IN THIS ISSUE...Next issue: 4/28/2011 (Thur)

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or on Facebook at http://www.facebook.com/optionstrategist

Please note that we are cuttingover to a new web site thisweekend. Each current

subscriber will receive an email,asking him or her to go to the new siteand establish a personal password. Please read the feature article for moreinformation.

We aren’t looking for April optionexpiration to be much of an influenceon the stock market (page 4).

Our market indicators remainmostly bullish, even though the markethas declined some in the past week.Essentially, the overbought conditionshave been relieved, and as long as$SPX doesn’t close below 1300, thebulls should be in charge.

There are a number of substantialtakeover stories at this time. Werecommend a call buy on page 7.

The CBOE’s effort to tradevolatility gold has met with as muchapathy as the CME contract did, andthe open interest is almost nonexistent(page 7)

There are two put ratio spreadsand one dual calendar recommendedon page 8.

Two speculative recommend-ations based on put-call ratio charts areon page 9.

Finally, on page 12, werecommend a $VIX/SPY put hedgebecause premium is large right now.#

THE OPTION STRATEGIST™© McMillan Analysis Corporation

P. O. Box 1323, Morristown, NJ 07962–1323Volume 20, No. 7 email: info@optionstrategist.com April 15, 2011Editor: Lawrence G. McMillan Our 20th Year of Publication Research: Ryan Brennan

New Option Strategist Web Site

It’s taken a while, but we are ready to roll out our new web site. It willofficially be open for business on Monday, April 18th. The cutover fromthe old web site will take place over the weekend of April 16-17.

There are quite a few new features on this site, but the one that willbe most evident to the average customer is the account management system.The account management system allows each user to see, control, andmanage his subscriptions and his paid activity on the site. Each currentsubscriber will receive an email, asking him or her to go to the new site andestablish a personal password. This includes subscribers to all of thesubscription-based products, not single-time purchases such as CD’s,DVD’s, or books. What products are considered to be subscription-basedproducts?

McMillan’s Upcoming2011 Speaking Schedule

McMillan Live, Online Webinar SeriesAnnouncing a new series of live, paid seminars

Weekday afternoons and evenings: 15-18 weeks in allCost: $49, each

Previously Recorded:Seminar #1: Detecting and Trading Takeover Rumors

Seminar #2: Strategies For A High Volatility EnvironmentSeminar #3: Understanding & Trading $VIX Options, Part 1Seminar #4: Understanding & Trading $VIX Options, Part 2

http://www.optionstrategist.com/products/seminars/online/index.html

Three Gurus Online Webinar2 days ... 10 sessions ... $99

Tuesday-Wednesday, April 26-27, 2011

Traders Expo, Dallas, TXWednesday-Saturday, June 15-18, 2011

Hyatt Regency Dallas at Reunionhttp://www.moneyshow.com/tradeshow/dallas/traders_expo/?scode=013104

April 15, 2011 There is risk of loss in all trading Page 2

They include all of our newsletters, plus the StrategyZone:

The Option Strategist The Option Strategist HotlineThe Daily StrategistDaily Volume AlertsThe Strategy ZoneOption Work Bench

From this time forward, we will no longer be sendingthe various newsletters as attachments to an email.Rather, when the issue is ready, you will receive anemail from us with directions to “click here to viewthe issue” Then you will click through to the website, where the newsletter is posted, and you enteryour password and view the newsletter.

I n f a c t , w h e n y o u g o t ohttp://www.optionstrategist.com, in the future, youwill have the opportunity to login, if you havealready established a password. Once logged in, youcan view any and all subscriptions for which youhave paid. Subscribers to The Strategy Zone andOption Work Bench will view their content in thatmanner.

Once you are logged in, all the paid contentthat you are entitled to see will be listed on the right-hand side of the screen. You can thus view any ofthem whenever you want.

You will also be able to manage your personalsettings – email, address, password, etc. In this way,you can personalize your username and password,rather than relying on the computer-generated onesthat we have been using (for Strategy Zonesubscribers).

Another nice feature is that you will be ableto view all of your current subscriptions in one place,as well as all of your subscription history and printinvoices, if needed (the “history,” however, startsfrom April 18, 2011, and goes forward – so if youneed something prior to that, you can still contact ouroffice).

