« October 2016

IVolatility Trading Digest™ Blog

Volume 16 Issue 40
Rising Wedge & Kings Update [Charts]

Rising Wedge & Kings Update [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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This week we review the Rising Wedge story along with a look at the Volatility Kings™ scheduled to report earnings this week along with our regular report on the VIX futures premium. Then a brief note with a chart for the latest WTI crude oil Commitment of Traders report.

Review NotesS&P 500 Index (SPX) 2132.98 declined 20.76 points or -.96% for week. The rising wedge identified last week in Digest Issue 39 "Likely Rising Wedge [Charts]" met its downside-measuring objective and then attempted to turn higher as expected when a continuation pattern meets its objective MO. Now chances are Support at 2120 will hold awaiting the development of a new pattern.





VIXCBOE Volatility Index® (VIX) 16.12 up 2.64 points or +19.58% after reaching an intraday high of 17.95 Thursday as SPX met the downside rising wedge objective.

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 just 2 trading days until the October monthly expiration, the day weighting applied 10% to October and 90% to November for a 7.02 % premium shown above. Our alternative volume-weighted average between October and November regularly found in the Options Data Analysis section on our homepage was slightly lower at 5.31% while the open interest weighted premium was 5.66%.

VIXThe 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.



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Volatility Kings ™ 3Q Earnings

Here are four updates for Digest Issue 38 "Volatility Kings 3Q 2016" reporting this week.




The implied volatility index IVXM for both INTC and MSFT have not reached last quarter’s high, Last Q but there are two more days for INTC and three more for MSFT. Both ratios Ratio of Implied Volatility to Historical Volatility based upon the range method, PHV suggest the width of the possible price distribution will be normal. However, for NFLX at 2.25 the IV/PHV ratio suggests the potential for another large move or even another gap.

From Friday’s Best Calendar Spread idea in the Rankers and Scanners section of our home page here is one more that should have been included in the 3Q Volatility Kings™ list.




Friday the scanner showed this Calendar Spread idea:

Buy Feb 17 32 Call at 2.30 IV 30.30
Sell Nov 16 32 Call at 1.28 IV 37.28

VIXDetermined solely by the implied volatility differentials shown above between options with two different expirations, calendar spreads, also called time spreads are used for quarterly reporting by selling the near term option with higher implied volatility and buying the same strike price in the deferred month with a lower implied volatility. However, since this position will have short gamma or the rate of change of delta, any large move of the underlying stock on the report date will result in a loss and the combination of the rising implied volatility index along with the high IV/HR ratio suggests the risk is high. For EBAY the Implied Volatility Index is already above last quarter’s high and the IV/PHV Ratio at 2.10 suggests the potential for a large move confirmed by the gaps on the price chart for the last year.


Crude Oil

Crude OilWTI Light Sweet Crude Oil (CL) 50.35 basis November futures advanced .54 points or +1.08 % for the week after reaching an intraday high of 51.60 on Monday October 10 and then reversing.

The weekly Commitments of Traders reports from the CFTC as of Tuesday October 11 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]."

As of Tuesday October 11, “Managed Money” continued to push prices higher by adding 6,187 long contracts while reducing short contracts by 27,252 for a net long position increase of +33,439 or up to 10.40% of the open interest from 9.52% last week, shown in the chart from March 17, 2015 when crude oil was 43.39. In addition, this week “Other Reportables” helped by doing the same adding 13,760 longs and reducing shorts 9,566 for a net position increase of +23,326.

Managed Money only chart:




Although prices pulled back slightly Wednesday and Thursday, the “Managed Money” group, the one that seems to have the most influence on prices at the margin, appers to remain bullish.

StrategyWhat a difference a week makes as interest rates and the US dollar index advanced once again on rising expectations of an interest rate hike in December. Citing disappointing trade data from China on Thursday was another reason for the S&P 500 Index decline. The biotech sector added to the woes as Democratic gains in Congress could mean more regulatory and legislative actions in an effort to slow price increases. Finally, breadth has been declining since July 22 and the downward momentum increased this week. Caution as suggested by the low VIX futures premium at 7.02% above, seems about right.




Despite headwinds from rising interest rates, the US dollar index and concerns about the US Presidential election that began influencing the S&P 500 Index through the biotech and other sectors, support at 2120 held but the rising VIX along with lower VIX futures premium going into an important earnings reporting week suggests caution.


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ActionActionable Options™

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Next week will include a more extensive market review including a look at breadth along with the regular report on the VIX futures premium and crude oil.


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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IVolatility.com 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.

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