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Today


IVolatility Trading Digest™ Blog


Volume 17 Issue 19
Smooth Sailing Again [Charts]

Smooth Sailing Again [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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There were few indications of increased hedging activity ahead of the French second round election scheduled for last Sunday. Digest Issue 18 "Au Contraire [Charts]" suggested watching the CBOE S&P 500 Skew Index (SKEW) for clues of increasing out-of-the money put option activity. Then the scene changed after SKEW declined dramatically last Monday indicating greatly diminished concern for a market decline after the election. Following the market review there is more including the US Dollar Index (DX) and a WTI crude oil update from the COT Traders perspective.

Review NotesS&P 500 Index (SPX) 2399.29 added 15.09 points or +.63% for the week closing with .41% of the gain occurring Friday with a +9.77 point advance to a new closing high, but still just shy of the March 1 intraday high at 2400.98, the next objective. On the downside, the 50-day moving average at 2366.42 is first support , then 2300, followed by the wide support zone between 2285 to 2275.

VIXCBOE Volatility Index® (VIX) 10.57 declined .25 or -2.31% for the week while the comparable IVolatility Implied Volatility Index mean, IVXM now 7.45 declined .48 or -6.05%.

VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second months.

With 7 trading days until the May expiration, the day-weighted premium between May and June allocated 28% to May and 72% to June for a premium of 17.58% the same as last week when there was more time to expiration.

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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. By this measure it remains in bullish territory.


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VIX Options Skew

While there as a noticeable difference between the VIX Call implied volatility at 88.55 and the Put implied volatility at 61.35, the chart below shows the difference was due more to an abnormally low Put level, the dark blue line, than a high Call level, the orange line. In addition, the third chart shows volume for both were low, suggesting a lack of enthusiasm to bid call price higher.

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CBOE S&P 500 Skew Index (SKEW) 131.36 down 15.62 points or -10.63% for the week with 18.52 points of the decline occurring Monday May1. Not to be confused with the VIX Skew above SKEW measures purchases of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions.

An increase of this index indicates greater expectations for an extreme down move. The CBOE explains further, a Skew value of 100 means the perceived distribution of S&P 500 Index log-returns is normal so the probability of outlier returns is negligible. Calculated from SPX option prices it describes "tail risk." As Skew rises above 100, the left tail of the distribution acquires more weight increasing the probability of outlier returns.

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Last week Digest Issue 18 "Au Contraire [Charts]" suggested watching the SKEW for clues of increasing out-of-the money put option activity going into the election. By this measure concerns for a large market decline dissipated last Monday perhaps reflecting poll results showing Macron with a substantial lead. Of course, if the polls are wrong the market reaction will likely be costly for unhedged bulls.

The US Dollar Index (DX) & (DXY) 98.53 down .53 for the week. Digest Issue 13 "Foremost Indicators [Charts]" included a (DX) chart when it was 99.44 and just above the neckline of a potential of a potential Head & Shoulders Top pattern. Since then it continued lower activating the pattern. Although the Right and Left Shoulders are not symmetrical here is the updated chart showing the January high at 103.82 marked with H for Head. After declining from the high it made two failed attempts to turn higher creating a new downward sloping trendline from the high. The first attempt marked RS best aligns with the Left Shoulder creating the Neckline market NL. Subtracting the height of the pattern from the neckline and subtracting it from the close below the neckline at 99 produces the 95 downside measuring objective marked MO in the right corner.

First quarter earnings of the multinationals were helped since the dollar was declining all quarter compared to the fourth quarter when it was advancing.

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Crude Oil Update

Crude OilWTI Light Sweet Crude Oil (CL) 46.22 basis June futures declined 3.11 or -6.30% for the week. From the intraday pivot high on April 12 to Friday's intraday low before the reversal the decline was 10.38 points or -19.17% after testing the 44 lows made last August and then rebounding to make a Key Reversal. (A new contract low with a higher close forecasting a higher high the next trading session).

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From the Disaggregated Commitments of Traders - Options and Futures Combined report as of May 2. “Managed Money,” the group that best correlates with crude oil price changes and arguably the most important, continued reducing their net long position selling 22,981 longs and increasing shorts -29,334 for a net reduction of -52,317 following a similar pattern the week before when they reduced their net long position -67,943 contracts. Now at 6.85% of the open interest down from 11.35% two weeks ago on 4-18.

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The "Managed Money" net long position has now declined from 15.16% of the open interest on February 21 to 6.85%. The Key Reversal made Friday, after testing the previous August 44 low, suggests short covering after reaching the 44 objective. With the upcoming OPEC and NOPEC meeting scheduled for May 25 "Managed Money" may have concluded they have pushed the shortside far enough and don't want to take the risk of further production cut news. If so, the reversal could continue higher.

The 19% decline set off by the unexpected gasoline inventory report on April 19 to the test of the August lows at 44 seems to support the Saudi view expressed in 2008 that crude oil prices are set in the "paper market" not the physical product market and changes made by “Managed Money” usually correlates the best with price changes.

"PMP" (Producer/Merchant/Processor/User) often referred to as "Commercials" seemed content to wait and see as their net short position declined from 7.96% of the open interest to 7.38%. For the week ending April 25 they reduced their short position 9,449 contracts then shorted -1,655 more net contracts May 2.

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As the May 25 OPEC along with NOPEC meeting approaches expect to see increased chatter about extending production cuts with OPEC officials sending signals they intend extending the cuts for another six months, perhaps even longer while analyst remain doubtful it will make much difference as US production increases.

StrategyMarket based indictors on Friday seem to have concluded the polls and pundits are right and that Emmanuel Macron will win the French election by a wide margin on Sunday.

ideaWith the S&P 500 Index at a new closing high only the old adage "Sell in May" could slow the advance making the Smooth Sailing call the most likely now that 1Q earnings reports were mostly favorable helped a declining dollar that may be headed even lower.

 

Summary

Mostly favorable earnings reports are receiving much of the credit for the advance by the S&P 500 Index to a new closing high although companies in the energy sector have gone in the other direction as crude oil declined. Any crude oil stabilization would add even further support for the major equity indexes.

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

Actionable Options™

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

"The best volatility charts in the business."

Next week we plan to fire up our rankers and scanners to find more interesting trading ideas to consider.

Finding Previous Issues and Our Reader Response Request

PreviousIssuesAll 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 Trading DigestTM Disclaimer
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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