The new home page layout is shown on page3 (facing). Across the top are concise drop-downmenus, enabling you to quickly gain access to thearea you want. For example, under “Products,” thereare:

• Advisories• Analysis Tools• Educational Materials

Once you click on one of those, you will seedescriptions of the items in that category, and on theright is a complete menu of “Products.” So you canmove around in the Products area as you wish.

Along the top of each page you visit is a“bread crumb” trail, showing were you are on thesite. For example, it might read:

Home > Product Categories > AdvisoriesYou can use this to navigate your way back up thechain you traveled to get to the current page. It’s alsothe fastest way to get back to the home page.

Returning to the layout on page 3, you can seethat the other main functions across the top of thepage are:

• Money Management• Mentoring• Blog• About Us• Contact Us

Those interested in our individual account moneymanagement, or in our one-on-one mentoring canclick on those links and read about our endeavors inthose areas.

The “blog” link is a new feature. On thehome page, along the right-hand side (see page 3) isa brief excerpt from the most recent blogs. To see thefull text and a full listing of blogs, click on either themessage or the “blog” heading. We will be puttingoccasional blogs on the site, all having to do withtrading and options – but not the kind of informationthat would be afforded to paid subscribers of ournewsletters. Rather, they might deal with generalmarket commentary, new derivative products, newsabout our company or web site, etc.

Also on the home page (see page 3) is alisting of featured products – usually discounts, orsome of the newer things we are offering – along theleft-hand side.

A brief weekly market commentary is alsoshown below that.

Upcoming events are shown on the upperright. These will include live appearances andwebinars. The next live webinar – to be announcedsoon – will be presented by Stan Freifeld, whoconducts all of our mentoring instruction. Stan willbe talking on the “B.E.S.T.” method – a system fortrading options just prior to earnings announcements.Those subscribers who like to trade earningsannouncements will find this information new and

April 15, 2011 There is risk of loss in all trading Page 3

April 15, 2011 There is risk of loss in all trading Page 4

informative. Stan – a former AMEX market makerand floor official – is a terrific instructor andexperienced trader. These are methods he uses in hisown trading.

The new web site offers a concise andefficient shopping cart and purchasing process, too.For those entering to purchase new products, theprocess is smooth and intuitive.

For renewals to paid subscriptions, if you areon “auto-renew,” you won’t see any change: yoursubscription will continue to be renewed at yourcurrent price unless you call us to cancel.

For other subscribers, not on “auto-renew,”who need to renew subscriptions, you will receive anemail explaining that your subscription is expiring,and you can log into your account to renew. We havenot previously offered “auto renew” for thisnewsletter, The Option Strategist, but we will nowhave that as an option as well. All subscribers will beable to “auto-renew” at current rates, before a priceincrease goes into effect later this year.

We are making one pricing change at thistime, although others may follow in the future. Theweekly Hotline update to this newsletter has beenavailable for free on our web site, or – for a fee – wehave emailed it to you. From now on, all subscribersto The Option Strategist newsletter will receive aweekly email notification when the Hotline update isready. You can then click on it and go to the web siteto read it.

For those subscribers who have been payingthe $50 annual fee to receive the Hotline by email,your subscription to The Option Strategist will beextended by 4 issues – roughly the equivalent of $50– to compensate you for the fact that everyone willnow essentially have email access to the Hotline eachweek.

In general, the new web site is a big step up inautomation of our processes. This will hopefullyallow us more time to do research to come up withmoney-making ideas for you, our clients. This moreefficient approach should benefit you, the client, aswell, since all of your subscription information iscentralized.

But, as always, if any questions or problemsarise, our staff at McMillan Analysis Corp. will beavailable to handle special requests (such as puttinga subscription on hold) or any more complicatedprocesses not automated on the web site.We are certainly looking forward to this renovationof our “public face” on the internet and hope that itwill serve our customers well.#

April Option Expiration

This week is April option expiration. It onlyhappens a couple of times per year that the 2nd

Thursday is prior to the 3rd Friday, but this isone of them. For that to happen, the 2nd Thursdaymust fall on the 14th of the month, and hence optionexpiration falls on the earliest possible date for the 3rd

Friday – the 15th. Market lore has it that the market rallies

during expiration week, but in reality it only makes amajor move if there is an imbalance between in-the-money call open interest and that of the in-the-moneyputs – and, in particular, in the index options.

