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Thursday, December 23, 2010

Volatility Near Its One Year Low

-Implied mean volatility was 13.6 for SPY as of 12/22/2010, according to IVolatility.com, which I would say is at fair value compared to my Fair Volatility Estimate (FVE) indicator's value of 14.1.
-FVE's previous low of 13.1 was right before the violent correction SPY went through back in April of this year. In recent history, FVE's lowest value of 10.5 was recorded in 10/26/2006.
-With volatility so low and options market makers looking to take profits a few days before and/or after the New Year, it may seem like an opportune time to look to go long options. However, I would wait for a triggering event, fundamental news or bearish signals from of my technical indicators.
-GLD position remains profitable. Expect GLD to fall sharply should it break below 50 day moving average, value around 133.8.

Monday, December 13, 2010

GLD Looks Vulnerable To Downside

-On 12/9, SPY broke out of my trading range 117.5-123 that I had forecasted for over three weeks. Problem is that I focused on predicting the future and being right, rather than recommending the best trades, especially when all my indicators turned bullish on 12/2. Here is SPY chart intraday.
-Speaking of a good trades, GLD looks vulnerable to the downside. I am purchasing 1 Jan 132 put and selling 1 Jan 142 call for higher than 0.15 credit. My indicators are diverging from GLD price trend for the past several weeks and volatility is rising as indicated by my Fair Volatility Estimate indicator. FVE value is at 22.3, while Implied Volatility is 18-19% for GLD options. (* FVE indicator is calibrated for SPY, so it's values would be less "accurate" for other indices, and even less so for individual stocks)

Wednesday, December 8, 2010

SPY Testing Upper End of Trading Range

- SPY still moving within a trading range 117.5-123, that I set forth on 11/17, but bulls have and are still testing the upper end of this range. I was able to sell the 124/126 call spread and 119/117 put spread for combined 0.86 credit yesterday.

-FVE Indicator's value is 17.3, while IV Index Mean according to IVolatility is 15.87 as of yesterday's close. Taking into account market's being closed on 12/24 and the current market bullishness, I'd say IV is close to fair value.

Wednesday, December 1, 2010

For The 3rd Week, 117.5-123 Scenario Ongoing

-On Nov. 17th post, I wrote that SPY was entering into a new pattern, from sharp rise to a trading range. Well, this is the third week that I am reaffirming my scenario 117.5 to 123. Oh, I'm not in the business of making predictions, but this was and still is the most likely scenario, based on my technical indicators.

- All of the technical indicators did turn bullish today. Based on this, I would expect the probability of SPY moving up towards 123 to be higher than it moving down to 117.5. The Dec18 119/117 put spread closed at 0.51 and Dec18 124/126 call spread closed at 0.32. I would recommend selling 1 put spread and 1 call spread for combined 0.86 or higher.

- Although, based on my scenario and the FVE Indicator, yesterday was the ideal time to sell this spread. FVE indicator's value was 19.67 yesterday and 19.2 today, while mean implied-volatility was 20.4 yesterday and 17.94 today. Yesterday was the first time in two weeks where implied volatility was higher than FVE indicator's value.

Sunday, November 28, 2010

Fair Volatility Estimate Indicator - Revisited

- Fair Volatility Estimate (FVE) indicator is my own creation, and I believe with it, I could contribute much to the study of markets, of volatility, and of technical analysis. But I am yet unsure of its potential because FVE was developed just this summer. I have been observing FVE Indicator's signals and commenting about the market for the past few months. So far, my observations based on FVE has been very accurate. Of all the technical indicators I use to gauge market energy and it's ever changing flow, FVE is the most valuable and unique.

-I have searched the internet to see if there were other indicators like FVE. VIX is the most similar, but VIX is calculated from options prices on the S&P500 index. FVE is very similar to VIX in that it mirrors VIX (0.988 correlation, variance on FVE 5.29, while variance on VIX is 5.72 for data Jan-Sep 2010), but FVE is calculated from the price of the underlying (SPY in this instance), and not the price of its derivative.

