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"Seasons in the Sun" is the English language translation of the 1961 song "Le Moribond" by Belgian singer Jacques Brel, made famous as a worldwide hit song for Terry Jacks in 1974. We borrowed this seasonal reference to introduce the continuation of the seasonal theme from last week’s Digest on the seasonal tendency in the implied volatility of the options on the S&P 500 Index. Seasonality is the annual reoccurrence of price movement at the same time each year due to fundamental forces. Because our trading an investment results can benefit from seasonal awareness we will consider some of them in the section below and offer two seasonal ideas along with four other new suggestions. First, our market review.
Market Review S&P 500 Index (SPX) 918.90. The decline we anticipated arrived last Monday, but the follow through was weak and by the end of the week SPX closed with just a minor decline of 2.33 points or -.25%. We do have a new resistance target at 923.85 from June 3, 2009. Now in order to resume the uptrend it will have to close above the newly established resistance, then reach, and exceed the active upward sloping trendline now at 975. In the meanwhile, the odds remain with the bears. S&P 500 Index Implied Volatility (IVXM). The implied volatility measures continued declining and closed the week at a new low. As the VIX closed below 27 we closed out our remaining bull call spread according to our trade plan. On Friday, the final VIX close was 25.93 and our Implied Volatility Index Mean closed at 23.35. Interestingly the October VIX futures contract closed at a 17.8% premium over the cash price with the future at 30.55. Since the premium last week was 13.4%, the rising premium is not good signal for the bulls as it indicates a willingness to pay an increasing premium for the October VIX futures contract. We attribute this to increasing hedging activity in the expectation that the VIX will be rising in the near future, as the market declines.   US Dollar Index (DX) 79.88. After maintaining the 80 level all week DX came under pressure on Friday as China again suggested it might consider shifting some of its foreign reserves from the dollar into Special Drawing Rights, a basket of currencies used by the International Monetary Fund. While still above the active downward sloping trendline the break below the 80 level is important and should be carefully watched to see if DX gains downward momentum. iShares Barclays 20+ Year Treasury Bond (TLT) 94.59. TLT continued higher once again last week gaining another 2.90 points as concern faded that the Federal Reserve will begin to raise long-term interest rates any time soon. We closed both long-term interest rate hedges, both TBT and TLT as it cleared 92 ½ to the upside. NYSE McClellan Summation Index 612.69. The decline in our breadth indicator slowed somewhat last week to down 210.61 points compared to a decline of 300.36 the previous week. We suggest keeping focused on the market internals for signs of divergence.
Strategy Continuing with our seasonal review, we note there are some well-known seasonal patterns that are used for timing important sectors. In the agricultural sector the grains, corn, wheat and soybeans have a tendency to begin declining in May and June and reach their lows in late summer or early fall. This helps to explain the current weakness in the fertilizer stocks along with the seed and farm equipment manufacturing companies. Copper prices sell off in the spring and then begin rising again in July reaching another high in September. Gold and the precious metals complex have a tendency to decline from March through September. Crude oil and natural gas rise in July reaching a peak in October to decline to a low in December or January.
Portfolio Update For the record, we made several adjustments during the week because positions reached or exceeding SU (stop/unwind) levels. On Monday June 22, 2009, we bought to close the short LDK Jul 10 put that was suggested in Digest Issue 23 at 1.36 for a loss of .62. In addition, also we bought to close the short PTEN Jul 12 ½ put suggested in Digest Issue 21 for a .97 loss. We booked additional losses on Thursday, as we closed our long VIX Jul 35/40 bull call spread from Digest Issue 20 as it closed below 27. We also closed our long TBT Dec 53/58 bull call spread also in Digest Issue 20 and the long TLT Jul 90/85 bear put spread in Digest Issue 22.  The current market environment is uncertain and prone to being whipsawed as we have experienced. A focus on a few reliable seasonal tendencies may be of some help.
IVOLalerts™ Visa, Inc. (V) 63.82. V was placed into the Alerts category in Digest Issue 23 as it broke below its upward sloping trendline on news of interchange fee discussions in Washington. We now think the stock is oversold and is ready to turn higher. With a current Historical Volatility of 30 consider this bull call spread with long vega as we still think implied volatility will rise between now and October.