It is often beneficial to look at the S&P 100Index ($OEX) options for this purpose, because 1)they are American-style, meaning they can beexercised on any day, 2) they are cash-based, and 3)there are no futures or meaningful ETF’s on $OEX,so the option activity is more “pure” than, say, $SPX– where SPY, S&P futures, e-mini futures, and soforth, distort the true picture.

In recent times, option expiration has not hada major effect on the broad stock market, especiallyon the non-quarterly months (i.e., not March, June,September, or December). This month is noexception, as open interest is modestly low and thusdoesn’t have market-moving potential.

$OEX closed Wednesday near 587. At thatlevel, there are only 4,400 in-the-money calls and11,830 in-the-money puts (open interest). That is aslightly bearish bias, but it really isn’t large enoughto be meaningful in terms of influencing broad stockmarket movements.

In fact, one would have to go down to the 575strike before in-the-money put open interest is sodominant over in-the-money call open interest thatmeaningful sell programs might result. On theupside, $OEX would have to rise above the 610 strikein order for call open interest to be so dominant overput open interest, so then buy programs could be inevidence.

In reality, it is quite unlikely that $OEX couldmove far enough to reach either of those strikes,although I suppose 575 is possible. The bottom lineis that we don’t expect options to have a materialaffect on the broad market this April week ofexpiration.#

April 15, 2011 There is risk of loss in all trading Page 5

Category Position Recent Mark Comment

Cov. Write: C330: 400 FRO cov.wr. (Aug 26c) –1496 Hold.C372: AGN margin put sale (2 Apr 65p) +126 ExpiringC376: FSLR margin put sale (2 Apr 125p)+206 ExpiringC377: NOV margin put sale (2 May 65p) –14 Stop: 64C378: HON cash put sale (3 May 57.5p) –210 Stop: 56C379: CAT margin put sale (2 May 100p) –42 Stop: 99C380: CSCO cash put sale (10 May 17.5p)–170 Stop: 16.6C391: WYNN margin put sale (2 May 115p) –2 Stop: 114

Condor: D47: S&P Condor spread +70 Expiring L 2 /SPJ 1115p, S 2 /SPJ 1120pEquity: E865: CTL straddle buy +176 Expiring

L 4 CTL Apr 45cE867: BVN straddle buy –627 HoldL 3 BVN Jun 42c, L 3 BVN Jun 42pE873: WY straddle buy –444 HoldL 6 WY July 23c; L 6 WY July 23pE874: COO straddle buy +72 HoldL 2 COO Aug 70c, L 2 COO Aug 70pE875: pcp Call Calednar –144 Hold.L 8 PCP Jun 150c, S 8 PCP May 150c

Futures: F263: Nat. Gas straddle buy +28765 HoldL 1 /NGU1 41c, L 1 /NGU1 41p

F381: SP Put Ratio Spread +1685 Stop: 1156.50L 2 /SPJ 1250p, S 2 /SPH 1220p, S 2 /SPH 1190p

Index: I411: SPY put ratio spread +360 Stop: 115.80L 12 Apr 125p, S 12 Apr 122p, S 12 Apr 119p

Put-Call: PC1122: L 2 AMZN Apr 170c +1584 Sold 1/3rd; stop: 176Roll to AMZN May 170c

PC1123: L 2 GS May 160c –360 Stopped out todayPC1124: L 3 ICE May 120p –486 Stop: 124

Spec: S604: L 4 BIG Apr 37.5c +392 Roll to BIG May 40c L 4 BJ Jun 47.5c –88 Hold L 4 CVLT May 41c +1116 Hold L 10 LWSN May 12.5c –120 Hold(Total of all “strategic alternatives” to date: +$10,510)

S610: Perpetual call buy –716 Tues: B May 29cL 4 $VIX Apr 30c

S619: L 6 SPY Apr 132c –1218 SellS620: XNPT event-driven straddle +618 Stopped out