- Why is this relevant? First of all, I would like to think that the FVE could be used as a simple, alternative way to measure appropriate implied volatility (IV) level of options, specifically, at-the-money IV of SPY options. Implied volatility can be described as the expectation of future realized volatility of the underlying by the options market. Well, if everything is already reflected in the Price of the underlying (as technical analysis assumes), why couldn't we estimate the future volatility of the underlying from the underlying market itself? I believe technical analysis adds great value, but technical analysts don't pay enough attention to the importance of volatility. On the other hand, mentioning technical analysis to vol traders would make you instantly lose credibility. Why such divide? I believe that there is value in technical analysis, in volatility analysis, and in technical analysis of volatility.

- FVE offers three general trading rules:

1) for directional or delta traders, when FVE is above/below its moving average, look to go short/long delta, especially when FVE's value has reached around its highest/lowest levels.

2) for gamma (options) traders, when FVE is rising/falling and above/below its moving average, look to go long/short gamma, and even vega especially when FVE's value has reached around its highest/lowest levels.

3) for options market makers, when implied volatility of SPY at-the-money options are significantly above/below (greater than 2-3 points) be better seller/buyer of options.

Examples of trading strategy 3 is on 11/1 ahead of elections and Fed meeting, implied volatility on SPY at-the-money options reached 21, but FVE indicator's value was 17.1. This was a good time to sell options and indeed, IV levels plunged the next few days to below 16. Also, on 11/24, implied volatility of SPY atm options were 16.3, while FVE indicator's value was 19.2. This was a good time to buy options, and on Friday 11/26, implied volatility of SPY atm options soared to 19.3.

Thursday, November 25, 2010

SPY 117.5 - 123, Trading Range Scenario Ongoing

-Despite some volatile up & down movement, SPY is moving as was expected back on 11/17/10, within a trading range, and given the environment of rising uncertainty abroad with improving economic fundamentals here in the U.S., I would think that the 117.5 - 123 trading range for the remainder of the year is the likely scenario.

-And perhaps, this scenario is what options investors are betting as the likely scenario as well, since mean implied volatility index is 16.43% versus 19.8 figure shown by Fair Volatility Estimate Indicator. Even when taking into account Thanksgiving holiday and the weekend, implied volatility seems low when compared to the way SPY is moving.

Wednesday, November 17, 2010

SPY Expected To Move In Trading Range

- SPY long position stop/loss triggered on Monday at open. Most of my indicators are in short-term bearish mode, but I see two scenarios of SPY moving for the remainder of the year, either moving within 117.3 - 122.5 trading range, or 115 - 122.0 trading range. Either way, since I'm expecting SPY to be range bound, the best trading strategy would be to use overbought/oversold indicators (like Stochastic Oscillator) that work best in trading ranges.

- A more sophisticated strategy would be to sell slightly out-of-the-money puts when Stochastic Oscillator turns up from oversold condition and buy at-the-money puts when it turns down from overbought condition.

-FVE indicator's value is 20.3 while SPY mean implied volatility according to IVolatility.com is 19. Because FVE is above it's moving average and higher than implied volatility, I would still be hesistant to short volatility.

Sunday, November 14, 2010

AAPL Stock Looks Vulnerable To Downside

- It isn't often I post a technical snapshot of stocks other than SPY, but I wanted to share with you my technical analysis of AAPL, because the stock looks vulnerable to the downside.
- While AAPL prices hit consecutive new highs (albeit barely) in the past few weeks, most my indicators failed to do so. Could this be a classic case of bearish divergence?
-As for SPY, while Friday's close of 120.20 keeps it within the bullish channel, my indicators are showing higher probability that SPY could break out of this bull-run into a new pattern. What that pattern would be is yet to be determined, but I would think that SPY would move within 117.5 - 123 trading range for the remainder of the year.
- December and January expiration options have traditionally been good months to sell premium due to the upcoming holidays. My FVE indicator is rising, however, so I would hold off selling options until a more opportune time.

Thursday, November 11, 2010

Reducing SPY Long Positions.

- I am exiting out of my long call spread position at open for following reasons. 1) US Dollar is showing the most strength it has in the past 2 and half months, obviously due to rising concerns once again from Europe's weaker economies. 2) CSCO stock's plunge after earnings is not a good sign, and besides technical snapshot of AAPL, the leader of tech stocks looks weak. 3) SPY has had a tremendous run, and even though it is still moving within the steep rising channel, my feeling is that SPY will undergo a period of consolidation.
- I would like to take all the long positions off, but will maintain discipline and keep the 45 SPY shares long, but with a profit/stop of 119.5
- FVE indicator is starting to rise again, 16.2 vs mean SPY implied volatility of 15.9 according to IVolatility.com as of yesterday's close. Obviously with SPY premarket being down, implied volatility would likely spike up, but I would look for opportunitites to buy options.

