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Denzel Washington as ATF agent Doug Carlin in the 2006 Movie Déjà vu reminds us we have been here before.  We are referring to crude oil prices since it was about this time last year they began the long decline.  In IVolatility Trading Digest™ Volume 8, Issue 25, Saudi Oil Summit, dated June 23, 2008 we wrote attention was beginning to be focused on the role of the futures trading in crude oil.  Now finally a year later, Gary Gensler, chairman of the Commodities Futures Trading commission said they are considering implementing position limits on all energy futures contracts which could be in place as soon as October.  Last year the big decline started on July 15, 2008 and this year it appears already to be underway having made a high on June 11, 2009.  At the risk of being late to the trade after last week’s rapid decline, we offer a bear put suggestion for the continuing crude oil decline.  Since the S&P 500 Index is correlated to crude oil prices, we also expect lower equity prices and higher Treasury bond prices as cash once again seeks safe haven.  We update our portfolio record and then we have a long Treasury bond suggestion, a hedge strategy for long oil equity exposure and finally a look at a possible takeover candidate.  As usual, we begin with our market review.
Market Review S&P 500 Index (SPX) 879.42. SPX continued lower last week declining another 17.29 points or 1.93%. The small Head & Shoulders Top we referred to last week has been set off with the close below the neckline at 887.50. We calculate the expected decline to be 68.73 points to a minimum measuring objective down at 818.77. This would most likely be interpreted as a retest of the March low and it could form the potential larger Head & Shoulder bottom that we have been anticipating. We estimated the minimum upside measuring objective of the larger Head & Shoulders Bottom to be up at 1,234. First, however we have to make the 818.77 low. S&P 500 Index Implied Volatility (IVXM). With the SPX decline, the VIX closed at 29.02 up 1.07 while our Implied Volatility Index Mean closed up 1.52 at 26.53. The October VIX futures contract closed with at 11.13% premium over the cash price, compared to the prior week at 10.9%. However, the September futures contract closed with a premium over cash of 11.99%. This suggests the expectation of a rising VIX and therefore a declining SPX in September. The VIX is currently right on its 20-day moving average. We will wait until it is clearly above the moving average before attempting another long VIX trade. US Dollar Index (DX) 80.31. The dollar traded along the 80 level for the week as the safe haven trade momentum shifted to the Japanese yen. Our UUP dollar hedge suggested last week now looks somewhat misplaced if the yen is going to the primary safe haven beneficiary. Some analysts mention yen strength without including reference to the closing of yen carry trades creating yen currency demand to repay yen denominated loans. By the end of the week, the Japanese government said they were watching the currency market and that excessive moves were undesirable. Bank of Japan intervention could come at any time as the yen is now above previous recent intervention levels. This could shift the safe haven focus back onto the dollar causing further problems for crude oil and dollar sensitive commodities. iShares Barclays 20+ Year Treasury Bond (TLT) 96.23. With another 1.93 increase for the week, TLT is in a well-defined uptrend that could be attributed to safe haven buying of Treasury bonds consistent with a stronger dollar, lower equity and lower oil prices. We offer a long TLT suggestion below. NYSE McClellan Summation Index 368.95. Downside momentum resumed last week, as our breadth indicator now appears to be declining at a steady pace. For the week, it was -243.98 as the number of decliners led advancers on the NYSE every day except one.
Strategy Until we see the completion of the small S&P 500 Index Head & Shoulders Top we mentioned above, we suggest caution with respect to new and existing long equity positions. Crude oil appears to be in a downtrend and since the correlation with equities is high, the crude oil downtrend will create a further drag on the broad equity market. In addition, there were reports from Australia on June 30, 2009 that a key Chinese state planning official “has signaled a halt to government buying of copper, aluminum and other high-value metals because prices have risen too high.” While this could just be jawboning in an attempt to slow or even reduce prices in the short term, it does raise another caution flag and it is consistent with apparent risk reduction reflected in the Japanese yen and US Treasury market last week. We suggest using Freeport-McMoRan Copper & Gold Inc. (FCX) 46.64 that we put it into IVOLalerts™ on June 29, 2009 along with the Baltic Capesize Index as indicators to confirm these comments from China. If true, both will have difficulty resuming their previous uptrends.