L 6 Apr 6c, L 6 Apr 6pS621: L 30 UUP May 22c –450 HoldS622: : 5 CEPH May 75c –210 Hold

FOLLOW-UPS TO PREVIOUS RECOMMENDATIONSThe following figures represent hypothetical performance; these positions were not actually traded in an account.NOTE: on this page, all stops are mental closing stops unlessotherwise noted.Position C372: the AGN Apr 65 puts will expire worthless today.Position C376: the FSLR Apr 125 puts will expire worthless.D47: the April put credit spread will expire worthless.

Replace it with the following:Position D48: SP Futures May Put Credit Spread

Buy 2 May SP 1185 putsand Sell 2 May SP 1180 putsFor a credit of 0.25 or more per spread

Position E865: the remaining CTL calls will expire worthless.Position F381: the Apr SP put ratio spread will expire worthless.

Replace it with the May position detailed on page 8Position I411: the SPY Apr put ratio spread will expire

worthless. Replace with the May position detailed on page 8Position PC1122: we sold a third of the AMZN Apr 170 calls.

Now roll the calls out to the May 170 calls. Raise the stop to176. We are staying with in-the-money calls to keep thehigher delta, rather than use an at-the-money call.

Position PC1123: the GS May 160 calls were stopped out today,when the stock closed below 156.

Position PC1124: set the stop at 124 for the ICE May 120 puts.Position S604: roll the BIG Apr 37.5 calls up and out to the May

40 calls.Position S610: the $VIX “perpetual call buy.” These calls’ last

trading day is next Tuesday. So, on Tuesday afternoon, buyMay calls that are at least 7.5 points out of the money (usingthe May futures as the underlying price). With May futures at20.15, for example, that would mean buying the $VIX May 29calls.

Position S619: the long SPY Apr 132 calls should be sold now.Position S620: the XNPT event-driven (FDA) straddle buy.

XNPT received approval, and the stock spiked above 11. Perour instructions in the last newsletter, we sold half of the Apr6 calls at that time. We then set a stop at 9.50, and the balanceof the calls were stopped out this week. It was very unusual tosee the stock trade down every day after the favorable ruling.

Position S621: the US Dollar calls (UUP May 22): The DSI is backdown to 5, so we are going to hold these calls, looking for thatcontrarian rally.

HYPOTHETICAL PERFORMANCE SUMMARY1

Breakdown by general investment strategy:All Hedged Speculative Positions Positions

Number of Closed Positions 1955 1447Avg Holding Period (days): 72 42Average Investment: $7471 $2119Average Gain: +$201 +$65Average Gain at Annual Rate 13.6% 27.1%1: Commissions assumed: $15/futures option, $2/stock option,4 cents/share of stock. No management fee is assumed. Profits are not compounded. See Disclaimer, on page 10.

Past performance is not a guarantee of future results

POSITIONS CLOSED SINCE LAST ISSUECategory Position Profit/LossPut-Call PC1121: COH put buy –1276Spec: S602: XNPT event-driven strad +618

April 15, 2011 There is risk of loss in all trading Page 6

. . . . . . . . SENTIMENT INDICATORS . . . . . . . . . . . . . . . .

Two weeks ago, breadth was strong and thecumulative advance-decline was making newhighs, so we expected $SPX to tag along and do

the same. That has not happened (yet), but there werenew highs in the Dow ($DJX), Value Line ($VLE),and Russell 2000 ($RUT).

There were some overbought conditions at thattime as well, though: extreme readings in the breadthoscillators, in particular. When new highs couldn’t bemade ($SPX unsuccessfully probed the 1340 areaseven straight days, but couldn’t get through), sellingset in.

During those four days of selling, breadth wasdecidedly negative (see table below), and breadthoscillators rolled over to sell signals. But, perhapsmore importantly, none of the other intermediate-termindicators turned negative.

$SPX touched support and its rising 20-daymoving average at 1310, and probed slightly belowthat level today before rallying. On overboughtpullbacks, it is

common for the major averages to probe slightly belowtheir rising 20-day moving average – which is exactlywhat has happened so far.