Saturday, November 6, 2010

Wow! That's All I Can Say.

- I'm glad to have followed my indicators and reentered long positions at 118.4 and 119.48, after having exited at 116.6. This market is exceptionally strong! That having been said, SPY is in very overbought territory, so I'll be vigilant about seeing any bearishness in the indicators.

-Implied volatility has dropped to 16.4, which is closer to FVE value of 15.3. Both values are at very low levels, so I'd be vigilant as well about developments in the market that could spike volatility back up. I'd not be adding to existing short gamma/vega positions.

Wednesday, November 3, 2010

SPY Continues to Move Within Rising Channel

-SPY continues to move within rising channel. Added to Long position by buying 45 shares of SPY at closing price of 119.48 on Tuesday. All technical indicators still pointing to bullish market.

-FVE indicator crossed back below moving average on 11/1, once again reaffirming the likelihood that implied volatility was going lower after rising ahead of the uncertain election results and FED announcement.

-Stop/Loss is now intraday price of 117.8 or closing price below the trendline support, which is currently 118.35 level.

Sunday, October 31, 2010

Waiting for Election Results

-SPY ended this past week flat, but the dips did allow us to buy the NOV 117/121 call spread for under $2.00. This spread ended the week worth $2.10, which shows the advantage of buying premium when implied volatility is low. I would expect the market to show greater movement after the elections on Tuesday.

-The question I have to ask myself is whether I am going to add to my long position or exit out of my call spread. At this moment, it is tough to call. Technical indicators are still in bullish territory, although the bullish energy seems to have weakened once again.

-I would look to add if SPY closes above 119.2 and exit out of my long call spread should SPY close below 116.9.

Sunday, October 24, 2010

SPY Continues to Rise Without Meaningful Correction

-I have to admit, in hindsight, my profit/stops were too tight. The biggest problem with having profit/stops that are discretionary without having concrete rules for reentry is that one could miss out on a monster trend.

-I thought SPY would go through a price correction last week, but SPY continues to rise. I was stopped out at 116.6, but SPY closed the week at 118.35. If I get back long SPY and prices fall, I would feel like an idiot, but on the other hand, if I chose to sit this market out, but SPY continues to rise I would feel even worse.

-All of my technical indicators are telling me to get back long the SPY again. Only the Future Volatility Estimate is telling me that the probability of a price decline is increasing. And because implied volatility on options is cheap, I would recommend buying 1 SPY November 117 call option and selling 1 SPY Nov 121 call option for 2.10 or less. This way, we would get some participation to the upside, but limiting our downside to $210.

Tuesday, October 19, 2010

Out of Long Positions in SPY

-SPY undergoing price correction, just as I expected from my posting over the weekend. My technical indicators were and still are showing that the bullish momentum is losing its strength. However, I would not be looking to short this market, but rather wait and see for how long and how much SPY prices correct.

-I would look to go long 1/2 position again should SPY fall to 115.0, but perhaps a better rule would be to wait a few days until stochastic oscillator turns up from low levels.

-FVE indicator has crossed above its moving average, so I would not be looking to short volatility at this time.

Sunday, October 17, 2010

Ready for SPY Price Correction

- Linear Regression Slope has started to turn down. Fair Volatility Estimate has started to move up and Stochastic Oscillator has started to turn down as well. So my technical indicators are signalling the rising probability of a price correction in SPY.

-However, SPY is still in a very strong uptrend, and we don't want to get off this ride. I'm moving my profit/stop level to 116.6 and would consider getting long again around 115.0

Tuesday, October 12, 2010

Raising Profit/Stop to 115.5, Watch the US. Dollar!

- This SPY rally continues to amaze, but I'm watching the US Dollar closely. The rally in the stock market coincided with the fall in the US Dollar, since September 1, as reflected by the prices of UUP (Power Shares DB US Dollar Index Bullish ETF). I'm noticing the lows in the UUP creep up for the past 3 consecutive days, indicating a good probability of a short-term dollar strength.
- If the US Dollar shows any strength, the stock market has high probability to undergoing a correction. My trading rules still tell me to be long the stock market, but I'm moving my profit/stop up to 115.5
- I also believe that SPY implied volatility and the VIX has fallen to a level where I would start to consider going long volatility. The FVE indicator is still below its moving average, however, so I would wait to go long volatility only if negative fundamental news comes out intraday.

