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As this Digest title suggests, this week we continue cutting back on our hedges and offer this thought in the process.  When the facts change, I change my mind.  What do you do, sir?  – JM Keynes The widely followed broad based S&P 500 Index continued higher last week and is now beyond our upper limit so the time has come to close our bear put spread we were using as a partial equity hedge.  We provide the details below along with other adjustments.  Then we offer another suggestion for long Treasury bonds, two more ideas for commodity related stocks and then finish with another high volatility thriller.  We begin with the market review.
Market Review S&P 500 Index (SPX) 940.09.  Once again, SPX continued higher with a gain of 20.95 points or 2.3%.  The important prior January 6, 2009 high at 943.85 was exceeded last Monday and then on Tuesday it closed above it 944.74.  With the new high, we once again redraw our upward sloping trendline putting SPX back above the new trendline.  While there is some selling at the 950 level it appears our long awaited correction is once again delayed.  Since the facts have changed, we now suggest unwinding the SPX hedge that we first suggested in IVolatility Trading Digest™ Volume 9, Issue 19, Seeking Another Hedge, dated May 18, 2009. S&P 500 Index Implied Volatility (IVXM).  Both of our volatility measures were higher by .70 for the week, the VIX closed at 29.62 and our Implied Volatility Index Mean closed at 26.53.  For now, we will keep the spreads open on the VIX that we suggested in IVolatility Trading Digest™ Volume 9, Issue 20, Still Building Hedges, dated May 26, 2009.   US Dollar Index (DX) 80.67.  After testing last December‘s lows just above 78 the US Dollar staged a rally on Friday closing up 1.236 on the day at 80.67.  However, since the dollar is in a downtrend we suggest looking for the next opportunity to establish a short position.   CurrencyShares Japanese Yen Trust (FXY) 100.64.  With a decline of 3.75 for the week, the Yen is now just above the 100 support level.  We expect to see it test the 100 level once again very soon.  As we wrote last week if it stays in the 100 to 105 is range, it will lose its significance as an indicator.   iShares Barclays 20+ Year Treasury Bond (TLT) 89.84.  TLT resumed its downtrend as we expected, and is back to the previous support at 90.  We continue to think the trend is lower and offer another hedging suggestion below for TLT.    NYSE McClellan Summation Index  1163.71. Our breadth indicator turned higher once again last week increasing 105.71 as the upside momentum appears to be returning once again creating some doubt about our previous presumption of a range bound market.
Strategy After making new highs for the year, the SPX is once again above its upward sloping trendline.  We will close our SPX hedge but keep the VIX and the TBT for the Treasury bonds and add one more using the TLT.  With crude oil trading near $70 once again, the alternative energy companies, such as solar and oil sands are once again attracting attention.  Materials and commodities remain in focus and we suggest adding more long bias positions once again in these sectors.
Portfolio Update Sears Holdings Corporation (SHLD) 69.47.   Last week in IVolatility Trading Digest™ Volume 9, Issue 21, Trimming the Hedge, dated June 1, 2009 we suggested converting our existing call credit spread into a condor with the sale of a put credit spread.  However, on Monday the stock closed up 4.98 at 61.83 and above the SU (stop/unwind) we had previously set when we opened the call credit spread.  Therefore, we did not add the put credit spread and we unwound the call credit spread as well, closing the position and booking a $86.50 loss. Portfolio Adjustments SPDRs (SPY) 94.55.  Here is the closing suggestion for the SPY that we mention above in the SPX section.
On Friday, the mid price for this spread was a credit (Cr) of .65 as shown in the “Price” column above.  Adjusting for time decay the estimated price on Monday should be .62 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. Wyeth (WYE) 44.14. When we included WYE in IVolatility Trading Digest™ Volume 9, Issue 5, IVolatility Trading Digest™ Volume 9, Issue 5 , Takeover File Update, dated February 2, 2009 it was at 42.67.  Now just slightly higher and with time decay becoming a  concern it is time to close all legs but the short Jul 42 ½ put which we will keep open an let expire.
