« November 2015 »

IVolatility Trading Digest™

Volume 15 Issue 44
Uptrend Appraisal

Uptrend Appraisal - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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This week’s Digest updates progress made by the S&P 500 Index to regain the long-term uptrend presented last week in Digest Issue 43 "Retracement Quandary [Chart]." Then, we offer a call spread for Netflix, Inc. (NFLX) followed by a put spread idea for SolarCity Corp. (SCTY) followed by an update on the Volatility Kings™ reporting earnings this week and next including a developing trade idea for Macy's, Inc. (M).


Review NotesS&P 500 Index (SPX) 2079.36 closed the week up 4.23 points or +.2%. Friday’s 10.05-point decline looks like retracement selling right at the long-term upward sloping trendline that began October 4, 2011 since SPX rebounded up to the trendline resistance after crossing below it on August 20. While the active double bottom pattern with a 2172 upside measuring objective remains intact it will first need to clear the trendline resistance. Should it now decline further there is support at 2050, a previous resistance level, adding in a cyclical perspective, increases the odds of testing 2050 support before the uptrend resumes.

CBOE Volatility Index® (VIX) 15.07 up .61 for the week, 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 12 trading days until November monthly expiration, the day weighting applied 60% to November and 40% to December for a 12.18% premium shown above. Our alternative volume-weighted average between November and December regularly found in the Options Data Analysis section on our homepage was slightly lower at 11.96%.

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 premiums were in the green zone above 10% every day expect Tuesday.

VIX Options

Perhaps reflecting some indecision at the trendline resistance mentioned above, options volume on VIX futures declined noticeably to a daily average for the week of 308,670 contracts compared to 818,950 the week before.


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Uptrend Resumption

Here is an idea assuming the long term uptrend, now possibly stalled at resistance, resumes in the near future.

Netflix, Inc. (NFLX) 108.38 +3.26. After pulling back under 100 after reporting earnings on October 14, it turned higher again closing the gap made on the earnings date.

The current Historical Volatility is 50.17 and 45.89 using the Parkinson's range method, with an Implied Volatility Index Mean of 38.70 down from 43.65 the week before. The 52-week high was 88.00 on August 24, 2015 while the low was 24.11 on June 5, 2015. The implied volatility/historical volatility ratio using the range method is .84 so option prices are inexpensive relative to the recent movement of the stock. For comparison, the at-the-money monthly November 108 call implied volatility was 39.59 while the put was 38.98 in line with the IVXM above. Last Friday’s option volume was 241,387 contracts traded compared to the 5-day average volume of 150,920.

Consider this long call spread.




Using the ask price for the buy and mid for the sell the call spread debit would be 1.07, about 27% of the distance between the strike prices. Use a close back below 105 as the SU (stop/unwind) since it would imply the advance to 110 was just to fill the gap made on the earnings report date.


SolarCity Corp. (SCTY) 29.65 -8.42. Like an ice cube in the sun, this one is melting down after reporting and reducing guidance for the second time as their lease accounting and sales practices come under scrutiny. After gapping lower Friday there could still be more downside.

The current Historical Volatility is 86.25 and 53.61 using the Parkinson's range method, with an Implied Volatility Index Mean of 71.55 up from 69.87 the week before. The 52-week high was 88.20 on August 26, 2015 while the low was 33.21 on June 23, 2015. The implied volatility/historical volatility ratio using the range method is 1.33 so option prices are about right relative to the recent movement of the stock. Last Friday’s option volume was 81,560 contracts traded compared to the 5-day average volume of 28,260.

Consider this long put spread idea.




Using the ask price for the buy and mid for the sell the call spread debit would be .85, about 28% of the distance between the strike prices with good volatility edge. Use a close back above 35 as the SU (stop/unwind).

The above suggestions use Friday’s ask price for the buy and middle price for the sell presuming some price improvement is possible. Monday’s option prices will be somewhat different due to the time decay over the weekend and any price change.

Volatility Kings™ Update

Now for an update to our list of companies originally presented in Digest Issue 40 "Volatility Kings 3Q 2015." These are the ones scheduled to report earnings this week and next, that have a tendency to experience increasing implied volatility as their quarterly reporting dates approach. Increasing implied volatility reflects uncertainty or the width of the possible stock price distribution on the report date. Some companies are on the list one quarter and not the next while others seem to remain quarter after quarter. While the objective is to identify the ones that increase regularly, called "permanent residents" others called "temporary visitors" will appear occasionally due to special situations or conditions.




