« December 2009 »

IVolatility Trading Digest™

Volume 9, Issue 50
A Winters Solstice

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

To add comments or to ask questions please click here (or use the blog "COMMENTS" link at the very bottom of the blog page).

Winter Solstice

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. 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. caution flag


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.

arrow  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 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

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.


I think the way it is now is just about right. I've learned a lot from this series. I wouldn't change a thing... except I would prefer to get an email about a change in a trade rather than open an account on twitter.

Posted by Dennis L Avner on December 20, 2009 at 09:37 PM EST

I love your Trading Digest.

I would like to see (1) more suggestions and strategies with more explanations, and (2) more "how to do" focused on the application and results from the ranker and scanner.

Posted by HM on December 21, 2009 at 09:58 PM EST

Wanting to take you up on your comment-seeking offer, here are my thoughts on the weekly options issue. The issues do a great job of explaining the correlations currently affecting the market. Going into (more) detail of perhaps statistical analysis, variables and assets that are affected most by the relationship would be very insightful.
I really like your event trading strategies. I would say, the more of these, the better. Additionally, more analysis and option strategies regarding the same assets or companies, but with different outcome bias would be great as well.
Like I mentioned, overall the blog is great - staying relevant is most easily achieved by reporting the predominant market dynamics/relationships at the time and getting as detailed and advanced as possible on analysis and strategies.
Great work.

Posted by Luis Calleja on December 27, 2009 at 11:10 AM EST

In reply to the question pretty much its OK, would like a ittle more education, bu not at the expense of trades.
Would appreciate more detail on the strategies.

Have got it wrong? your opra for uppcv is strike 21? Not 24 as shown.
Keep up the good work


Posted by David Synnott on December 28, 2009 at 12:23 AM EST

i like your work and i would like to continue receiving it.
keep the the market review,add more deals like call back ratio or put back ratios, but also delta neutral between stocks and options and follow with adjustments,try to suggest new ideas like sqare box,,suggest stocks or ETF with low volatility about to explode.
coulkd you also suggest deals with fures and their options?
looking forward to your new suggestions happy new year and lot's of good deals

Posted by c morio on January 05, 2010 at 08:41 AM EST


Thanks for the comment about using twitter for adjustments and updates. There is an alternative to opening a twitter account. Just go to our web site and locate the twitter link in the Digest space of our home page. Click on the link you will see all of our tweets listed. Look for the ones that have Trading Digest in the first line.


Posted by Jacktrader ( on January 08, 2010 at 07:23 PM EST


Thanks for your nice comment and request. We are planning to offer more suggestions along with more ranker and scanner results.


Posted by Jacktrader ( on January 08, 2010 at 07:28 PM EST


Thanks for taking the time to respond and for the nice compliment. Your comment about suggesting multiple option strategies on the same company or asset is interesting. Since we are recording the trades for our model portfolio, we will consider doing this on a selected basis while maintaining the directional bias when applicable. For example, we would not want to recommend a long strategy and a short strategy as the same time, but there may be other combinations, with the same directional bias, that can be offered.


Posted by Jacktrader ( on January 08, 2010 at 07:44 PM EST


Thanks for the comment. We will attempt to provide more trades and strategy details. Since there are many sources that describe the various strategy types, we will try to use the space for more suggestions and more explanations of why a strategy was selected. As for the option symbols we do make some mistakes and since this is a detail intensive endeavor there will be more even though we try to catch them when editing. When you see something that does not look right, please bring it to our attention.


Posted by Jacktrader ( on January 08, 2010 at 07:54 PM EST


Thanks for all of the good suggestions. Some of the strategies, like the box, do not make a lot of financial sense for those not on the trading floor due to the cost of the bid/ask differential and commission costs. Now that we have expanded our Futures coverage, we will be doing more suggestions using options on Futures. From time-to-time, let us know when there are more ideas you would like to see.


Posted by Jacktrader ( on January 08, 2010 at 08:09 PM EST

Permalink Comments [10]

Comments are closed for this entry.

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".