Company when it was 16.34.  Subsequently we made five adjustments to this position in attempt to keep it alive on the theory the stock would correct back into the mid teens.  The expected correction has not come and the sum total of all positions has negative delta and negative theta.  Since we no longer have the view that WFC is going to correct in time to benefit our positions it is time for them to be unwound.   Wells Fargo & Company (WFC) 25.50.   Here are the two spread trades needed to unwind the WFC positions.
On Friday, the mid price for this spread was a credit (Cr) of .40 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be about .38 as shown above in the “E Price” column. Use the deltas for each leg to adjust for the change in prices of the underlying or use the net spread delta for spread orders. Selling this spread two times to close as shown in the “O/C” column above will reverse our existing long spreads resulting in a small gain or loss depending upon the closing prices on Monday. Since both legs are in-the-money the estimates above may have to be adjusted for the bid/ask spread.
On Friday, the mid price for this spread was a credit (Cr) of .92 as shown in the “Price” column above.  Adjusting for time decay the estimated price on Monday should be about the same as shown above in the “E Price” column.  Use the deltas for each leg to adjust for the change in prices of the underlying or use the net spread delta for spread orders.  Selling this spread to close as shown in the “O/C” column above will reverse our existing long put spreads resulting in a small gain or loss depending upon the closing prices on Monday.  In IVolatility Trading Digest™ Volume 9, Issue 10, The Magic Sum, dated March 16, 2009 we suggested two takeover positions for the Merck/Schering- Plough proposed combination.  From what we can tell, it appears this deal will be completed as announced without any other competing offers for Schering-Plough.  Since both spreads have negative time decay, or theta we suggest they both now be closed.     Merck & Co. Inc. (MRK) 27.58
On Friday, the mid price for this spread was a credit (Cr) of 1.03 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be about the same as shown above in the “E Price” column. Use the deltas for each leg to adjust for the change in prices of the underlying or use the net spread delta for spread orders. Selling this spread to close as shown in the “O/C” column above will reverse our existing long call spread resulting in a small gain or loss depending upon the closing prices on Monday. Schering-Plough Corp. (SGP) 24.40.
On Friday, the mid price for this spread was a credit (Cr) of .75 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be about .73 as shown above in the “E Price” column. Use the deltas for each leg to adjust for the change in prices of the underlying or use the net spread delta for spread orders. Selling this spread to close as shown in the “O/C” column above will reverse our existing long call spread resulting in a small gain or loss depending upon the closing prices on Monday. Last week in IVolatility Trading Digest™ Volume 9, Issue 20, Still Building Hedges, dated May 26, 2009 we suggested a call credit spread for Sears Holdings since we thought the upside was limited while there could be some downside pressure. Since the stock did not decline as expected and because it looks to now seems be trading in a range with many others we suggest converting the call credit spread into a Condor with the addition of a put credit spread. In addition, Sears Holdings was our Best Calendar Spread selection on our web site Friday. Sears Holdings Corporation (SHLD) 56.85.
This additional put spread does not have volatility edge, as the put we are buying is a bit more expensive in volatility terms than the one we are selling. However, if the stock remains in 50- 63 range for the next 18 days until the June expiration we can add $54 of income with no further margin requirement since we have already have $580 in initial margin for the call side. Since the position has negative Vega we also benefit from the current declining volatility trend and reduce our upside price risk. IVOLopps™ In a range bound market, which this one appears to be in, we ideally want stocks or ETFs that still have high, but now declining implied volatility without taking on excessive price movement risk. Here is one idea. Las Vegas Sands Corp. (LVS) 9.91. This casino company owns and operates the Venetian, Palazzo and the Sands Expo and Convention Center in Las Vegas, Nevada and the Sands Macau, the Venetian Macao and the Four Seasons Hotel Macao, Cotai Strip in Macau. The company is also developing the Marina Bay Sands, in Singapore and the Sands Bethlehem, Pennsylvania. After being below $2 a share in March LVS has rebounded on capital restructuring news and new loan agreements as well as a new CEO. Since people have not stopped going to Las Vegas or Macau the casino sector has rebounded. LVS is expected to report second quarter earnings on about July 30, 2009 and in the meanwhile, we think it is probable that the stock will trade in the 8-13 range that was formed after the first quarter report. LVS expects to open the Marina Bay Sands in Singapore in December so we can expect the news reports on its progress to support the stock price. With a current Historical Volatility of 138 and declining, consider these two credit spreads making an Iron Condor. Call Credit Spread
Put Credit Spread
Using the estimated Monday prices shown above these spreads would produce a combined credit of 1.41. The net Condor estimated Greeks are Delta -6.11, Gamma -4.48, Theta .98 and Vega -.74. The initial margin requirement for the call spread is $342 and the put spread is $241 so our requirement is the lager of the two or $342. In conclusion, if LVS does its part and stays within the 8-13 range for 45 days until the July options expiration we could realize $141 on a $342 margin requirement, or 41%. Short Put in Brief Before we finish we want to offer one more short put sale for consideration. Patterson-UTI Energy Inc. (PTEN) 14.34
The current Historical Volatility is 81 and declining while the Implied Volatility Index Mean is 68. Assuming oil prices hold up and the oil service stocks remain favorable for the next 45 days until the July options expiration the return could be $66 on an initial margin requirement of $191, or 35%.  Keep in mind as the stock declines the margin requirement will increase so this is a best-case estimate of the margin requirement.  We suggest using a close below 12 ½ as the SU (stop/unwind).  If it declines near this level, you may want to consider taking the stock by assignment in the event it closes below the strike price on the July options expiration. This was the support level for the last pivot and could again act as support.  The additional margin requirements for the long stock will need to be considered among other factors in making the decision.

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.

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