Wednesday, October 6, 2010

SPY Right at Trendline Resistance

- In hindsight, 113.9 may have been too tight of a profit/stop to take off 1/2 our position, but that's what my trading rules suggested. SPY has remained very strong, longer than most investors would have anticipated. My feeling is that if you have riden this tremendous run from start of September, now may be a good time to take some profits, but I would still maintain a bullish position.

- Linear Regression Slope, FVE, and Stochastic Oscillator indicators are still bullish, while surprisingly, the Volatility Signal indicator remains in bearish territory. I'm moving up my 2nd profit/stop level to 112.8.

-The FVE indicator has remained in a downtrend since 8/25, correctly instructing us not to have been long volatility all this time.

Thursday, September 30, 2010

SPY What a Rally!

-Good economic data is boosting the overall market in early trade. SPY is trading at 115.35 at this moment, and it is so tempting to take profits, especially considering how far SPY has risen in such a short period of time. But my indicators are still mostly in bullish territory, and SPY has yet to break below the steep trendline. Let's see how far this market goes...
- First profit/stop is raised to 113.9, and second profit/stop is 111.9. I think this rise is a meaningful rally, and even if there's a correction, I would be surprised to see SPY below 112.

Tuesday, September 28, 2010

Trendline holds, SPY Losing Some Momentum

- SPY bounced off near trendline support this morning. All indicators are still in bullish territory, except for Volatility Signal. However, all indicators are a little "off" because of 0.60 ex-dividend on 9/17. Nevertheless, it is only natural that SPY cannot continue its torrid pace of ascent.

- Therefore, I'd suggest moving profit stop up to 113.18 and 111.8. If SPY is to continue rising, I'd have to think financials and other laggards would have to start rising.

- FVE is 18.8 and implied volatility on SPY is 20. I'd be neutral vol at this moment because the probability of a price correction is getting higher.

Friday, September 24, 2010

SPY Uptrend Intact

- Durable Goods Orders and German Business Sentiment helped boost the market in early trade. This market is very strong based on the speed and duration of ascent from the most recent bottom of 104.5. Just look at AAPL, AMZN, NFLX, FCX that are leading the market.

- Having said that, yesterday's low of 112.18 gives us a reference to draw a trendline, and I would use this trendline as my first profit stop/limit. Second profit stop/limit is being raised to 111.9.

- Fair Value Estimate Indicator is 19.6 and SPY IV which was creeping higher last few days is now at 19. FVE indicator is, however, above its moving average. Whether this continues in the next few days is uncertain, but should prices break below profit stop levels, we may want consider going short at those levels as well.

Tuesday, September 21, 2010

SPY Rise Strong, Approaching Trendline Resistance

-The speed at which SPY has been rising is incredible. My technical indicators are also slightly misleading due to 0.60 dividend adjustment last Friday, which Reuters does not seem to adjust for. We are, however, approaching the upper trendline resistance area 115.5 to 117.5, and I would expect some form of consolidation over the next week or two.
-I am moving my stops up to 111.9 and 110, but I am expecting SPY to remain in a bullish trend.
-Fair Volatility Estimate is between 18-19, while implied volatility on SPY options is 19.

Friday, September 17, 2010

Fair Volatility Estimate Indicator for SPY

- I have devised a custom indicator using just daily price data to try to come up with theoretical value for at-the-money, 30-day implied volatility of SPY. This indicator can be used intraday with real-time price data as well. I call this indicator Fair Volatility Estimate (FVE). The chart shows the values of the FVE indicator vs. actual 30-day ATM implied volatility data of SPY, obtained from LiveVol Pro.

- I had named the FVE indicator previously as the Estimated Future Volatility Indicator, but that is not appropriate. The correlation of my FVE indicator value to actual implied volatility data is 0.9115. If we offset implied volatility data 1 day forward, the correlation declines to 0.8799, 2 days forward the correlation is 0.8523, while 1 day backwards correlation is 0.9196 and 2 days backwards is 0.9079. So, the FVE indicator is not a predictive indicator of future implied volatility. But I believe the FVE indicator is a good measure of what implied volatility "should or may be"...and of course, implied volatility on options implies what options market is expecting future realized volatility to be.