The implied volatility index (IVXM) values for Friday are in column 9, while column 10 compares the current value to the estimate based upon last quarter. Often the at-the-money (ATM) implied volatility for the first option series to expire after the report date will have higher implied volatility than the index. For example, the Facebook 102 ATM November 6 call implied volatility was 58.20 while the put was 56.84 substantially higher than the index of 37 shown above.

Due to the recent rotation out of biotech and health care, Celgene is in the "temporary visitors" category, probably not a "permanent resident."

High IV/HV Ratio

Now for an example of one ranked number 3 in the high-implied volatility/historical volatility ratio category from Friday’s ranker sample. We offer the Top 5 as a regular complimentary feature in the Rankers and Scanners section on our Home site. High IV/HV ratios are the first alert that something unusual is happening as the options prices are being bid up to abnormal levels. From there a little more investigation will usually provide answer as to the likely direction.

Macy's, Inc. (M) 50.98 +1.28. Retracing after making a low at 48.66 on October 26 it ranked number 3 in Friday’s high IV/HV ratio category and number 5 in the high 52-week range group.

The current Historical Volatility is 23.50 and 23.13 using the Parkinson's range method, with an Implied Volatility Index Mean of 48.78 up from 44.04 the week before. The 52-week high was 50.55 on October 28, 2015 while the low was 18.35 on March 20, 2015. The implied volatility/historical volatility ratio using the range method is 2.11 so option prices are high relative to the recent movement of the stock. Last Friday’s option volume was 35,664 contracts traded compared to the 5-day average volume of 31,150. A check of the volatility chart shows the implied volatility has risen from 20 in late June.

Scheduled to report 3Q earning on November 11 with a consensus earnings estimate of .51per share the volatility chart suggests there is something more going on here that just earnings expectations. In the past, there was some chatter about activist pressure to spin off its real estate holdings into a REIT. Speculation about and update or an announcement along with the quarterly report about a possible spin-off may be responsible for advancing options implied volatility.

From a traditional calendar spread perspective, the caution sign begins flashing when IV/HV ratio exceeds 2.00 suggesting the stock may move more than estimated by the options pricing. Checking the implied volatility for the options expiring after the report date the implied volatility the at-the-money November 20 call was 54.38 while the put was 53.07 for an average of 53.73 for an IV/HV ratio of 2.32 well into the caution zone.

Accordingly, the best plan is to wait for the earnings date confirmation and then check the at-the-money call and put implied volatility on the day before the report date. In the event the IV/HV ratio continues increasing, a long out-of-the-money call spread with a long out-of-the-money put spread may offer less risk than a short volatility options strategy. We will look again next week when the reporting date gets closer.


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From a traditional barchart perspective, it appears the S&P 500 Index ran into resistance at the retracement back to the long-term upward sloping trendline. From a longer term Elliott wave perspective, it appears the August decline was a countertrend Elliott 4th wave and a 5th may now be underway if it overcomes the trendline resistance. In the meanwhile, more earnings reports and the non-farm payroll report will be the focus this week.


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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.


Next week’s issue will feature our regular bi-weekly market review including updating our current "Foremost Six" indicators.


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 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


How does one use the “Volatility Kings: information? Would you suggest buying long calls/puts earlier and selling them at a later date? How would you decide whether to go with calls or puts? Any other suggestions would be welcome as well? Thank you.

Posted by Opt on November 02, 2015 at 07:59 AM EST

I want to calculate the IV for specific stocks with timeframes of 10 or 21 days. I conduct weekly credit and debit spreads, using puts and calls. I follow the following stocks, WMT, T, MCD, PG, KO, PEP mostly. 815-217-5415. Ed and Joe

Posted by JBALLI and Edward Balli on November 02, 2015 at 04:34 PM EST

Opt, Thanks for the Volatility Kings question. Refer to the “Some Strategy Ideas” section in Digest Issue 40 for some thoughts about two Calendar spread ideas. In addition, there are straddle and strangles, both long a short to consider. Further just knowing the implied volatility increases for some stocks on a regular quarterly basis offer the opportunity for directional trades, some advance into the report date and then sell off while some will decline before reporting and then advance. While trading around earnings dates is challenging, the Kings list provides some ideas to consider and the IV/HV ratios on the day before the report offers some clues. Jack

Posted by Jack ( on November 02, 2015 at 05:29 PM EST

Ed and Joe, Take a look at our complimentary Basic Options page on our website. More details for other periods are available at our Advanced Historical Data page requiring a modest subscription fee. Jack

Posted by Jack ( on November 02, 2015 at 05:30 PM EST

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