Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Calm Before the Storm is the debut album of Canadian country music artist Paul Brandt, released in 1996 on Reprise Records. Our reference is more ominous referring to the current state of the equity market. The concern is about the declining volatility and the extended current uptrend both of which could be quickly reversed. We have more in the S&P 500 Index and Strategy sections below. We also have a few more portfolio adjustments to make including some sales in the resource sector, a retail alert and another hedge in anticipation of a market decline and then as usual another short put suggestion. First, our market review.
Market Review S&P 500 Index (SPX) 946.21. SPX is in a tight upward trending channel just under 950 having made several closes above the previous January 6, 2009 resistance at 943.85. For the week, the gain was 6.12 points or .65%. It looks as if the narrow upward trending channel could continue for some time as it appears to be neither overbought nor oversold in this slow rising pattern. S&P 500 Index Implied Volatility (IVXM). Once again, both volatility measures declined for the week. The VIX closed at 28.15 and our Implied Volatility Index Mean closed at 24.49. Until the VIX closes below 27, we will keep the VIX spreads open that we suggested in IVolatility Trading Digest™ Volume 9, Issue 20, Still Building Hedges, dated May 26, 2009. US Dollar Index (DX) 80.13. The most recent DX rally took it above the active downward sloping trendline and it now appears to be following the slope of the trendline lower. It could be attempting to make a consolidation pattern after testing the 78 level. If so, it will likely be a continuation pattern so our bias remains to the downside. iShares Barclays 20+ Year Treasury Bond (TLT) 89.97. After trading as low as 87.56 TLT reversed and closed the week just under 90. In order to reverse the current downtrend it would need to close above 92 ½. For now, the odds continue to favor the downside. NYSE McClellan Summation Index 1123.66. The breadth indicator seems to be reflecting the character of the market as last week it declined by 40.05 while the SPX was higher for the week. This divergence if it continues could be important and should be carefully watched.
Strategy While we acknowledge having been too cautious and wrong for several weeks, the equity buying now seems less enthusiastic and since it takes continuous buying to push the market higher, we wonder what could be the catalyst for its continuation. Perhaps the upcoming end of the second quarter window dressing by mutual funds will provide the needed buying support. It seems likely short-term traders and hedge funds would be using any expected mutual fund buying as an opportunity to begin rotating out of the current leading sectors. If so, watch for deteriorating market internals as the major indexes continue higher. We think it is prudent to begin unwinding positions in the leading sectors and establishing shorts as hedges.
Portfolio Adjustments We start our portfolio adjustment section with a correction for the closing suggestion we made last week for Wyeth (WYE) 44.80. Our position was long two July 45 calls so we need to sell the one remaining that was not included last week.
The mid price on Friday is shown in the “Price” columns above.  Adjusting for time decay the estimated price on Monday should be as shown above in the “E Price” column.  Use the delta to adjust for any price change. Freeport-McMoRan Copper & Gold Inc. (FCX) 58.51. We suggest unwinding the FCX bull calls spreads that we last suggested in IVolatility Trading Digest™ Volume 9, Issue 16, No More Java, dated April 27, 2009 when it was 40.93. Both of the spreads are now deep in the money and there appears to be a Head & Shoulders Top in gold that is of concern.  In addition, we are starting to see some selling in other resources that looks like profit taking.   Here are the trades to close both of the open positions.
The mid price for this spread on Friday was a credit of 1.65 as shown in the “Price” column above. The estimated price on Monday should be about the same as the time decay is offset in the spread and is 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. Our cost basis is .92.
The mid price for this spread on Friday was a credit of 4.15 as shown in the “Price” column above.  The estimated price on Monday should be about 4.18 as is 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. Our cost basis is 2.025.  iShares Silver (SLV) 14.63. Assuming there is a Head & Shoulders Top in gold then we arrived too late for the party when we made this suggestion last week.  Here is the trade to unwind.