Perhaps more interesting is the fact that the equity-only put-call ratios have remained on buy signalsthroughout the pullback over the last week. You cansee from the charts above that the standard andweighted ratios have continued to decline, even whilethe market sold off. This is quite bullish. In otherwords, there was not a rush to buy puts, even thoughthe market backed off.

There was similar action in the volatility indices($VIX and $VXO). As the market backed down fromits highs near 1340 to the 1300-1310 level, $VIXdidn’t move higher. In fact, on some of the down days,$VIX actually fell. Thus, there was no rush to buy$SPX puts (a fact which causes $VIX to rise). Thecalm in these volatility indices was another bullishindication, despite the falling broad market.

The $VIX futures gained premium as $VIX fell.Thus the May futures, which will be the front month asof next Wednesday, are trading with a whoppingpremium of 3.88 to $VIX. The term structure of thefutures slopes upward from there, which is also bullish.For example, the Sept $VIX futures settled with apremium of 7.33 to $VIX today. These are not thelevels of a bearish phase. It’s more like an overboughtphase – which is nonsensical, given the fact that $SPXhas been declining. Even so, we don’t think the termstructure can steepen much more, so a $VIX/SPY putspread is feasible (see page 12).

In summary, the bears have growled a bit thisweek, but the market has pulled back to its risingmoving average in an orderly fashion – alleviating itsoverbought breadth condition – while the otherintermediate-term indicators remain positive. This isa positive combination from our point of view.#

“Stocks Only” Data20110401 2226 961 126520110404 1737 1188 54920110405 1613 1307 30620110406 1815 1254 56120110407 946 2160 -121420110408 880 2264 -138420110411 833 2261 -142820110412 546 2774 -222820110413 1710 1243 46720110414 1741 1196 545

90% Days are shown in red

Intermediate-term buy signals remain ineffect, so we are bullish

unless $SPX breaks down below 1300.

April 15, 2011 There is risk of loss in all trading Page 7

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Takeover Rumors

There has been a lot of takeover activity – rumors, truetakeovers, and things in between. Several are worthnoting, as they provide some potentially profitable

opportunities.

Tyco (TYC) – rumors began to surface on Monday of thisweek (actually, the very first rumors surfaced a weekearlier) that a European company was looking at TYCfor a possible buyout. Rumors heated up substantiallythis week, when certain news outlets reported that aFrench company, Schneider Electric, had made a bidof about $63 for TYC. That news exploded the stockup to 53 on Tuesday. However, Schneider then saidthat “it is not in discussions with Tyco.” On thatnews, TYC at first dropped more than two points, butquickly recovered and is currently trading near 52.Many think Schneider’s statement was a carefullyworded ploy, as rumors continue to swirl thatSchneider is lining up financing.

Skilled Healthcare (SKH) – announced on Tuesday thatit is exploring strategic alternatives, including thepossible sale of the company. As longer-termsubscribers know, this is our favorite catch-phrase, asit indicates a far larger probability that some sort oftakeover will actually take place here – as opposed toa mere rumor. SKH did not move much on theannouncement, though. We would prefer to see alarge jump in price, for there is often another largejump when and if an actual deal takes place.

Biomarin (BMRN) – on Wednesday, option activity wasvery heavy and implied volatility exploded (the CIVjumped from 31% to 61% that day). The stock rose1.50 or so on this activity. However, nothing furtherhas surfaced or been announced. But usually when theoptions get that active in the complete absence ofnews, it is a positive sign.

99 Cent Stores (NDN) – received a “going private”proposal on March 11th, from its CEO’s family and aprivate equity firm. The price was $19.09. The stockimmediately traded slightly above that price, and nowthis week it traded up to and slightly above 20. Therewas heavy stock and option volume in this week’strading. The question here is, “how much of a higherprice is possible?” Not much higher, apparently, asthe 20 strike calls are selling for 50 cents or so.

Lawson Software (LWSN) – is a stock in which wealready hold a position. The stock had previouslyreceived an unsolicited takeover bid, and then shortlyafter declared “strategic alternatives.” Rumorssurfaced again this week that an announcement is near,but the stock remains locked in the area just above 12.