Thursday, September 16, 2010

SPY & TLT Daily Chart w/Today's Intraday Prices

- As expected in my 9/13 posting, SPY is moving sideways in a very tight range. Economic indicators announced this week thus far have been overall supportive of the market, but have come in mostly in expected range.
- All indicators are still in bullish territory, but I am raising my stops to 111.5 and 109.5, respectively.
-There is something significant going on in the long-term bond market. Yields are rebounding quickly & bond prices, as reflective by TLT ETF are dropping quickly. If money is coming out of bond market because of improving economy expectations, that would be supportive of the stock market and would push SPY higher, above 113.2 resistance.
-However, if long-term bond yields are rising because of higher uncertainty and growing concerns of U.S. government borrowing capacity, this would not be supportive of the stock market.
- SPY implied volatility is at 20 and ETF indicator is at 19.6. I would go neutral vol and be ready to adjust positions when SPY move out of 111.55 - 113.35 range.

Monday, September 13, 2010

SPT Daily Chart w/Today's Intraday Prices

- SPY continues its rapid rise this morning. 11-day Linear Regression Slope is at 0.68 and Stochastic Oscillator is at overbought levels. Considering 113.2 was top of previous two high points, we could very well see SPY take a breather or even fall this week.
- This is Quadruple witching week, and many key economic indicators are going to be announced this week, as well. The markets are expecting these numbers to be supportive of the view that U.S. economy would not experience a double-dip recession.
- Conventional thinking would be that in expiration week with many economic indicators being announced, we could see volatile price movements. Since SPY implied vol is at 19 vs 19.8 value for EFV indicator, now may be an appropriate time to go long volatility. Well, unless economic numbers are much worse than expected, I don't see a significant move to the downside. If they are much better than expected, the rally may continue, but since SPY has come up so far, so quick, I do not see the violent move upwards either.
- I am going to remain long delta and NOT long volatility because my indicators are telling me to do so. But I am going to raise my stop/level to 110.0 and 108.9.

Thursday, September 9, 2010

SPY Daily Chart w/Today's Intraday Prices

- SPY is in the midst of a very quick move upwards. I'd have preferred SPY move sideways this week before breaking above trendline resistance. SPY is 111.2 level at this moment, and there is always the chance that today's intraday breakout is false and we'll close below the resistance trendline, but all indicators are pointing to probability that SPY would move higher.

- I would buy the remaining 1/2 long delta position 111.2. 109.5 would be my 1st stop/loss consideration. 108.5 would be where I get out of all current long delta position.

- EFV value is 20.3 and SPY implied volatility is 20.

Wednesday, September 8, 2010

SPY Daily Chart w/Today's Intraday Prices

- SPY is 110.5 at this moment, which is right at the top resistance line. Last Friday, I recommended to go long delta 1/2 position should SPY fall this week. I went long at 110.0. I would go long the remaining half either below SPY 109 or above closing price of 110.6. My first stop/loss level would be 106.9.
- If SPY closes up today, the Volatility Signal would cross above 50, turning bullish as well, confirming Linear Regression Slope and EFV indicator, which turned bullish last week.
- Implied Volatility in SPY is 22, while EFV indicator is at 20.4. I would not be long volatility at this point.

Friday, September 3, 2010

SPY Daily Chart

-SPY closed the week right at the resistance level of wider, falling channel lines. The most recent low is above the previous low, so if SPY closes above 110.9 level next week, we could see a move upto 116 level. However, because we shot up around 5% in just 3 days and because 113.2 level has been the top of the previous two highs, I would expect SPY to consolidate sideways next week before building up more energy to breakout to the upside.
- The reason I am more bullish then bearish on the market is because AG and commodity stocks are showing higher highs and lower lows. These were the stocks that fell way before the overall market did back in April, and it seems as though the strength in these stocks are leading the market upwards as well.
- Most of my technical indicators are bullish and EFV is at 20.55, while implied volatility in SPY at-the-money options is 20. Of course, SPY could fall and implied volatility on options rise, I believe there is higher probability of SPY going higher. I would look to put 1/2 long delta position on Monday and the other half on weakness. Finally, I am tempted to go neutral SPY vol since it has fallen from 27 to 20 this week, but EFV indicator is showing that's it is in a downward trend, so I would not go long vol.

