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« November 2015

IVolatility Trading Digest™ Blog

Volume 15 Issue 47
Potential New Uptrend Underway

Potential New Uptrend Underway - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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After the Paris tragedy markets around the world held up better many expected, especially the CAC 40 closing slightly higher on the day. Perhaps it was an example of the consensus getting it wrong or perhaps markets were oversold and when they failed to open lower the shorts began covering, making Monday November 16 an important day for the S&P 500 Index. There is more in the strategy section below following our regular bi-weekly market review including a crude oil update followed by an ETF strategy idea from our friends at The Blue Collar Investor, and then a follow-up on the High IV/HV indicator after (CRM) reported Wednesday.


Review NotesS&P 500 Index (SPX) 2089.17 gained 66.13 points or 3.27% for the week taking it almost back to where it was two weeks ago, but then it was on the way down while now it’s on the way back up . The double bottom upside measuring objective at 2172 remains the upside target. Last Monday it found support at the 9-17 high of 2020.86 that defines the double bottom when it traded down to 2019.39, made a pivot and closed up 30.15 for the day. The pivot potentially defines a new more sustainable upward sloping trendline from the September 29 low at 1871.91, but first it needs to close above the previous November 3 high of 2116.48.

CBOE Volatility Index® (VIX) 15.47 down 4.61, based on real-time prices of options on the S&P 500® Index, constructed to reflect 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 17 trading days until the December monthly expiration, the day weighting applied 85% to December and 15% to January for a 13.43% premium shown above. Our alternative volume-weighted average between December and January regularly found in the Options Data Analysis section on our homepage was slightly higher at 14.16 %.

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.

Premiums for normal term structures during uptrends are 10% to 20% while premiums above 20% are unsustainable suggesting a lack of enthusiasm for VIX hedging often occurring around market highs suggesting overbought conditions associated with pullbacks. Alternatively, premiums less than 10% suggest caution and negative premiums indicate oversold conditions. Last week the volume-weighted premium began in the negative red zone at -1.07% remained negative Tuesday at -.81%, then turned positive Wednesday at 1.88% returning to the green zone Friday at 14.16%.

VIX Options

With a current 30-day Historical Volatility of 119.77 and 109.24 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’s closing option mid prices along with their respective month’s futures prices, since the options are priced from the tradable futures.




Compared to the current range historical volatility of 105.37 both December and January at-the-money options are inexpensive relative to recent movement of the VIX futures. Friday VIX futures traded 129,897 contracts compared to 283,426 the week ending November 13 while options on the futures traded just 296,045 contracts compared to 1,203,771 the week before reflecting a significant sentiment change.


All of the Implied Volatilities along with the Historical Volatilities and Greeks for the VIX options based upon the futures prices are on our Advanced Options page, found by clicking on the “market close” link shown near the top of the page.


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Foremost Six Update

As a prominent member of our Foremost Six and the perhaps the most important last week, here is a crude oil update.

United States Oil (USO) 12.93 as a proxy for WTI Crude Oil it declined .13 or - 1.00% for the week while the January WTI futures declined .10 or - .24% closing at 41.90. The December futures expired Friday so the relative underperformance of USO relative to the futures is most likely due to contango in the futures market since USO uses futures it constantly sells lower priced futures and buys higher priced futures as it rolls from month to month.

Updating the CFTC Commitment of Traders report for November 17 shows the "Managed Money" group reduced their longs by 7,776 while increasing shorts by 16,246 for a net increased short position of 24,022 contracts or -16.58%, but only -.34% as a % of open interest since it declined 285,717 contracts as of three days before the December expiration. For more details about the Commitment of Traders Report (COT) and a definition of the "Managed Money," group and their significance refer to Digest Issue 37 "Waiting for the Fed & S&P 500 Index [Chart]."


strategyThe combination of significantly reduced hedging activity detailed above in the VIX Option section along with the S&P 500 Index reversal made last Monday at an important support level brightens the picture for the bulls while confirming the validity of the double bottom upside measuring objective at 2172, a level now likely to be reached by yearend. Once it closes back above November 3 high of 2116.48, and the is a reasonable change it could be this week since the days before Thanksgiving are normally positive, it will confirm the potential new upward sloping trendline from the September 29 low at 1871.91. Then with a new sustainable uptrend in place SPX is likely to reach the upside objective assuming the December 16 Federal Reserve meeting announcement remains consistent with market expectations for a small interest rate increase.


Blue CollarCovered Call Writing on the Top-Performing S&P 500 Index Sectors


Most studies and computer-generated approaches to covered call writing involve the use of slightly out-of-the-money strikes on the S&P 500 Index Exchange-Traded Fund (ETF). The contracts generally have 1-month expirations and rarely include discussions of position management techniques. This article offers some ideas for enhancing returns by writing calls on the best performing sectors of the S&P 500 Index at the time of the trade.