Exelixis (EXEL) – last November, the company reportedpositive trials results for its ovarian cancer treatment.Apparently that spurred larger pharmaceuticalcompanies to consider a buyout of EXEL. This week,Bloomberg reported that EXEL had hired advisors to

help it sort out the offers. In effect, this is tantamountto a “strategic alternatives” declaration. The stock hasdoubled in price since last November, but this latestannouncement didn’t spur much of a price increase,despite heavy stock and option activity.

NXP Semiconductors (NXPI) – has been exhibiting highimplied volatility in its options for some time.Takeover rumors are now surfacing, after a report inReuters that said INTC, BRCM, and QCOM werelooking at the company. Later on, though, the CEOdenied that the company is looking for a sale – astatement he later qualified by saying he might sell ifthe price were high enough! Another negative: thecompany announced that it might issue another stocksecondary in the second half of this year. Thatcertainly doesn’t sound like a takeover is imminent.

Position S604: Tyco (TYC) Call Buy(Addition to position S604)Buy 4 TYC May 50 calls At a price of 3.70 or less.

We are adding this to the position that is generallyreserved for “strategic alternatives” or actual bids. Ifwe consider the reports that Schneider has made a bid,it fits in the category. We will hold these callswithout a stop, since an ongoing takeover negotiationcan produce some volatile price swings withoutchanging the overall probabilities.

CBOE Gold Volatility Derivatives

The CBOE began trading options on its gold volatilityindex on Tuesday, April 12th. The Gold VolatilityIndex symbol is $GVZ. Recall that a volatility

index (like $VIX) requires actual option prices for itscalculations. In this case, $GVZ is based on the Gold ETF(GLD) options. Futures on $GVZ were listed a fewweeks ago, and now the options have been listed as well– both on the CBOE.

Since this may be a bit confusing, here is acomparison with the similar entities for $VIX.

S&P 500 GoldVolatility Index $VIX $GVZOptions used in Vol calculation $SPX GLD

Public response has been poor. As we’ve noted before,similar contracts listed by the CME some time ago haveessentially no activity. These aren’t much better. Futuresand options trade on $GVZ. To date, there is an openinterest of 8 in the futures (4 in May, 4 in June), and anopen interest of eleven in the $GVZ listed options (oneMay 16 call traded this week and 10 May 15 puts).

That is abysmal. One would think that with Gold nearall-time highs, and GLD options very active, traderswould want a volatility hedge, but either they don’t orthey don’t understand what these products are.#

April 15, 2011 There is risk of loss in all trading Page 8

OEX Implied Volatility SkewingNear-Term Options (Recent History)

Strike 4/14/2011 3/31/2011 3/10/2011At – 25 18.0 21.3 21.9At – 15 16.0 18.0 21.1At – 10 15.2 16.6 20.2At – 5 14.3 15.4 19.9At-money 13.3 14.1 18.7At + 5 12.5 12.9 18.1At + 10 11.6 12.0 17.3At + 15 11.1 11.3 16.6

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Volatility Skew Table Underlying Symbol Price Rating

Check Point CHKP 53.56 49.91Jun S&P /SPM1 1311.5 46.95

Varian Med. VAR 69.19 41.20S&P 100 $OEX 587.32 38.99Jun Gold /GCM1 1475.8 38.61

Express Scripts ESRX 55.10 34.22Cephalon CEPH 75.54 33.21

Apollo Group APOL 39.96 31.28Newmont NEM 57.53 30.28

Proctor & Gam. PG 63.30 26.87May Feed Cattle /FCK1 134.05 26.01Goldman Sachs GS 155.79 25.54Franklin Res. BEN 122.56 23.65

S&P 500 $SPX 1314.5 21.70Russell 2000 $RUT 827.5 20.55

BJ’s Wholesale BJ 49.03 17.55Big Lots BIG 43.68 17.31

Dow Jones $DJX 122.85 16.60June Yen /JYM1 119.90 15.87

June Pound /BPM1 163.40 15.19June Aussie $ /ADM1 104.63 14.20CME Group CME 305.53 13.53

INDEX OPTIONS & VOLATILITY SKEWING

Covered Writes/Naked Put Sales

Implied volatility has declined substantially of late – notonly in the price of $VIX, but in the measures shownin the snapshots in the above tables. Hence, the

number of acceptable writes on margin has dwindled evenfurther, and cash accounts are still forced to “stock pick,”rather than rely on the mathematics of the put option sale.As a result, we would advise put writers to engage in theput spreads listed below, rather than sell equity puts now.

