Time To Buy Volatility

- Fair Volatility Estimate indicator's value is 13, while mean implied volatility on SPY is 14.6. While SPY implied volatility is above FVE indicator's value, I believe one should be looking to buy options and buy volatility because FVE indicator has crossed above its moving average from low levels.

- I would also think that buying the Feb 128/125 put spread and selling Feb 132 call for under 0.30 would be a good trade to put on for a possible correction.

GLD Position Looking Good

- Most recent push up to 138.72 stopped short of GLD's previous high of 139.11. By Jan 22 expiration, the chance that GLD prices would go above 142 is very small. Now the question is will the Jan 132 puts be in the money by Jan 22 expiration? GLD is testing 133-134 support level once again.

- As for SPY, mean implied Volatility has dropped a point to 15% from 16% as of Monday morning's post. FVE indicator's value is 11.5. According to my indicators, implied volatility remains overvalued.

Implied Volatility High Compared to FVE

-FVE indicator's value is at 12.1, compared to mean implied volatility on SPY options of 16.12, according to IVolatility.com. As I expected last week, market makers would take profits and buy back their short options positions. This is probably the reason why implied volatility has risen over the past week, even though the market had remained quiet and unchanged.

-Some of my indicators are starting to show bullish energy subsiding, and SPY is due for a correction, but I feel implied volatility (although still at low levels) is overvalued.

-I would sell the Jan 22 120/129 strangle for 0.90 or better.

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.

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)

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.

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.