Portfolio Update For the record, here are three positions closed during last week having exceeded their original SU (stop/unwind) levels. On Monday, we closed our Petroleo Brasileiro (PBR) 35.45 bull call spread, previously suggested in Digest issue number 25, on June 29, 2009, after gapping lower and exceeding our SU (stop/unwind) previously set at 37 ½. We booked a 76.50 loss on closing this spread. In addition, we also closed the Fluor Corporation (FLR) 47.00 short put sale when it traded below 47 ½, the previously set SU (stop/unwind) also from Digest issue number 25, on June 25, 2009. On this one, the loss was 107. Closing these positions adds confirmation to last week’s shift in market sentiment away from cyclical stocks. Then again on Tuesday we closed our Visa, Inc. (V) 59.86 bull call spread when it closed below the previously set SU (stop/unwind) at 60. Also from Digest issue number 25, on June 25, 2009, adding another 56.50 loss. In last week’s Strategy section of IVolatility Trading Digest™ Volume 9, Issue 26, Track Record, dated July 6, 2009 we mentioned many stocks were breaking down after they appeared to be resuming uptrends after making corrections. We are now booking the results as many failed to continue going higher.
IVOLopps™ Returning to the same strategy we suggested this time last year in IVolatility Trading Digest™ Volume8, Issue 27, Bears and Oil, dated July 21, 2008, here is a bear put spread with long vega that benefits from increasing implied volatility as oil declines. United States Oil  (USO) 32.38.  This ETF reflects the performance of the spot price of West Texas Intermediate (WTI) light, sweet crude oil.  The fund invests in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges.  With a current Historical Volatility of 39 here is bear put spread to test the presumption that USO will continue down and retest the 27 ½ level.
The mid price for this spread on Friday was a debit (Dr) of 1.50 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be about 1.48 as shown above in the “E Price” column. Use the deltas for each leg to adjust for any price change of the underlying or use the net spread delta for spread orders. Use a close above 33 ¾ as the SU (Stop/unwind). Long Bonds Next, we turn our attention to one of the safe haven alternatives. iShares Barclays 20+ Year Treasury Bond (TLT) 96.23. With a current Historical Volatility of 30.21, consider this bull call spread for a continuation of the uptrend in the long Treasury bonds.
The mid price for this spread on Friday was a debit (Dr) of 2.575 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be about 2.555 as shown above in the “E Price” column. Use the deltas for each leg to adjust for any price change of the underlying or use the net spread delta for spread orders. Use a close below the last pivot low at 93.39 as the SU (stop/unwind). With a 7-point difference in the strike prices, this spread has the potential to almost double in value if TLT continues trending higher. Oil Hedge In IVolatility Trading Digest™ Volume 8, Issue 49, Santa Claus Rally, dated December 22, 2008 we suggested a BP Plc. covered call as a hedged value position when it was 44.90. Now as it approaches this level once again we return and suggest selling another call as a hedge. BP plc (BP) 45.22. London based BP operates in two segments, Exploration & Production, and Refining & Marketing worldwide. In the western US they are the retail gasoline price leader with their many ARCO self-service stations.
With a current Historical Volatility of 29, consider this covered call as a hedge against the 100 share long stock position.
The mid price for this spread on Friday was a credit of 1.80 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be about 1.75 as shown above in the “E Price” column. If we are right about USO and it declines back to 27 ½ then BP could be on the way to retesting the 40 level. In this event, we will need to adjust our call sale strike price as it declines. After the initial stock purchase and the expiration of the first call sale in April then a long April put spread our adjusted basis is 41.26. In addition, we have collected two dividends of .84 each, total 1.68 and we expect to collect another in the middle of August. There is good support at 40 but there is a risk that BP will cut the dividend causing the stock to decline beyond our current expectation level. We think this is unlikely before the August dividend payment. Takeover File Direct from the “Options Data Analysis” and the “Rankers & Scanners” sections of our home page we offer this “Stock Trend Analysis” suggestion as a regular feature for your consideration. The selection criterion includes an Exponential Moving Average, Relative Strength Index and the Chaikin Money Flow indictor and more. For more details click here . Last Friday the Stock Trend Analysis selection was a company previously involved in an attempt to acquire another company. NetApp, Inc. (NTAP) 19.21. Sunnyvale based NTAP, a leader in the market for mid range data storage equipment may become an acquisition target after EMC Corp won the bidding for Data Domain last Wednesday with a $2.4 billion offer. Speculating analysts suggest there are several large potential buyers including IBM, HP and perhaps CSCO. After briefly dropping below its upward sloping trendline it has now once again turned higher with a bullish rank of 55.56%. With a current Historical Volatility of 45, consider this bull call spread.
The mid price for this spread on Friday was a debit (Dr) of .75 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be about the same as the time decay is offset by the spread and is shown above in the “E Price” column. Use the deltas for each leg to adjust for any change in the stock price or use the net spread delta for spread orders. Use a close below the most recent pivot at 18 as the SU (stop/unwind).

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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