« September 2009 »

IVolatility Trading Digest™

Volume 9, Issue 36
Unrepentant Bull

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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The term "bull" is thought to have originated from the way in which it attacks its opponents. A bull will thrust its horns up into the air. This became the metaphor for the market when the trend was up, typified by a sustained increase in share prices.

While pondering the sustainability of this bull market here is a quote to consider.

“It was never my thinking that did it for me, it was my sitting!
Men who are right and can sit tight are uncommon.” Jessee L. Livermore

In this Digest, we review the state of the bull market in some detail from the perspective of the S&P 500 Index. We then offer an adjustment suggestion for a current open position along with one more new technology idea in the wireless internet sector. First, our brief market review.

Market Review

S&P 500 Index (SPX) 1042.73. SPX rebounded quickly from the previous week’s sell off and was selling at new trend highs by the weekend. The weekly gain was 26.33 points, or 2.6%. While we are still focused on the upside measuring objective at 1233.29, from the large Head & Shoulders bottom explained in more detail below, it made key reversal on Friday by making a new intraday high and then closing below Thursday’s closing price. This means we can now expect to see a low below Friday’s low.

E-mini S&P 500 Future (ESU9) 1041.50. The September e-mini futures contract was up 27.50 points, or 2.7%. The open interest numbers confirm the new high made on Thursday as they expanded by 191,474 contracts to set new high of more than 2.8 million contracts. As we have previously written for the uptrend to continue, open interest needs to keep expanding and it did so very nicely last week.

S&P 500 Index Implied Volatility (IVXM). With the new highs in the SPX, the volatility measures declined once again. Our Implied Volatility Index Mean was 1.23 lower at 20.91 and the VIX declined .96 to 24.15 as the 20-day moving average declined once again to 24.82. The September VIX futures premium over cash, declined 7.44 to 2.48% and the October premium decreased 6.57 to 14.70%, as the November premium became the highest at 17.39%. The only indication seen of higher risk premiums came from the Implied Volatility Mean Index of the VIX options as it increased from 90.76 to 95.52. For now, there is less demand for downside protection in October as attention is now shifting to November.

US Dollar Index (DX) 76.61. As equities were pushing higher, the DX was sliding lower in what appears to be continuing risk preference reflected not only in equities, but also in crude oil, gold and silver as foreign exchange traders having returned to work from summer vacation were probably selling dollars.

iShares Barclays 20+ Year Treasury Bond (TLT) 96.70. Bonds closed below 95 on Tuesday as we expected, but then reversed on Wednesday trading back above the previous near term resistance at 97.66. If long bonds were being sold by investors to raise cash for equities, oil, gold and silver then somebody stepped into this market and provided a lot of support reversing the downward momentum that began earlier on the week. Events like this are a good reminder of why it is important to include stops in trade plans.

NYSE McClellan Summation Index 1228.84.  The breadth indicator increased 114.17 along with the market as advancing issues on the New York Stock Exchange exceeded declining issues every day except Friday and they were very close on Friday. Another indicator we occasionally follow is the Investor’s Intelligence percent bullish and bearish. Now reading 48.3% bullish and 23.6% bearish the spread is +24.7%. For comparison, the readings on March 11, 2009 were 26.4% bullish and 47.2% bearish for a spread of -20.8%.

Baltic Capesize Index (BCI) 3539. The long route dry-bulk shipping index continues to decline this week as it was down another 112 points or 3.1%. The continuing decline of this shipping index is a real concern as it confirms that China has slowed the importation of some raw materials. The Financial Times reports copper inventories in China are up 12% to 97 tonnes , the highest level in more than two years. Other raw material imports may begin slowing as well. Until we see this indicator turn higher, this caution flag will continue flying. flag


As the US Dollar declined last week, some important commodities were rising including oil, gold and silver in particular. If the Chinese have stopped buying copper, we would suggest the same by avoiding the copper miners. We would also be on the lookout for others raw materials that may now be in the same category.

