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Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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In this, the third of our seasonal series we are looking at gold since it has been conforming to its expected seasonal pattern. We offer a suggestion, not using gold, but silver. Then we have some comments about the amazing capabilities in our newly introduced IV Graph tools then suggest closing three positions in the adjustments section. First, the market review.
Market Review S&P 500 Index (SPX) 1004.09. The expected pull back to the breakout above 950 may have begun last week as SPX declined 6.39 points or .6%, as the volume also declined from June’s levels. Looking at the SPY see the volume was 275 million shares on June 11th compared to last Friday’s volume of 200 million shares, a decline of 27%. Since this is the August vacation season, this may be the best we can expect and ideally, we would like to see declining volume on any pullback. E-mini S&P 500 Future (ESU9) 1005.75. The decline for this actively traded futures contract was just .75 for the week and the corresponding decline in volume for August is comparable to the SPY. The June 11th volume was 3.4 million contracts compared to last Thursday’s volume of 1.8 million, or 47% less volume. S&P 500 Index Implied Volatility (IVXM). The volatility measures continued lower last week as our Implied Volatility Index Mean declined 1.05 point to 21.62 while the VIX declined .49 to 24.27. The September VIX futures, premium over cash increased from 13.3% premium to 16.6%, while the October increased from 17.3% to 20.9%. Noteworthy was the increase in the Implied Volatility Mean Index of the VIX options rising 49.42 point to 112.95 while there were actually more puts traded than calls on Friday. In the section below, “Looking at VIX Options,” we show an unusual call and put value relationship suggesting a lot of put selling. US Dollar Index (DX) 78.73. The dollar index declined .25 for the week while maintaining its positive correlation with equities for the second week. As we mentioned last week this positive relationship would be important, if it continues.  iShares Barclays 20+ Year Treasury Bond (TLT) 93.35. Long-term bonds reversed again rising 2.86 for the week. The 90 level, corresponding to yield of 4.66 is developing into an important support area. We suspect bonds are being supported to keep long-term interest rates from rising further. For now, it looks as if long-term interest rates are being managed. NYSE McClellan Summation Index 1378.18. Our breadth measure continued higher again last week, but at a much slower rate as the increase was just 21.53 points. We wonder if it may be near another inflection point, but this could also be just more of the August low volume effect. Baltic Capesize Index (BCI) 4708. Our long route dry-bulk shipping index closed 264 up on the week reversing the prior week’s decline. August is a slow period in the shipping industry and if the BCI continues to decline in September it would be a concern as it could be indicating China’s raw material restocking had been completed as previously reported.
Strategy We are operating on the premise defined by the Head & Shoulders bottom with its measuring objective of at least 1233.29, lasting until October. Previously we noted resistance at 1,000 and then again at 1,100, meaning it will have some difficulty with these levels and we are seeing that now here at 1,000.    We continue to favor stocks and ETF’s that have broken out with the broad market and remain wary of those with potential double top formations. Because several material and commodity stocks are now overextended, we do not suggest any new positions in these sectors, but will wait to see if they correct providing more future opportunities.   For new long positions, we suggest using bull call spreads with long volatility or Vega as we are still expecting a seasonal increase in implied volatility going into October.
The Amazing IV Graph We recently introduced a new IV Graph service designed for those who want more options information from our extensive databases.  For example, if you want to plot the options price for the last month, or perhaps you want to see the relationship between the Parkinson’s Historical Volatility and the annual rate of change Historical Volatility method, then these will be a useful new tools.  Here are some examples of the many different combinations that can be created using IV Graph.  We selected our favorite copper stock, which we still have in the Alerts file, as an example.  Freeport-McMoRan Copper & Gold Inc. (FCX) 63.65.  In addition, for the option, we selected the November 70 Call option, FHZKN.  The top frame shows the OHLC price chart of FCX for the prior six months.  In the second frame, we see the November 70 call and notice that although the stock price is now higher than in mid June the November 70 call is still below its mid June peak.  In frame three, we show the Historical Volatility of FCX using the Close-to Close calculation method and then we compare it to the Range Method in the final frame.  Other available selections include individual and total options volume, options open interest, implied volatility, implied volatility surfaces and many others.  For those interested in the real “nitty gritty” of options this is an amazing addition to the toolbox.
Graphs of FCX data as of 8-14-09 using IV Graph.
Looking at VIX Options Here is an extract from Friday’s list for the VIX October options.
