« August 2016

IVolatility Trading Digest™ Blog

Volume 16 Issue 33
Crude Oil Chatter Again [Chart]

Crude Oil Chatter Again [Chart] - IVolatility Trading Digest™

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New commentary about efforts to support crude oil prices from the Saudi oil minister helped lift the S&P 500 Index Thursday to new intraday and closing highs while trading in a narrow range all week on relatively low volume. There is more in our market review below including updates for the VIX futures and options data as well as the latest Commitment of Traders report for WTI crude oil from the Commodity Futures Trading Commission.

Review NotesS&P 500 Index (SPX) 2184.05 advanced slightly gaining 1.18 points or +.05% for week after making an intraday high at 2188.45 Thursday. From a fundamental perspective, as it continues higher it continues attracting more bearish commentary, wrong at least so far.


The bulls cite low interest rates to justify higher prices with the 10-year Treasury Note yield at 1.52%, compared to the earning yield of 3.97% and 4.41% using S&P’s 2Q estimates of 86.66 for “As Reported” and 98.36 for “Operating” earnings. However, based on the “As Reported” yield of 3.97% this allows only 2.45%, equity risk premium compared to a typical 3% premium.

Brendan Brown at the Mises Institute: “Many investors looking at the array of high asset prices realize that many of these are far above fundamental value yet desperation for yield defeats cool rationality.”

It seems any further advance can only be justified by a further reduction in the risk premium unless earnings improve. Since they have been constrained by the energy sector, advancing crude oil prices quickly equate to better earnings estimates.

CBOE Volatility Index® (VIX) 11.55 was up .16 last week, after making an intraday low of 11.02 Tuesday.

According to the CBOE, based on real-time prices of options on the S&P 500® Index, VIX reflects investors' consensus view of future (30-day) expected stock market volatility.

The table below shows the VIX cash compared to the next two futures contracts as well as our calculation of Larry McMillan’s day-weighted average between the first and second months.




With 2 trading days until the August monthly expiration, the day weighting applied 10% to August and 90% to September for a 27.40 % premium shown above. Our alternative volume-weighted average between August and September regularly found in the Options Data Analysis section on our homepage was lower at 18.94% while the open interest weighted premium was 21.16%.

While day-to-day VIX changes offer little forecasting insight following the VIX futures premium helps since it measures expectations of tactical professional traders and money managers using VIX futures and options for hedging long portfolio risk.

The premium measures the amount the futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration. Depending on the time to expiration, premiums for normal term structures during uptrends are 10% to 20% and decline when the VIX advances faster than the nearest future as the market declines and/or the futures decline as the front month expiration approaches. Premiums less than 10% suggest caution and negative premiums indicate oversold conditions when the VIX is higher than the futures and are usually associated with reversals.

Although the August futures expire Wednesday, the open interest continues increasing as of Friday up another 4.28% to 538,668 contracts advancing for the last six weeks as VIX futures and options continue attracting hedge related activity.

VIX Options

With a current 30-day Historical Volatility of 73.23 and 83.12 using Parkinson’s range method, the table below shows the Implied Volatility (IV) of the at-the-money VIX calls and puts using the futures prices based upon Friday closing option mid prices along with their respective month’s futures prices, since pricing of the options are from the tradable futures.




While August futures expire Wednesday, compared to the current range historical volatility of 83.12 September at-the-money option prices are in line relative to the recent movement of the VIX futures.



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Crude OilWTI Light Sweet Crude Oil (CL)44.49 basis September futures advanced 2.69 points or +6.44% week after making a wide outside range day Thursday putting it right up against the current downward sloping trendline and resistance from previous lows around 45.25.


Although reflecting positions before advancing Thursday and Friday the weekly Commitments of Traders reports from the CFTC as of Tuesday August 9 provides insight into the activity of the participants that determine the market reference price of crude oil, using the Disaggregated Commitments of Traders - Options and Futures Combined as explained in Digest Issue 31 "Rounding Top & Crude Oil [Chart]."




Week ending 8-2 “Managed Money” pressed their net short position by -7,992 contracts. For week ending 8-9 they reversed by adding +15, 638 net contracts, increasing their % of the open interest from 3.35% to 3.91% while the “Non-Reportables” or small speculators, who are often on the wrong side liquidated longs and added shorts for a net change -18,181 contracts. At the margin, since “Managed Money” usually determines the price it appers headed higher although now up against some resistance. Since the COT report lags the price change by three days, next week’s report will reveal who pushed prices up to resistance Thursday and Friday.

Using the crude oil ETF United States Oil (USO) 10.50 here is a seasonal chart for the last five years, not including 2016 and the gain so far this month.




In the past 5 years, August was positive, but the picture is quite different for September through the end of the year.

StrategyStrategyAlthough August is not typically a strong time of year for equity markets, this year could be an exception, perhaps because it’s an election year with hope in the air. From a fundamental earning perspective, some caution seems warranted unless crude oil prices continue advancing thereby improving the outlook for the energy sector that has been suppressing S&P 500 Index earnings. However, until something changes sentiment, such as a key reversal on increasing volume, or an external macro shock, the bulls will continue getting the nod.





Increasing VIX futures open interest suggests more hedging activity by those willing to pay the cost to protect long portfolio positions against an unexpected market decline as the S&P 500 Index continues advancing supported by increasing crude oil prices despite a historically stretched fundamental valuation.


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Since the focus during the last two weeks of August usually shifts from trading desks to various vacation resorts from the beach to the mountains, the Digest team also decided it was a good time to take a break. The next issue on September 6, after Labor Day will update our market review to include VIX futures hedging activity, crude oil and more.


Finding Previous Issues and Our Reader Response Request

All previous issues of the Digest can be found by using the small calendar at the top right of the first page of any Digest Issue. Click on any underlined date to see the selected issue. Another source is the Table of Contents link found in the lower right side of the IVolatility Trading Digest section on the home page of our website.

CommentAs usual, we encourage you to let us know what you think about how we are doing and what you would like to see in future issues. Send us your questions or comments, or if you would like us to look at a specific stock, ETF or futures contract, let us know at Support@IVolatility.com or use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com website. To receive the Digest by e-mail let us know at Support@IVolatility.com


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