SelectSector SPDRs

The Select Sector SPDRs are unique ETFs dividing the S&P 500 Index into nine distinct sector index ETFs.

The Consumer Discretionary Select Sector SPDR Fund (XLY)
The Consumer Staples Select Sector SPDR Fund (XLP)
The Energy Select Sector SPDR Fund (XLE)
The Financial Select Sector SPDR Fund (XLF)
The Health Care Select Sector SPDR Fund (XLV)
The Industrial Select Sector SPDR Fund (XLI)
The Materials Select Sector SPDR Fund (XLB)
The Technology Select Sector SPDR Fund (XLK)
The Utilities Select Sector SPDR Fund (XLU)

$50,000.00 sample portfolio

As of market close on November 20, 2015, the top three performing sectors over the past three months were XLY (81.23), XLK (44.20) and XLI (55.37). Allocating approximately 16K per position rounded off the nearest hundred to stay under 50K leaving some cash left over for possible exit strategy executions, a hypothetical portfolio looks like this:

200 Shares XLY
300 Shares XLK
300 Shares XLI

Total investment, 46,117.00 plus commissions




Initial 1- month returns = 540/46,117 = 1.2% or 14% annualized

Potential 1-month return if prices move to short strikes (for example, XLY moves to 82 by expiration)
(540 + 283)/46,117 = 1.8% or 21.4% annualized (Returns are slightly less after including commissions).

When writing calls on the S&P 500 Index, improved returns are often possible by using the SelectSector SPDRs focused on the best performers at the time of trade. In addition to selecting the best underlying securities, option selection and position management are the other two required skills to master covered call writing.

Remember to be prepared with an exit strategy should the trade move too far in either direction.

To learn about mastering the skill of selling options and much more information on becoming an elite covered call writer and put-seller, click on The Blue Collar Investor.


High IV/HV Ratio Update (CRM) 80.99 +.35 Friday and up 3.64 after reporting Wednesday

Last week in Digest Issue 46 "Retracement Selling & Macy's [Chart]", we noted the rising implied volatility of going into the scheduled earnings report on Wednesday November 18 after the close.

The IV/HV ratio using the range historical volatility had risen to 3.79 suggesting a large stock price move on the earnings report. At the close Wednesday when the stock was 77.35 the November 20 at-the-money 77 call and put implied volatility mean was 157.02 while the range historical volatility was 22.57 for an IV/PHV ratio of 6.96 indicating expectations were high for a large stock price move Thursday.

Since a one-day one standard deviation estimate using an implied volatility of 157 implies a 9.8% or 7.59 point move in either direction the actual advance on Thursday while significant at 4.25% or 3.29 points, it was less than implied by the options prices.

While the high IV/PHV ratio suggested a large move that would be harmful to a traditional long calendar spread seeking to take advantage of the high-implied volatility, an alternative long out-of-the-money iron condor may also have not been very successful. However, the risk would have defined and limited giving it an advantage.


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Monday November 16 was an important day for the S&P 500 Index as the combination of significantly reduced hedging activity in VIX Options along with the reversal at an important support level brightens the picture for the bulls while confirming the validity of the double bottom upside measuring objective at 2172. Assuming no surprises from the Federal Reserve reaching the objective by yearend seems quite likely.


Twitter Follow us on twitter for more ideas from our scanners and other developments.


ActionActionable Options™

We now offer daily trading ideas from our RT Options Scanner before the close in the News section of our home page based upon active calls and puts with increasing implied volatility and volume.


For next week’s issue, we will fire up the rankers and scanners looking for new interesting trade ideas.


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.

As 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 or use the blog response at the bottom of the IVolatility Trading Digest™ page on the website. To receive the Digest by e-mail let us know at


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IVolatility Trading DigestTM Disclaimer is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter constitutes a recommendation to buy or sell any security. Before entering a position check to see how prices compare to those used in the digest, as the prices are likely to change on the next trading day. Our personnel or independent contractors may own positions and/or trade in the securities mentioned. We are not compensated in any way for publishing information about companies in the digest. Make sure to due your fundamental and technical analysis homework along with a realistic evaluation of position size before considering a commitment.

Our purpose is to offer some ideas that will help you make money using IVolatility. We will also use some other tools that are easily available with an Internet connection. Not a lot of complicated math formulas but good trade management. In addition to Volatility we use fundamental and technical analysis tools to increase the probability of success and reduce risk. We prepare a written trade plan defining why the trade is being made, what we call the "DR" (determining rationale) and the Stop/unwind, called the "SU".