As for the S&P 500 Index, now that the summer vacation season is over it is time to update our graph of the Head & Shoulder bottom pattern. In addition, we added the active upward sloping trendline making it a busy and perhaps confusing graph. Some explanations may help.

S&P 500 Head & Shoulder bottom pattern

While this pattern has been developing since the March low it was set off after forming the right shoulder with the July 10th low at 872.81 and then breaking out as it crossed the neckline shown above. The neckline is from the January 6th high at 943.85 to the June 6th high at 956.23. When extended, this line goes through the gap created at the opening on Thursday July 23rd confirming the breakout and setting off the H&S bottom pattern. See the dotted line on the chart above.

 We calculate the minimum upside measuring objective by taking the distance from the low of the Head at 666.79 on March 6, 2009 from the average between the January 6th high of 943.85 and the June 11th high of 956.23, a slightly rising neckline, or 950.04 (950.04 - 666.79) which is 283.25 points. We then add this to the neckline value of 950.04 and the result is the Minimum Measuring Objective of 1233.29 indicated by the small arrow in the right margin.

We marked two areas of upside resistance, the first at 1000 that has now been exceeded and the second at 1100, both are labeled above. The slope of the active upward sloping trendline from the March low and touching the right shoulder low is an estimate of the expected rate of increase. Unless the rate of increase accelerates, it could be yearend before it reaches the minimum measuring objective.

In the meanwhile, we have two well-defined places to watch for any potential threat to the uptrend scenario. The first is the support at 1000 that was the previous resistance, and the second is a close below the active upward sloping trendline currently at about 980. If it were to close below 980 and if it were accompanied by a substantial decline in the total open interest of the E-mini futures contracts then hedging operations should be considered.

Since we have some objective guidelines to follow and until we see evidence this market is exhausted we remain bullish while resisting the temptation for too much overbought thinking.

Portfolio Adjustment

Las Vegas Sands Corp.(LVS) 16.73.

In IVolatility Trading Digest™ Volume 9, Issue 21, Trimming the Hedge, dated June 1, 2009 we sold an Iron Condor when LVS was 9.91. We were assigned stock from the July 9 in- the- money put portion of the condor and then we sold an August 9 call against the long stock. The result, after subtracting the four credits from the Iron Condor, was a covered call with a stock basis of $675. Next, we were assigned on our short call resulting in the sale of the stock at 9 or $900. So far, the net gain is $225.

Then in IVolatility Trading Digest™ Volume 9, Issue 31, Load the Boat, dated August 10, 2009 we suggested selling the September 10 put at .60. Since this put will most likely expire at the end of the week, further adding to our gain, we suggest replacing it now with a larger two-part combination.

Part one – short put sale.

Sell 2 October puts. Here are the details for each.


The mid price for this put sale on Friday was a credit of .95 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be .89 as shown above in the “E Price” column. The “Greeks” are based upon Friday numbers, before the position is established and they will be reversed when the put is sold. Use the delta as shown above to adjust for any change in the stock price when placing the order.

Part two – long call spread.

Buy 2 long call spreads. Here are the details for each spread.


The mid price for this spread on Friday was a debit (Dr) of .875 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 or use the net spread delta for spread orders.

Use a close below the current upward sloping trendline (just under 15) as the SU (Stop/unwind). Since there is now good support at 15 it will first need to violate support before closing below the trendline. In this event, we will need to reevaluate the overall market conditions to see if we still want to keep the short Oct 15 puts and to receive stock by assignment in the event it is below 15 at the October expiration. If market conditions remain favorable, we will use it as an opportunity to acquire stock once again.

Position Summary

Using Friday’s closing prices here is the summary for this combination.

Credit .15 ((-.95 x 2) + (.875 x 2)) or $15
Delta 84.46 ((29.29 x 2) + (12.94 x 2))
Gamma -15.70 ((-7.77 x 2) + (-.08 x 2))
Theta 4.12 ((2.13 x 2) + (.-07 x 2))
Vega -3.46 ((-1.78 x 2) + (.05 x 2))

Using the CBOE Margin Calculator, we found the initial margin requirement for the put sales is $513.20 and the long calls is $516, total $1,029.20. At this price level we have a long position equivalent to 84.46 shares.