Volatility Skews

Since this is expiration week, we want to replcce theS&P futures and SPY put ratio spreads.

Position F382: May SP Put Ratio SpreadBuy 2 May SP 1290 puts

and Sell 2 May SP 1270 putsand Sell 2 May SP 1240 puts

For a credit of 2.50 per 1x1x1 spread.Allow $15,000 in margin per 1x1x1 spread. Stop yourselfout if June SP futures trade at the lower breakeven pointof 1217.50.

Position I412: SPY Put Ratio SpreadBuy 12 SPY May 129 puts

and Sell 12 SPY May 127 putsand Sell 12 SPY May 124 puts

For a credit of 0.25 per 1x1x1 spread.Allow $1,900 in margin per 1x1x1 spread. Stop yourselfout if SPY trades at the lower breakeven point of 121.75.

This next position is to take advantage of the horizontalskew that is arising because of earnings on April 26th.

Position FE76: LMT Dual Calendar SpreadBuy 10 LMT June 82.5 calls

and Sell 10 LMT May 82.5 callsand Buy 15 LMT June 72.5 puts

and Sell 15 LMT May 72.5 putsFor a debit of $1,200 on the entire position.#

OEX Implied VolatilityAt-the-money Options

Current Data & Recent History Month Volatility%

4/14/2011 3/31/2011 3/10/2011 May 13.3 15.2 18.8 Jun 14.3 15.8 18.9 July 15.5 16.2 Sept 17.0 Dec‘11 17.9 17.9 19.6 Dec’12 18.9 18.6 20.1

April 15, 2011 There is risk of loss in all trading Page 9

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Special Biotech SituationsStock Expensive CommentSymbol Month(s)AMRN May UnknownBMTI May PDUFA 5/12/2011UTHR Aug Trial data

The only recent activity here was the approval forXenoport (XNPT), which resulted in a nice gaphigher by the stock, but it has been down five straightdays since then. So, while the straddle buy workedbriefly, the price couldn’t hold up. This is anunusual, but not unheard of, result to a positive FDAdecision.#

Futures, Sector, and Stock Sentiment

Since we last published, there were new buysignals in BBY, COH, DELL_w, GE_w,GLW, MSFT, QCOM, SMH, Gold futures

and Coffee futures_w.There are oversold conditions – soon to be buy

signals – in AAPL, AMAT, RIMM, and Cottonfutures.

There are new sell signals in CDE, CMCSA,CME_w, CNX, CVX_w, FDX, JPM, PBR, FXE,OIH, $XAU, and XME.

There are overbought conditions – soon to besell signals – in CVS, GG, ISRG, NOK, NUE,PFE_w, PM, X, XLU, and Euro FX futures.

Position PC1125: Coeur D’Alene Mines(CDE) Put Buy

Buy 4 CDE June 31 putsat a price of 3.00 or less.

CDE: 31.08 June 31 put: 3.10

Stop yourself out on a close above 35.

Position PC1126: Chevron (CVX) PutBuyBuy 3 CVX June 105 puts @ 4.20 or less

CVX: 104.88 June 105 put: 4.20

Stop yourself out on a close above 107-1/2.#

DSIJake Bernstein publishes the Daily Sentiment Index(DSI) report (http://www.trade-futures.com or callthem at 831-430-0600).

This is a contrarian report. If more than 90%of those surveyed are bullish, then a sell signal issetting up; conversely, if less than 10% of thosesurveyed are bullish, then a buy signal is setting up.

The US dollar is at 5% right now, and has beenbelow 10% for the last 8 consecutive days – and mostdays prior to that as well. There aren’t many whobelieve the dollar can rally. That’s why we’reholding onto the dollar calls on the UUP ETF.

