Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Winter Solstice occurs exactly when the earth's axial tilt is farthest away from the sun. Depending on the shift of the calendar, the winter solstice occurs between December 21 and December 22 each year in the Northern Hemisphere, and between June 20 and June 21 in the Southern Hemisphere. In most cultures, it is a time for festivals, gatherings, rituals celebrations and holidays. Since this is the last Digest of the year, it is also the time when we begin thinking about changes to maintain relevancy. Therefore, we are going to ask for your suggestions and comments. First, we offer our market review and then one suggestion.
Market Review S&P 500 Index (SPX) 1102.47. Last week SPX lost 3.94 points just about the same amount it gained in the prior week. However, since it made a new high of 1119.13 on December 4th a new upward sloping trendline has been established from the March low. With Friday’s close SPX is right on the new trendline. While we are watching the new trendline along with other minor trend change indicators we are still maintaining our minimum upside objective at 1233.29 shown in our Head & Shoulders Bottom chart in Digest issue 36. For now, the question is whether equities will be able to survive the stronger dollar. E-mini S&P 500 Future (ESHO) 1097.75. Since the December E-mini future contract expired we are now using the March 2010 contract. Including the rollover serge, open interest peaked at 3.5 million contracts compared to about 3.1 million in September and since expanding open interest is required for the continuing trend the futures are still supporting the bullish view. S&P 500 Index Implied Volatility (IVXM). Our Implied Volatility Index Mean increased .08 to 18.45 while the VIX increased .09 to 21.68. In the meanwhile the Historical Volatility continues to decline from 16.60 to 13.87 and a new 52-week low. For the VIX Futures, January closed at 24.10, 2.42-point premium over the cash at 21.68. February closed at 26.40, or a 4.72-point premium. Using Larry McMillan’s day-weighted average between the first and second months, we calculated the premium to be 2.60 points compared to a premium of 3.83 points the previous week. When the futures are selling at a premium, they are giving a sell signal and presumably the strength of the sell signal and the market risk increases as the premium increases. Using this short- term measure the strength of the sell signal diminished last week. The adjusted implied volatility of the at-the-money VIX January call based upon the futures increased from 58.33 to 69.60 and the put increased from 62.46 to 65.00. The February call declined from 66.58 to 61.17 and the put declined from 69.76 to 61.45. The Historical Volatility based upon cash declined from 109.95 to 90.57. US Dollar Index (DX) 77.82. DX reflects considerable weakness experienced by the Euro on the news of sovereign debt concerns and the potential changing fundamentals in the foreign currency markets. DX moved substantially higher than the 75- 76 ½ range that we suggested in Digest issue 42. Now the new target trading range is 78-79. Reciprocal weakness in gold was not shared by equities or crude as both held up well as the dollar advanced. iShares Barclays 20+ Year Treasury Bond (TLT) 92.79. TLT increased .70 points on the sovereign debts news and the apparent flight to the safety of Treasury bonds as the equivalent long-term Treasury yield declined 4 basis points to 4.45%. NYSE McClellan Summation Index 596.18. The NYSE breadth indicator continued to improve last week adding another 99.42 points but the oscillator is back to the zero line. Until momentum improves, we will continue flying the caution flag.   Baltic Capesize Index (BCI) 4566. Our preferred Baltic dry-bulk shipping rate index for the larger ships continued declining last week, this time another 627 points or 12%. We are now beginning to think this yearend weakness will carry over into the New Year. In the other important segment, the Capital Link Tanker Index increased again by 150.04 points or 7%. So weakness in the dry-bulk trade is being offset by strength in tankers. Until we see some improvement in the dry-bulk rates, we continue flying the caution flag.
Strategy The decoupling of equities to the rising dollar that we mentioned last week now appears to be a good possibility and we may now begin to see the unwinding of the “great carry correlation trade of 2009.” Surprisingly crude oil reversed higher as the dollar advanced along with long Treasury bonds. Although SPX equities declined slightly they were remarkably resistant to the rising dollar. In addition to the dollar strength there is relative strength in the tanker market and there are opportunities selected special situations in the tech and biotech sectors for those who may want to sell some premium over the slower holiday period. For some specific ideas look at our regular “Top 5 stocks based on IV Index Mean vs 30D HV” located in the Rankers and Scanner section on our home page.  Top 5 stocks by implied volatility change. Dollar Strength Since the US Dollar index is above the forecasted range in Digest Issue 42 we are now suggesting another long dollar position. News of increasing sovereign debt concerns may be changing the fundamentals in the foreign currency markets. As a result, here is another long dollar position as a trend continuation trade. Our last long dollar attempt was made in Digest Issue 47 but unfortunately, we closed it prematurely. Now with the concern of changing fundaments we return. PowerShares DB US Dollar Index Bullish (UUP) 23.01. With the current Historical Volatility of 12.50 and the Implied Volatility Index of 14.33, consider this long call spread.
The mid price for this spread on Friday was a debit (Dr) of .325 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be just 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. Use a close back below 22 ½ as the SU (stop/unwind). Ideas, Suggestions, Comments and Questions In a continuing effort to maintain relevancy in this last Digest Issue for the year we would like to ask for your feedback. Please take a few minutes and let us know what you think. To help generate some responses ideas here are a few thoughts to consider.
Too long - or perhaps, too short. Too much detail and it does not make sense. Reduce the verbiage and give tables loaded with good trading ideas. Is the Market Summary section relevant or redundant? Is it delivered on the best day of the week? If not, is there a better day? Should it be more “how to do” focused on the application and results from our ranker and scanner tools? Should we have content that is more educational and fewer trading suggestions? Should we explain strategies in more detail? Should we reduce the explanations and generate more specific trading ideas? Should we focus more on specific options application opportunities, such as takeovers, quarterly reports or hedging strategies?
We will be making some changes for 2010 so your comments will be greatly appreciated in helping us to produce relevant content. If you prefer not to respond using our blog then send your suggestions comments, questions and complaints directly to us at support@ivolatility.com . If you would like to discuss it in detail on the phone, give me a call after the New Year at 646 401-1190. Last Digest Issue for 2009 The next issue is scheduled for January 11, 2010.
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 on our web site, take a browse through our bookstore for more reference information and material.
In next week’s issue, we will summarize all of the suggestions comments and questions followed by a review of proposed changes for 2010.

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.