Note the disparity in the implied volatility between the puts circled in red and the calls just above for each strike price.  If there we no volume shown for the put it would indicate old price quotes not actual implied volatility numbers, but that appears not to be the case as both put series traded during the day, in the case of the 22 ½ put the volume was 15,500 contacts.
Portfolio Adjustments We have three positions to close from previous issues. First from last week’s Digest issue 31, Best Calendar Spread, we now suggest closing this as the near term implied volatility has declined after the FDA approval event that created the opportunity. This was an event trade and it has occurred. Amgen Inc. (AMGN) 60.85. For the week, the stock was up .36, but the implied volatility of the October 60 call declined from 54.20 to 27.15 as the option price decline from 3.05 to 1.46, and will decline even more by Monday from rapid time decay. In the meanwhile, the implied volatility of our long Oct 60 call declined from 35.97 to 30.87 as the option price declined from 4.425 to 3.575. As of Friday, the position had increased in value by $70 after commissions. Unless there is big price change Monday the gain will be a bit better as the Aug option will decline more than the Oct before we can close it. Here are the trades to close.
The mid price on Friday was a credit (Cr) of 2.12 as shown in the “Price” column above.  Adjusting for time decay the estimated price on Monday should be about 2.22 as 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.  For those who may want to follow it closely we will be sending out the actual closing prices on Monday by twitter. Amylin Pharmaceuticals Inc. (AMLN) 13.23.  From Digest issue 25 we have decided to close this covered write position since it is now trending lower and since the market could be somewhat weaker in the near term, we want to reduce our risk with this one.  Here are the closing details.  Step one:  Sell 100 shares of AMLN. Then, buy back the short call to close.
The mid price on Friday was .70 as shown in the “Price” column above.  Adjusting for time decay the estimated price on Monday should be about .67 as shown above in the “E Price” column.  Use the delta to adjust for any change in the stock price.   Coach Inc. (COH) 28.55.  From Digest issue 29, we were using Coach as our retail strength and market trend continuation indicator and because it’s now turning lower we suggest closing this one as well.  Here are the closing details.
The mid price on Friday was a Credit (Cr) of .725 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 any change in the stock price or use the net spread delta for spread orders.
IVOLopps™  Golden Silver Last - but not least, is our seasonal feature.  We decided to use silver as a proxy for the expected seasonal price increase in gold as a risk reduction strategy since they are both already fairly close to their May highs and we want to reduce our risk in the event they stall creating a double top. They are highly correlated and by using less expensive stocks or ETFs, we reduce the initial margin requirements and the total at risk. iShares Silver Trust (SLV) 14.43. The iShares Silver Trust is a grantor trust holding silver bullion.  The net asset value is quoted on the AMEX with the symbol SLV.NV; Friday’s NAV quote was 14.83. With a current Historical Volatility of 27 and with an Implied Volatility Index Mean of 38.42 currently there is a positive volatility spread as shown below.
The rising implied volatility means the options are pricing in greater price movement that is currently reflected in the actual movement of the ETF.  Since the implied volatility is rising and our volatility forecast is for higher implied volatility we want to use strategies that benefit from higher expected volatility, positions with more long options than short options that have positive Vega.  Here is one idea.
The mid price for this spread on Friday was a debit (Dr) of .95 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 price of the underlying ETF or use the net spread delta for spread orders. We suggest setting the SU (stop/unwind) at a close below the current upward sloping trendline from  the July 13th pivot low at 12.27 touching the July 29th low at 12.97. A close below this trendline, currently about 13.75, would mark the place to reevaluate and most likely close it out. The theoretical maximum value of this spread is the difference between the strike prices, or $3 (17-14) and the theoretical maximum gain for our spread is $2.05 (3.00 -.95). Our potential gain is 2X our defined, yet limited risk, and we have allowed enough time for it to reach its maximum value since our seasonal expectation for gold and silver is sometime in December. In addition, we have a volatility edge since the option we are selling is more expensive in implied volatility terms than the one we are buying (40.27 vs. 37.35).
Visit us on twitter for more ideas from our scanners and portfolio updates, including positions closed or unwound during the week.
IVolatility.com Bookstore.  In addition to the vast number of articles and information on our web site, visit our bookstore for more reference information and material.                                      In next week’s issue, we have several more suggestions that we would have suggested this week if there were enough space and time, including a few more trend continuation ideas.

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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