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Monday, February 28, 2011

Looking for Opportunity to Buy Options on SPY

- Many of my indicators are pointing to higher probability of a SPY price correction. This time, however, I would not go against the bull market until SPY closes below bullish trendlines. Short-term Linear Regression Slope has gone negative. I will be watching Volatility Signal to see if it goes negative soon.

- Fair Volatility Estimate is 16.6 as of 2/28 in early trade. SPY mean implied volatility is 15.3%, so SPY options has gone from overvalued to undervalued in a matter of few days. Conditions seem right to look to buy options, but there needs to be a trigger.

-VXX is the symbol for iPath S&P 500 VIX Short Term Futures ETN and is an instrument to trade S&P500 volatility (only for very short-term). I'll study if there are any opportunity to use my Fair Volatility Estimate indicator to trade VXX profitably, although the contango (prices on 2nd month expiration futures trade higher than front month expiration futures) built in to VIX futures makes this instrument difficult to compare with my FVE indicator.

Thursday, February 24, 2011

Apologize for the Absence.

- Sorry for lack of updates past 4 weeks. I have been quite busy with other matters but I should have more free time now to post more frequently. As for my simulation, to maintain total integrity, since there were no updates since the last trade recommendation, I assumed the most recent position closed on Feb expiration, which would result in a 2.83 loss! Ouch!

- Looking forward, there are many uncertain factors affecting the markets. This is reflected in volatility having spiked the past 2 days with SPY dropping sharply the past 2 days. Mean Implied Volatility has jumped to 17.90% for SPY options. Fair Volatility Indicator has also spiked, but it's value is at 16.07. The difference in the two is not significant enough for me to say SPY options are overvalued.

- I would pay attention to the bond markets, since bond prices have been crushed the past 6 months. If bond prices start to find a bottom, the bull market in stocks could take a pause.