Wednesday, September 1, 2010

SPY Daily Chart w/Today's Intraday Prices

- SPY opened above the short-term channel lines, which was signal to buy-in short position at 106.70. Position entry was at 110.50 so 3.8 points profit plus 1/2 position bought in at 104.5 and resold at 106.5 for an extra 1 point profit.

- SPY level 107.8 - 108.8 are resistance levels. Half the technical indicators are showing bullish signals, half still bearish so no positions at this moment.

- Implied Volatility on SPY has fallen to 23, which is now more in line with EFV value at 22. My short options bias was correct when SPY IV was at 27.

Monday, August 30, 2010

SPY Daily Chart w/Today's Intraday Price

-SPY has rebounded to near the top of the short-term falling channel, which is currently around 107.3. There are may economic indicators to be announced this week which could determine whether the overall market would continue its fall, or establish a new pattern by breaking out of the well-defined channel. I would put back on the short position that I recommended to take off when SPY was near 104.2. However, I would take off the entire short position should SPY close above 107.6.

-Technical indicators for the most part are still bearish, but EFV is below its moving average which is bullish and Linear Regression Slope, while still below zero, is above its moving average as well. Implied Volatility on SPY is 24.

Wednesday, August 25, 2010

SPY Daily Chart w/Today's Intraday Prices

- SPY in early morning is trading lower. This would be the fifth straight days of decline if we close down for the day. Stochastic Oscillator (11-day) is showing that SPY is at oversold levels, so we could see a technical bounce from around 104.2, which is today's value of the lower channel line of the current, short-term trend. The upper line's value for today is at 108.5.

-All indicators are confirming that a Trend (down) has taken form. The rule is to follow the trend, but I would be inclined to take some of the bearish position off at around 104.2 and look to add it back on at higher SPY levels. Of course SPY could keep falling, but prices do not go into freefall without a clear and present shock. Fears of a double-dip recession are real and currently has a strong hold on the markets, but this plays itself out over a longer-time period.

-Implied Volatility on SPY has risen now to 27, compared to EFV indicator's value of 24. I would tilt my bias to start shorting options, but not aggressively...yet.

Tuesday, August 24, 2010

SPY Daily Chart w/Today's Intraday Prices

-SPY continues its decline, and the pace of the decline is shown by the narrow trendlines. I would also use the top of the this narrow trendline or 108.6 level as of today's date as my profit stop level for the current bearish position.
-Implied Vol on SPY options is up 2 pts. to 26 at this moment. This is higher than the Estimated Future Volatility Indicator's value at 24.23.

Friday, August 20, 2010

SPY Daily Chart w/Today's Intraday Prices

-All indicators pointing to high probability of further price declines in SPY. 1) Linear Regression less than 0 and below its moving average. 2) Volatility Signal less than 50 and declining. 3) Estimated Future Volatility Indicator above its moving average. 4) MESA Sine Wave crossed below MESA Lead Sine Wave. 5) MOST NOTABLY, Stochastic Oscillator crossing below its moving average without having risen to overbought levels.
- Current bearish view since SPY opening price of 110.65 on August 11 continues. New short-term trendline drawn to show profit stop of 109.65 as of today's date.
- Estimated Future Volatility Indicator's value is at 24.22 vs. Implied Volatility level of SPY at 25

Tuesday, August 17, 2010


-SPY is currently at 109.01. First resistance level is 109, second resistance level is 110.0. After sharp declines early last week, SPY has shown little movement up or down.

-All indicators are still showing that risk is to the downside. Estimated Future Volatility Indicator is at 24.5, still above it's moving average but lower than the previous day's value. Implied Volatility on at-the-money options for SPY is at 24.

-Still bearish, neutral vol.

Thursday, August 12, 2010


- SPY off of morning lows, but below all previous support levels. The next major support is 105.0 level. Resistance is now 109.0 and 110.0. Linear Regression has gone to negative. Stochastic Oscillator not yet in oversold levels.
- Estimated Future Volatility rising and at 25 level.
- Bearish, long vol.

Wednesday, August 11, 2010

SPY TEMA Daily Chart

- What a difference a day makes! SPY intraday now below 2nd support level of 110.0, threatening to break below on daily chart basis. Next support level is 109.0 but it is minor. Next major significant support level is 105.0
-Estimated Future Volatility now above moving average and looking to breakupwards from downtrend.
-Technical Outlook. Bearish, long vol.