On the other side of the coin, the Swiss Francand Euro FX are showing very high readings – inexcess of 90% bulls.#

In-The-Money Covered Call Writesranked by prob. of not reaching the downside breakeven point

AERTNC = Annualized Expected Return, Cash

Symb Stk Opt StrkMn Call %DBE PrDBE AERTNC InvtMDVN 20.6 Jan 7.5 13.5 0.65 97 4.6 7.2LVS 44.6 Jan 22.5 23.0 0.51 96 4.0 21.7NFLX 238.8 May 180 59.9 0.25 96 3.2 179.0ERX 77.7 May 55 23.2 0.30 96 3.3 54.6SSO 52.3 Jun 43 9.9 0.19 95 3.5 42.6VRTX 47.4 Jul 30 18.0 0.38 95 3.7 29.5AAPL 336.1 May 290 47.8 0.14 95 3.2 288.4FAS 29.7 Jul 20 10.2 0.34 95 3.7 19.7LULU 92.1 Jun 70 22.9 0.25 95 3.2 69.3CISG 13.7 Jul 7.5 6.5 0.47 95 3.2 7.3

April 15, 2011 There is risk of loss in all trading Page 10

Chevron: new sell signal Dell: new sell signalCoach: new buy signal

CME: new buy signalPHLX Gold Index: recent sell

Qualcomm: recent buy signal

Gold futures: recent buy signal

JP Morgan: new sell signalGen’l Electric: new buy signal

April 15, 2011 There is risk of loss in all trading Page 11

S&P 500 Index ($SPX)

Coeur D’Alene Mines Corporation Idaho

Lockheed Martin Corporation

99 Cents Only Stores

CBOE’s Volatility Index

Chevron Corporation

Tyco International Limited

Exelixis Incorporated

April 15, 2011 There is risk of loss in all trading Page 12

L

Implied Volatility of $VIX Options:On 4/14/11, with $VIX = 16.27

and $VXO = 16.06Implieds (average of bid iv% & asked iv%)

Strikes Months...May’11 Jun’11 Jul’11 Aug’11

ATM-1 70% 69% 65% 63%ATM 82% 75% 71% 66%ATM+1 91% 79% 76% 71%ATM+2 99% 84% 79% 75%ATM+3 105% 86% 83% 79%Futures 20.15 21.40 22.25 22.8520-day HV 31% 25% 24% 23%

Volatility and Variance Futures and Options UpdateVolatility Drops Despite Market Decline

As noted in several places in this newsletter, volatility has dropped over the past two weeks, even though thebroad stock market is lower. This drop is evident in several ways. First, $VIX itself is lower. Second, thefutures premium is higher, and the term structure is steeper. The box on the right just below shows a few

of these facts: $VIX closed at 16.27, but the front-month May futures settled at 20.15 – a large 3.88 premium to$VIX. Furthermore, the August futures settled at 22.85 – a 6.48 premium to $VIX.

Also, you may want to look back at thetables at the top of page 8 – which show theskews in $OEX options. In those boxes thereare three snapshots – looking at the volatilitystructure of $OEX on each of the last twopublication dates, plus today. Volatility hasdropped. Also the term structure has widenedquite a bit. The Dec ‘11 and Dec ‘12volatility is about the same as it was twoweeks ago, but the volatility in the frontmonths (May and June) is considerably lowerthan two weeks ago.

Also, the composite implied volatility(CIV) of all equityoptions is back down tothe 14th percentile again(chart, page 8). Also, 20-day historical volatilityof $SPX is back down to8%. These seem likeextreme reactions in amarket that hasn’t reallyfound any bullish footingin over a week – exceptfor late-afternoon rallies.

As a result, we aregoing to recommend apurchase of puts on both.If the market rallies, the$VIX futures premiumshould shrink and $VIXputs will profit; if themarket falls, SPY putswill profit.

Position I413: Buy 5 $VIX May21 puts and Buy3 SPY May 132

puts. We will look to takeprofits if the May futurespremium shrinks.#

VX ExpirationDates

4/20/20115/18/20116/15/20117/20/20118/17/20119/21/2011

10/19/201111/16/201112/21/20111/18/20122/15/20123/21/2012