The mid price for this spread on Friday was a credit of .95 as shown in the “Price” column above. The estimated price on Monday should be about .94 as is 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. Our cost basis is 1.045. Hartford Financial Services Group Inc. (HIG) 12.95. In IVolatility Trading Digest™ Volume 9, Issue 20, Still Building Hedges, dated May 26, 2009 we suggested an Iron Condor for HIG when it was 15.02. The plan was of it to stay in a range between 12 ½ and 17 ½ until the June expiration and we planned to keep the original credit of .76. On Friday it accelerated to the downside, so we suggest unwinding this trade by buying back the short June 12 ½ put and giving up some of our original credit to reduce the risk since we do not want to be assigned stock in an environment when we are expecting a market correction.
The mid price for this put on Friday was a debit .425 as shown in the “Price” column above. The estimated price on Monday should be about .32 as shown above in the “E Price” column. Use the deltas to adjust for the change in prices of the underlying.
High Volatility Thriller Update  Last week in IVolatility Trading Digest™ Volume 9, Issue 22, More Hedge Trimming, dated June 8, 2009 we suggested Savient Pharmaceuticals Inc. (SVNT) 9.26 when it was 7.20.  After declining down to under 6 on Thursday it rebounded to close up 3.33 on Friday.  This is indeed a volatility thriller and our options all expire on Friday.  While the move on Friday as substantial it was not enough to help our long calls.  We suggest letting it ride to see if there is more upside to come.  If it closes below 10 then we keep to original credit of .15.  If it closes above 10 but below 12 ½ we get no help from our long calls as they will expire.  Ideally we would like to see a close above 12 ½.  Stay tuned for the conclusion, we will report the result next week.
IVOLalerts™ From time-to-time, we see an interesting suggestion but the timing is not quite right so we put it in the Alerts category.  If it changes direction before the next Digest then consider it.  We will be watching it and will include it when we think the timing is right.    Visa, Inc. (V) 64.36.  Visa, Inc. operates a worldwide retail electronic payments network. In the last week, the stock declined from above 70 on news that interchange fees are under attack in Washington.  Since late January when V was under 45 it has been in a defined uptrend that would require a close below 62 to change the direction.  This could be a normal correction and it is worth watching.  What caught our attention was the volatility skew.  The call implied volatilities were 40.06 while the puts were 37.62.  This can change daily, but is worth investigating for a stock with good options volume as may indicate the calls were being bid higher as the stock declined. IVOLopps™ Another Hedge Strategy Since we still think the chances are good we will see a correction in the near future we want to continue looking for hedging opportunities. Here is one constructed using the retail ETF with positive theta or time decay value for the next month while we wait to see if the correction materializes. If we see rotation out of the recent leading sectors then retail will most likely be included with the selling. SPDR S&P Retail (XRT) 28.10. With a Historical Volatility of 42 and a high bearish put call ratio of 4 consider this combination strategy of selling a bearish July call credit spread and buying a bearish September put spread.
The mid price for this spread on Friday was a credit of .825 as shown in the “Price” column above. The estimated price on Monday should be about .81 as is 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. This spread with negative delta has positive theta or time decay and will be useful to offset the negative time decay of the put spread below until its July expiration.
The mid price for this spread on Friday was a debit of .875 as shown in the “Price” column above.  The estimated price on Monday should be about .87 as is 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. The combination of these two spreads gives us a low cash cost position with a net debit of .06 with an estimated initial margin requirement of $482.  It has an initial net negative delta of about -36.45, a slight negative gamma of -.20, positive theta of .31 and the vega is mostly offset at -.01.  This position tests the thesis that we may have a market decline that could come toward the end of June or in the first part of July without negative time decay while we are waiting. With negative delta our price risk is to the upside so we want to set the SU (stop/unwind) and /or adjust at a close of the underlying stock back above the most recent high at 30. Short Put in Brief
Higher crude oil prices along with China’s emphasis on the development of massive solar projects have put a new shine on the solar stocks. While the group appears to be overbought here is one that has recently pulled back from its breakout. With a current Historical Volatility of 133 consider this put sale as long alternative. LDK Solar Co.Ltd. (LDK) 12.50.
The mid price for this spread on Friday was a credit of .70 as shown in the “Price” column above. The estimated price on Monday should be about .67 as is shown above in the “E Price” column. Use the delta to adjust for the change in the price of the underlying. Use a close below 10 as the SU (stop/unwind). In the event of a close below it may be considered as an opportunity to acquire stock by assignment depending upon market conditions and the available excess margin as this would be an attractive alternative if crude oil prices remain high.

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.