On Friday, the mid prices for the legs were as shown in the “Price” columns above.  Adjusting for time decay the estimated prices on Monday should be as shown above in the “E Price” column.  We are closing two positions, one the bull call spread and the other a synthetic long, both had the Jul 42 ½ call one long the other short.  These trades will reverse the existing position while keeping the short Jul 42 ½ put with positive theta, or time decay.
IVOLopps™ iShares Barclays 20+ Year Treasury Bond (TLT) 89.84. Here is the addition to the Treasury bond hedge using the TLT, not the leveraged inverse TBT.  The current Historical Volatility is 22.
As of Friday, the mid price for this spread was a debit (Dr) of 1.90 and the expected price (E Price) on Monday should be about 1.88.  Use the deltas for each of the legs to adjust for the price change.  The Jul 90 put should move about 51% of the underlying while the Jul 85 put should move about 23% of the underlying.  Since the position is not yet established, the delta of the second leg will also be negative until the put is sold.  It will then become positive as shown in the table above.  The alternative is to adjust to the price change as a spread using the net delta shown above.  Use a close above 95 as the SU (stop/unwind) level. iShares Silver Trust (SLV) 15.01. Consider this bull call spread for Silver as a combination inflation and dollar devaluation hedge strategy.  The current Historical Volatility is 34.
As of Friday, the mid price for this spread was a debit (Dr) of 1.15 and the expected price (E Price) on Monday should be about the same at 1.15 since the time decay of the longs call is offset by the time decay of the short call.  Use the deltas for each of the legs to adjust for the price change.  The Oct 15 call should move about 56% of the underlying while the Oct 20 call should move about 20% of the underlying.  Since the position is not yet established the delta of the second leg will also be positive until this call is sold when it then become negative as shown in the table above.  The alternative is to adjust to the price change as a spread using the net delta shown above. Use a close below 14 as the SU (stop/unwind). Alcoa, Inc. (AA) 10.94.  Alcoa Inc. produces aluminum, and alumina worldwide as the last major independent producer.  There was takeover speculation last year before commodity prices declined and it may be returning once again.  With the current Historical Volatility at 68 and with an extremely bullish put/call ratio of .2 consider this 1 x 2 call ratio backspread.
As of Friday, the mid price for this spread was a Credit of .22 and the expected price (E Price) on Monday should be a Credit of about .23. Use the deltas for each of the legs to adjust for the price change. The Oct 14 calls should move about 33% of the underlying while the Oct 11call should move about 58% of the underlying. Since the position is not yet established the delta of the second leg will also be positive until this call is sold when it then become negative as shown in the table above. The alternative is to adjust to the price change as a combination using the net delta shown above. Use a close below 9 as the SU (stop/unwind). Another Volatility Spread Trade Thriller Savient Pharmaceuticals Inc. (SVNT) 7.20.   Savient Pharmaceuticals, Inc. a specialty biopharmaceutical company recently announced that on June 16, 2009 an FDA advisory panel of outside experts is expected to offer recommendations on the approval of Krystexxa (pegloticase), a new proposed biological drug for treatment of gout patients. For several weeks, SVNT has been our leading positive volatility spread candidate and we take a different approach for this high volatility opportunity than the one we last suggested for Dendreon. The current Historical Volatility is 51 with an Implied Volatility Index of 205.21. Once again, consider using a 1 x 2 call ratio backspread that retains the upside potential, but with a defined risk.
As of Friday, the mid price for this spread was a Credit of .225 and the expected price (E Price) on Monday should be a Credit of about .23. Use the deltas for each of the legs to adjust for the price change. The Jun 12.5 calls should move about 14% of the underlying while the Jun 10 call should move about 32% of the underlying. Since the position is not yet established the delta of the second leg will also be positive until this call is sold when it then become negative as shown in the table above. The alternative is to adjust to the price change as a combination using the net delta shown above. Consider using a close below 6 as the SU (stop/unwind) level. Blog Response Delay  To our readers that recently sent us questions and comments we apologize for not posting your comments and our responses sooner. The notification system that we use to advises us when we have comments developed a problem and we did not realize that we had unanswered mail. We will be doing a better job of checking it more frequently in the future.

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