« November 2015 »

IVolatility Trading Digest™

Volume 15 Issue 45
Employment Rebounds

Employment Rebounds - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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The non-farm payroll report released Friday was much better than expected, much higher than most, if not all economist were expecting thereby greatly increasing the probability the Federal Reserve will finally hike interest rates next month. Preferring data without seasonal adjustment Steven Hansen at Econintersect boldly said, "Non-seasonally adjusted non-farm payrolls grew 655,000 - the best this century."

Following our regular bi-weekly review, this week’s Digest rearranges the order of the "Foremost Six" in response to the apparent change of circumstances. Then an update of the increasing implied volatility data ahead of Macy's, Inc. (M) earnings reports on November 11 followed by a new trend continuation suggestion for China A-Shares ETF(ASHR).


Review NotesS&P 500 Index (SPX) 2099.19 advanced 19.83 or +.95% for the week. The double bottom upside measuring objective at 2172 remains the target, but first sector rotation and resistance in the 2050 -2100 range from July 27 to August 20 around the long-term upward sloping trendline will likely slow the upward momentum from the September 29 low at 1871.91.

CBOE Volatility Index® (VIX) 14.33 down .74 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 an 11.65% 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 higher at 11.76%

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 at 14.20% Monday, declined to 8.40% Thursday before closing Friday at 11.76%.

VIX Options

With a current 30-day Historical Volatility of 104.97 and 105.37 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 November and December at-the-money options are inexpensive relative to recent movement of the VIX futures. Friday VIX futures traded 193,360 contracts while options on the futures traded 502,692 contracts, both higher than the previous week.


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

In last week’s order of perceived significance:

ProShares UltraShort 20+ Year Treasury (TBT)
US Dollar Index (DX)
Market Breadth
China A-Shares ETF (ASHR)
United States Oil (USO)
iShares Transportation Average (IYT)

Expanding on five of the top six:

ProShares UltraShort 20+ Year Treasury (TBT) 46.08 up 2.51 or +5.76% for the week gapping up at the open Friday after the non-farm payroll report but still below the high of 47.38 made on September 16. The other interest rate indicator to watch: iShares 7-10 Year Treasury Bond (IEF) 105.37 down 1.65 or -1.54% for a yield of 2.33% up 9 basis points or +4.02% Friday. While the IEF uptrend from the July 13 low was broken on November 2, as it gapped lower, it needs to decline below 104.36 or a yield of 3.20% to confirm the likelihood that higher rates will continue higher.

US Dollar Index (DX) 99.17 up 2.22 or +2.29 for the week ripping through the previous August 7 high of 98.33 on Friday putting downward pressure on commodities, perceptible in crude oil and very noticeable in gold as (GC) December futures declined 15.30 or -1.39% to 1,088.90 and while the % decline did not equal the % gain in interest rates, gold could soon be back to the previous lows seen in late July and early August. If Dec gold closes below the July 24 low of 1,073.70, now 15.20 points lower, it will confirm the stronger dollar scenario.

Market Breadth The McClellan Oscillator Ratio Adjusted Summation Index reported by McClellan Financial Publications, available at StockCharts.com symbol $NYSI advanced 90.69 points last week to 503.10 slightly above 500, the level needed to confirm a resumption of the long-term uptrend according to Tom McClellan. Any further continuation along with rising interest rates and a stronger dollar could indicate an improving economy despite weak manufacturing and exports, but construction spending is up 14.1% year-over-year, much faster than the economy in general.

China A-Shares ETF (ASHR) 38.01 up 2.49 points 7.01% for the week and up 31.8% from the August 26 low of 28.84. Interestingly the Shanghai Composite continued higher despite Monday’s report that the October PMI index missed expectations at 49.8 while final Caixin PMI improved to 48.3 from 47.6, but remained below 50.0, indicating continued contraction. However, Tuesday Xi Jinping announced the Communist Party had set a 6.5 percent target for annual economic growth from 2016 to 2020 and the Shanghai Composite responded Wednesday gaining 4.31%. See the trade idea below.

United States Oil (USO) 14.23 as a proxy for WTI Crude Oil declined .58 or - 3.92% for the week while the December WTI futures declined 2.30 or - 4.94% closing at 44.29.

Updating the CFTC Commitment of Traders report for November 3 shows the “Managed Money” group reduced their short positions by 17,395 contracts while increasing longs by 11,366 thereby increasing the net long position by 28,761 contracts pushing cash crude up to 47.94 on November 3. Since the price has now declined from that level, they must have been selling again later in the week.


strategySince there have been several previous false starts it seems like a good idea to establish some parameters for the dollar index and interest rates before getting overly excited about the non-farm payroll report. In addition to the guidelines above for interest rates and the dollar, if the equity market begins to recognize interest rates are going to continue higher watch for sector rotation into the beneficiaries such as banks and brokers. However, since this could become just another one of many previous rising interest rate scares some caution could be prudent.

"Among the safe courses, the safest of all is to doubt." – Spanish Proverb


High IV/HV Ratio Update

See Digest Issue 44 "Uptrend Appraisal." Here is an update to last week’s high IV/HV ratio example, the first alert that something unusual is happening as the options prices are being bid up to abnormal levels.

Macy's, Inc. (M) 48.90 down 2.08 or - 4.08% for week, the 3Q earnings report comes Wednesday morning before the opening with a consensus estimate of .53 per share on revenue of 6.12 bn.

In the past, there had been 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.

For the week, while the 30-day Implied Volatility Index Mean advanced from 48.78 to 52.54 the November 20 at-the-money 49 call and put implied volatility increased from 53.72 to 69.86 for an IV/HV ratio of 2.84 well into the red zone for traditional long calendar spreads. While the November 13 expiration options are even higher with an IV/HV ratio of 3.39. However, the options volume for both at-the-money expirations was light Friday.


Trend Continuation

China A-Shares ETF (ASHR) 38.01 since one reason the Federal Reserve previously hesitated to raise interest rates was the declining Shanghai Composite Index the current uptrend should remove this concern. The uptrend now seems well enough defined to test the premise that it will continue higher and a long call spread not only has an opportunity for gain it will also help maintain focus on this important market before the December FOMC meeting.

The current Historical Volatility is 35.01 and only 12.73 using the Parkinson's range method, with an Implied Volatility Index Mean of 38.83 down from 42.47 the week before and likely to reach 30 if the uptrend continues. The 52-week high was 86.74 on July 8, 2015 while the low was 20.47 on November 20, 2014. The implied volatility/historical volatility ratio using the range method is 3.05 so option prices are expensive relative to the recent movement of the ETF. Last Friday’s option volume was 13,405 contracts traded compared to the 5-day average volume of 11,810.

Consider this long call spread idea.




Using the ask price for the buy and mid for the sell the call spread debit would be .97, about 32% of the distance between the strike prices. Use a close back below the upward sloping trendline now at 35 as the SU (stop/unwind).

The suggestion above uses 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.


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Although the market response to the non-farm payroll report suggests the jobs gains were a game changer this is not the first time interest rates and the dollar spiked higher and then melted back down. Since manufacturing and exports remain weak and are not beneficiaries of a higher dollar and interest rates, establishing some parameters for interest rates and the dollar while watching for rotation into interest sensitive equity sectors will help maintain some objectivity.


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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.


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 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



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.

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".