The mid price for this spread on Friday was a Debit (Dr) of 1.80 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be 1.79 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. Set the SU (stop/unwind) at a close below 60. IVOLopps™ Amylin Pharmaceuticals Inc. (AMLN) 13.69. San Diego based AMLN is a biopharmaceutical company engaged the development of medicines for diabetes, obesity, and other diseases. With an improving health care environment, On Friday AMLN was ranked number 4 in our Top 5 stocks based on IV Index Mean vs 30D HV. It was also ranked number 4 in the Top 5 stocks with greatest IV change. Other than the presentation made last Wednesday in London at the Piper Jaffray Europe Conference, we did not find any fundamental news that would explain the unusual stock volume and options activity. With a wide spread between the current Historical Volatility of 46 and the Implied Volatility Index Mean of 80.03 with the calls at 81.37, here is a conditional suggestion. If AMLN continues is trading below 15 on Monday then we suggest this covered call sale. Buy 100 shares of AMLN 13.69
The mid price for this call sale on Friday was a Credit of .60 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be .54 as shown above in the “E Price” column. Use the delta to adjust for the change in prices of the underlying. We do not suggest buying the stock and selling the call if the stock price is above 15 on Monday. Use a close below 12 as the SU (stop/unwind). Seasonal Suggestions Here are two ideas designed to fit the seasonal tendencies mentioned above. Petroleo Brasileiro (PBR) 40.85. With a positive production growth profile, PBR is Brazil’s national integrated oil company. Consider this bull call spread with positive vega. The current Historical Volatility is 51.
The mid price for this spread on Friday was a Debit (Dr) of 2.125 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 as shown above in the “E Price” column. Use the delta of the legs to adjust for the change in prices of the underlying or use the net spread delta for spread orders. Use a close below 37 ½, the last pivot as the SU (stop/unwind). With positive vega of .48 this trade plan should be helped by the rising seasonal tendencies in both crude oil and market implied volatility through October. IVOLalerts™ Copper’s seasonal tendency to rise during the summer months should benefit Freeport-McMoRan Copper & Gold Inc. (FCX) 50.55. Its recent sell off from 60 was reversed at 47 ½ but it is not yet back above the upwards sloping trendline. We think it is likely it will continue higher and we will be watching for a close back above the trendline to establish another long position, perhaps next week. Put Sale Ideas Next we offer two directional ideas not directly related to seasonal tendency and do not have positive vega to protect from rising market implied volatility. Fluor Corporation (FLR) 51.83. Irving, Texas based FLR provides engineering, procurement, construction management, and project management services worldwide to the oil and gas, transportation, mining, life sciences, telecommunications, manufacturing, commercial and institutional, microelectronics, and healthcare sectors . We last suggested FLR in IVolatility Trading Digest™ Volume 9, Issue 3, Political Picks, dated January 19, 2009, at 44.60. As the market was declining into the March low FLR declined to 30, but we closed our short put position after only ten days for a small loss. Now FLR looks as if it has made an Elliott 4th wave off the March low and has now closed back above its upward sloping trendline. If we are right about the wave count then we can expect to see a high above 55, but caution that 55 could also offer resistance and a potential double top formation. Keeping these thoughts in mind, with a current Historical Volatility of 51 consider this put sale.
The mid price for this put sale on Friday was a Credit of 1.55 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be 1.46 as shown above in the “E Price” column. Use the delta to adjust for the change in prices of the underlying. Use a close below the last pivot point at 47 ½ as the SU (stop/unwind). In addition, watch for the potential double top at 55 and be prepared to close if it fails going higher.
America Movil S.A.B. de C.V. (AMX) 38.73. Mexico DF based AMX provides wireless communications services in Latin America with a reported 77% market share. Selling at about 12 times earnings and growing earnings at 45% a year, this momentum stock is once again receiving attention as the focus is now back on wireless communications and the growth expected from 3G wireless services. AMX recently corrected down from 39.55 to 35 where it made a pivot to turn higher, closing back above its upward sloping trendline once again in another Elliott 4th wave pattern. Once again, there is the risk of a double top so it needs to be carefully watched as it approaches resistance at 39.55. With a current Historical Volatility of 37, here is another put sale idea to consider.
The mid price for this put sale on Friday was a Credit of 1.25 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be 1.19 as shown above in the “E Price” column. Use the delta to adjust for the change in prices of the underlying. Use as close below the last pivot at 35 as the SU (stop/unwind) and watch for the possible double top formation as it reaches the resistance at 39.55 and be prepared to buy back the put if it fails and turns lower.

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