Weekly Option Volatility Report

Each week OPTIONMIZER analyzes markets showing opportunities based on volatility. We delve into the volatility analysis of the markets to find trade designs advantageous to options traders. This report provides specific trading strategies to use in select markets based on the OPTIONMIZER volatility analysis.

S&P 500

5 Month Average Implied Volatility = 35.1

Current Estimated Implied Volatility = 22.2

MARKET AND VOLATILITY ANALYSIS: Prices - and optimism - appear to be soaring as better than expected housing data reinforces recovery hopes. Higher home prices and improved new home sales come on the heels of what appeared to be a reasonably positive earnings season; however, lurking below the surface is the potential for a few darker sides to recent hopeful headlines. There were still some companies which have struggled to make ends meet, including those who resorted to layoffs and spending cuts to make second-quarter targets. This may be the calm before another storm of uncertainty - or even disappointment. Implied volatility levels have dropped back down and may provide entry opportunities.

RECOMMENDATION: Take possible advantage of the lower level of implied volatility and buy puts to play a potential drop.

Soybean Meal

5 Month Average Implied Volatility = 37.1

Current Estimated Implied Volatility = 37.6

MARKET AND VOLATILITY ANALYSIS: Domestic use for soybean meal was projected lower by the USDA in their most recent World Ag report. That estimate was likely heavily influenced by the potential for reduced hog numbers following the swine flu scare. Prices have fallen and now appear to be consolidating as the news of revised acreage estimates from the USDA hits headlines. Although it is unclear whether the USDA surveys will yield lower or higher production estimates, the current dip in implied volatility levels in soybean meal may be worth taking another look at. Right now, implied volatility levels are below statistical and nearly matched to the five-month average.

RECOMMENDATION: Buy strangles ahead of the USDA's crop production release in August to play a potential breakout in either direction or a spike in implied volatility levels.

Sugar

5 Month Average Implied Volatility = 38.1

Current Estimated Implied Volatility = 39.2

MARKET AND VOLATILITY ANALYSIS: Sugar prices have soared recently, likely buoyed by concerns that some of the top producers may experience production issues. Timing and quantity of monsoon rains in India have been watched to confirm the possible impact on cane production. Shortfall in that nation in particular may lead to a global deficit, according to some industry professionals who cite the possible extension of duty-free sugar imports as evidence. Implied volatility levels have maintained a high level and are well above statistical volatility levels.

RECOMMENDATION: Sell call spreads to try to take advantage of higher implied volatility levels and play a possible pullback in a market which appears overbought.

Gold

5 Month Average Implied Volatility = 30.0

Current Estimated Implied Volatility = 17.5

MARKET AND VOLATILITY ANALYSIS: Stirrings of positives within the earnings and housing news stories may help break down the recent gains in gold prices; however, there is still an underlying issue with key ingredients for recovery: consumer confidence, spending, and employment. Until these remaining pillars are viewed as being in better shape than recent months have left them, there may be support for these prices. Implied volatility levels have dropped well below the five-month average. Fears of inflation and collapse seem to have all but disappeared.

RECOMMENDATION: Establish ratio put back spreads to try to use the slightly elevated implied volatility levels to play the potential for volatility expansion or a complete price breakdown.

Disclaimer: Transactions in options carry a high degree of risk. Purchasers and sellers of options should familiarize themselves with the type of option (i.e., put or call) which they contemplate trading and the associated risk. Selling ("writing" or "shorting") an option generally entails considerably greater risk than purchasing options. Naked options writing involves unlimited risk. Although the premium received by the seller is fixed, the seller may sustain a loss well in excess of that amount. Option buyers should calculate the extent to which the value of the options must increase for a position to become profitable, taking into account the premium paid and all transaction costs. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEYARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICALTRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
This newsletter has been prepared solely for information purposes, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. The information presented in this site is for general information purposes only. Although every attempt has been made to assure accuracy, we assume no responsibility for data errors or omissions. Examples are provided for illustrative purposes only and should not be construed as investment advice or strategy. The information presented herein has not been designed to meet the rigorous standards set by the Commodity Futures Trading Commission for disclosure statements concerning the risks involved in trading futures or options on futures. That disclosure statement must be provided to you by your broker.