From our PnL Options Calculator here is the risk profile at Friday’s price.

PnL Options Calculator

Las Vegas Sands has recently received broker upgrades based upon improving business conditions in Macau. As long as the equity markets are in an uptrend, we favor the long side for LVS.


We are running out of space, but before we go, we have one more timely suggestion to make.

Wireless Internet

RF Micro Devices Inc. (RFMD) 5.57. RFMD designs and manufactures high-performance radio systems for mobile communications applications including power amplifiers, transmit modules, cellular transceivers and systems-on-chip for current and next-generation mobile handsets, cellular base stations, wireless local area networks, wireless personal area networks and global positioning systems.

In a recent webcast the CEO said demand for RFMD's products is tracking ahead of plan, driven by end demand in the cellular handset market and current customer forecasts and backlog support expectations for continued handset market strength into the December quarter. RFMD is a primary beneficiary of the increasing demand for 3G smartphones, which require 3-5 times the RF dollar content of 2G handsets. RFMD believes it is gaining share in the cellular market and anticipates sequential quarterly revenue growth at each of its major cellular handset customers.

In the last week, the stock turned higher and has now exceeded the previous resistance at 5.50. With a current Historical Volatility of 56.59 and a Put /Call ratio of .27, here is a long call spread to consider.


The mid price for this spread on Friday was a debit (Dr) of .80 as shown in the “Price” column above. Adjusting for time decay the estimated price on Monday should be .81as shown above in the “E Price” column. Since the options trade with less volume that some of the others we suggest be prepared to pay a somewhat higher price based upon the bid/offer spread. Based upon Friday’s prices, before adjusting for any Monday price change we would not pay more than .85 for this spread. Use the deltas for each leg to adjust for any change in the price of the stock or use the net spread delta for spread orders.

Use a close below the last pivot at 4 ½ as the SU (stop/unwind).

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In next week’s issue, assuming the uptrend continues we will offer few more trend continuation suggestions.

Previous Issues and Reader Response Request

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.


Do you plan a portfolio update on the MDT call spread suggested in Issue 34? Thanks.
Winston Faust

Posted by Winston Faust on September 14, 2009 at 03:42 PM EDT
Website: http://wfaust@suddenlink.net


Thanks for the Medtronic Inc. (MDT) question. When we suggested this trade in Issue 34, we noted that it had been in an uninterrupted uptrend from just above 32 and we expected it would make a correction, even though we had no idea when it might come. As a result, we suggested using November for the spread in order to allow enough time for the stock to reach our objective. On Friday, the stock did make a correction closing below the active upward sloping trendline. Today it recovered closing on the high, up .74 and right on the trendline. If this is all the correction we are going to get then it should easily reach our objective. Watch today’s low of 37.35 and use this as the new SU (stop/unwind) price level. If it turns back down and closes below this SU then the correction will most likely continue and we suggest closing this spread.


Posted by Jacktrader ( on September 14, 2009 at 08:14 PM EDT

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IVolatility Trading DigestTM Disclaimer
IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter constitutes a recommendation to buy or sell any security. Before entering a position check to see how prices compare to those used in the digest, as the prices are likely to change on the next trading day. Our personnel or independent contractors may own positions and/or trade in the securities mentioned. We are not compensated in any way for publishing information about companies in the digest. Make sure to due your fundamental and technical analysis homework along with a realistic evaluation of position size before considering a commitment.

Our purpose is to offer some ideas that will help you make money using IVolatility. We will also use some other tools that are easily available with an Internet connection. Not a lot of complicated math formulas but good trade management. In addition to Volatility we use fundamental and technical analysis tools to increase the probability of success and reduce risk. We prepare a written trade plan defining why the trade is being made, what we call the "DR" (determining rationale) and the Stop/unwind, called the "SU".