Tuesday, August 10, 2010

SPY Daily TEMA Chart.

-SPY still moving in short-term rising channel, but losing bullish momentum. 111.80 1st support level being tested today, but after FED announcement, appears to be holding. 110.0 is 2nd support level.
115.1 is next resistance level.
-Estimated Future Volatility Indicator and 30-day Implied Volatility in SPY ETF has come steadily down over past several weeks both to 20 level, so I do not see discrepancy.
-Mildly bullish, neutral volatility.

Friday, July 30, 2010

Bearish on TLT, Buy Dec 100/93 1x2 Put Spread

-I think money will start to come out of long-term bonds due to many reasons. First, recent decline in credit default swap prices, decline in gold prices, rise in European Stock prices, Stabilization in U.S. stock prices, decline in U.S. Dollar all point to investors fears of double-dip recession continuing to subside. Second, commodities prices have also been rising of late. Wheat, corn, coffee, orange juice, copper, natural gas, etc. are all higher since May. If these trends continue, higher commodities prices could put pressure on cost inflation in coming months.
-Of course, future economic outlook is highly uncertain and even the FED seems to be concerned about of risk of deflation more so than inflation. This has to date supported bond prices. Although stronger July Chicago PMI numbers today turned the stock market around from earlier losses, bond investors are gonna wait to see more convincing signs of economic strength before they start to take money out.
-August/September PPI and CPI and upcoming jobs data would likely be the key indicators, but I believe the risks of bond prices as reflected by TLT are to the downside. I would recommend buying the Dec 100/93 1x2 put spread for $1.55.

Monday, July 26, 2010

Market Comment, Valuation & Stock Picking

-Fears of double-dip recession are subsiding quickly. Earnings announcement, management outlook and recent economic news are reassuring investors that the global economy would not be as weak as investors had feared.
-What I am seeing in the markets are low Price to Earnings multiple (PE) stocks with growth potential or improving outlook, especially those levered to global growth, are being bought, while stocks that disappointed expectations and have high PEs are being sold. GE is a good example of the former, AMZN and NFLX are good examples of the latter.

Starwood Hotels (HOT) Options Strategy, Bullish Butterfly

-Recommendation, buy AUG 48/50/52.5 1x2x1 butterfly call spread- buy 1x Aug48 calls $2.2, Sell 2x Aug 50 calls for $1.1 and buy Aug 52.5 calls for $0.40- net purchase $0.4. Maximum loss is $0.95 for each spread if stock goes to $52.5 or above by August Expiration or $0.45 loss if stock falls below $48. Current stock price is $48.50.
-Starwood Hotels announced strong earnings last Thursday, raising their 2010 earnings outlook. They are benefitting from strong growth in Asia and Latin America. While concerns remain on overall health of the U.S. and European economies, investors are putting less likelihood of a significant global economic slowdown, and have been buying stocks levered to international growth again. In this market environment, I would expect HOT to rise steadily to around $50 in the next few weeks.

Wednesday, July 21, 2010

PRAA Stock Price Falling After FTC Report

- On July 12, FTC Issues Report on Reforming Debt Collection Litigation and Arbitration; Recommends Steps to Protect Consumers and Repair a Broken System (http://www.ftc.gov/opa/index.shtml).
Legislators pledge to fix state's 'broken' debt collection system (http://www.startribune.com/investigators/98380794.html) in Minnesota. Massachusetts Senate passes debt collection measure (http://www.boston.com/business/personalfinance/articles/2010/07/21/senate_passes_debt_collection_measure/). More and more states are likely to introduce legislation giving consumers more protection against debt collectors.

-The uncertainty and likely negative environment for Portfolio Recovery Associates Inc. (PRAA) is causing it's stock price to drop, and I believe it will continue to do so until support area of around $50. Unfortunately, the spread on options prices in PRAA is too wide and illiquid to put on a meaningful position. I would recommend looking for opportunities to short the stock on any strength.

Monday, July 19, 2010

Results of Relative Volatility and P&F Trend Indicator Simulation

-I began two simulations few weeks ago using two of my indicators on TEMA chart. First, on June 29, I compared the value of the Estimated Future Volatility (EFV) indicator against the 30-day weighted implied volatility numbers for each stock that has options trading at penny increments. I picked out 10 stocks out of the top 40 whose implied volatility seemed low relative to the EFV indicator's value and 10 stocks out of the bottom 40 whose implied volatility seemed high relative to the EFV indicator's value. The logic behind this simulation was to see if the value of the EFV indicator could be used to systematically select stocks whose options prices were "overvalued" and thus should be sold or "undervalued" and thus should be bought-as part of a Volatility Arbitrage.
-Second, on June 30, I picked stocks whose P&F Trend Indicator changed from 1 to -1 or vice versa and bought the At-The-Money options, while at the same time selling an equal dollar amount of ATM options on an index (options on SPY in this instance). This is a variation of a strategy known as Dispersion, which typically consists of short selling options on a stock index while simultaneously buying options on the component stocks. Here, we are buying only options on stocks that shows a change in P&F Trend indicator. The P&F Trend indicator changes when a stock price moves a certain amount counter to the previous direction (often an established trend). The assumption is that regardless of whether the countertrend buying/selling power succeeds or fails to reversing the established trend, enough energy has been built up to move the stock one way or the other, relative to the overall market.
-Before I discuss the results of the two simulations, I would just like to say that any observations I draw would be based on just these two simulations and that more and better simulations would need to be conducted before I could come up with definitive "conclusions". Furthermore, I am limited in resources and time to design and test more complex and detailed simulations.
-Results from Relative Volatility Simulation: I was disappointed that the simulation did not result in profits. In the first portfolio, I bought and sold ATM straddle/strangle for a net credit of $34 and ended on July expiration date with a net debit of $943. In the second portfolio, I bought and sold ATM call and put spreads for a net credit of $78 and ended on July expiration date with net debit of $1006. Trying to reduce the overall exposure risk by buying/selling option spreads actually resulted in higher losses
-Results from P&F Trend Indicator Simulation: I was encouraged that the simulation of portfolio 1 resulted in profits from net debit of $150 to net credit of $2,386. However, when I bought and sold ATM call and put speads in portfolio 2, it went from net credit of $130 to net debit of $454. Once again, what appeared to be a less risky portfolio performed worse.
-Observations from both simulations: Based on my past experiences and other testing done on the P&F Trend Indicator, I am encouraged to find that this simulation also supported my view that there is potential for profitable trading strategies, in this case buying ATM options of stocks while selling ATM options of SPY (a variation of Dispersion Strategy), whenever the P&F Trend Indicator changes on any given stock. However, more testing would be required on the EFV indicator. First of all, the design of the simulation was not ideal for evaluating the EFV indicator. In volatility Arbitrage, delta is systematically maintained neutral, therefore actual realized intraday volatility and changes in implied volatility during the period of simulation would be the determining factors as to the profit potential of the EFV Indicator, rather than what the closing price of the underlying was at a given period after the start of the simulation. Second, the EFV indicator was optimized using SPY historical prices and therefore might not be very effective when translated to other stocks.

Thursday, July 15, 2010

Deckers Outdoor Corp. (DECK) Also Looking Weak, Amphenol Corp (APH) Looking Relatively Strong

-Following the pattern of previously strong stocks (strong YTD performers) starting to breakdown, Deckers Outdoors Corp. (DECK) stock is in danger of breaking below its long established bull trend. Two days ago, I noted SKX as being vulnerable to a breakdown. The stock is down a further 8% last 2 days.

-DECK is another footwear company, seller of famous UGG brand. Overall Retail Sales numbers have been weaker than expected the past two months and recent economic indicators are definitely pointing to momentum loss in domestic economy's growth. As economy comes out of recession, consumers buy premium shoes on pent up demand and to feel good about themselves. But as consumers' disposable income remains weak, they can't justify buying $100+ shoes. DECK stock has also benefitted from UGG shoes having been one of the hottest consumer trend products the past few years. I would bet that UGGs would no longer be a must have product this winter in the U.S. Furthermore, production costs in China probably increased due to currency appreciation and higher labor cost.
-DECK is set to announce earnings on July 22. The implied volatility on Aug options are high. I would recommend buying Sep 45/35 put spread for $2.90 or selling the Aug 45/50 call spread for $1.90.
-I would offset the bearish outlook of DECK buy putting on a bullish position in APH, a global maker of electrical connectors and interconnect systems, by selling the Aug 40/35 put spread for $0.70 or buying the Aug 40/45 call spread for $2.80 as part of long/short strategy.