« January 2016 »

IVolatility Trading Digest™

Volume 16 Issue 5
January Review Update

January Review Update - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Updating the January Barometer, also called the January Effect adds another lower January close to the tally. According to the Stock Trader’s Almanac January’s S&P 500 Index close, up or down determines the likely direction of the for the year. Adding last year’s close to the record puts another “Right” in the result column increasing the probability for this year to 54%.




Review NotesS&P 500 Index (SPX) 1940.24 up 30.34 or + 1.75% for the week with 46.88 points or 2.48% occurring Friday making an upside breakout from what appeared to be a classical barchart Rising Wedge or perhaps Pennant. Either way the breakout to the upside is important since both are usually continuation patterns while reversals are very unusual. Should it continue higher it might define a significant turning point considering the action taken by the Bank of Japan to implement negative interest rates that could preclude the Federal Reserve from rising interest rates further thereby relieving the current upward pressure on the US dollar, – good for equities, emerging markets, commodities and crude oil.

CBOE Volatility Index® (VIX) 22.20 declined 2.14 the week. 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 12 trading days until the February monthly expiration, the day weighting applied 60% to February and 40% to March for a 6.47% premium shown above. Our alternative volume-weighted average between February and March regularly found in the Options Data Analysis section on our homepage was slightly higher at 6.53%.

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 started the week negative, turned positive Tuesday, then continued higher to close Friday at 6.53% still in the caution zone, but after Friday’s unusual reversal SPX is likely to continue higher at least for the next few days.

VIX Options

With a current 30-day Historical Volatility of 149.87 and 127.90 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 127.90 both February and March at-the-money options are inexpensive relative to recent movement of the VIX futures.


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

Since there is little doubt the most important indicators last week, in addition to the S&P 500 Index, were the US Dollar and Crude Oil, updates follow.


DollarUS Dollar Index (DX) 99.61 up.04 for the week and until Friday it appeared to be turning lower having closed below the upward sloping trendline from the December 15 low at 97.19. After the abrupt 1.09-point advance Friday, last Thursday’s low at 98.43 now makes the second point of the new upward sloping trendline from the December 15 low. The dramatic turnaround resulted from the Bank of Japan’s announced negative interest rate unconventional monetary policy that immediately reduced the yen exchange rate by 1.94% to 121.12.

While it’s not clear why the Bank of Japan thinks doing the same thing over and over will produce a different result. For now, the dollar index suddenly turned higher again. However, since the Federal Reserve may now defer further interest rate hikes equities made an unusual upside reversal. Watch the newly established upward sloping trendline and the previous December 2 high at 100.51. Should this most important indicator continue higher, it would be inconsistent with higher equity and commodity prices.


OilUnited States Oil (USO) 9.65 as a proxy for WTI Crude Oil gained .38 for the week or + 4%. WTI crude oil futures basis March gained 1.43 or 4.4% closing at 33.62 continuing the advance from the January 20 low of 27.56.

Since prices are determined in the “paper” futures market, tracking the activity of the Managed Money group in the weekly Commitment of Traders (COT) reports provided by the CFTC could confirm that the price low made on January 20 at 27.56 represents the low for this long secular decline. The latest COT report dated January 26, shows Managed Money reduced their shorts by 5,443 contracts while adding to their longs by 23,032, for a net long increase of 28,475 contracts in addition to a net long increase of 12,202 contracts the week before. While the open interest increased by 114, 219 contracts the Managed Money long percentage increased to 4.39% from 3.41% for the week ending January 19 and 2.75% for the week ending January 12. While there has yet to be a significant decline in open interest reflecting short covering by other categories, the increasing long position by the Managed Money implies the cyclical low and perhaps even the secular longer-term low was 27.56 on January 20.

A "money manager", for the purpose of the COT report, is a registered commodity trading advisor (CTA), a registered commodity pool operator (CPO), or an unregistered fund identified by CFTC. So called "hedge funds" are included in this category, regardless of whether they are registered. With the most at risk at turning points, changes in the net long position of this Managed Money group are usually associated crude oil price changes.


S&P 500 Index Downside Objectives

Last week in Digest Issue 4 "Oversold Bounce" the focus was on downside-measuring objectives. After the unusual reversal Friday, after the action taken by the Band of Japan the focus now shifts to how high it may go, keeping in mind the long-term trend is still down, breadth is weak, and the important transports continue suggesting a slowing global economy.

Since SPX returned to the 1900-2000 range, and there is little resistance before 2000, at the top of the previous range, it makes a likely target where selling could resume. However, should the Federal Reserve do the unlikely and confirm there will be no further interest rates hikes in the near future it could attempt to retest the November 3 high back up at 2116.48. However this would do nothing to resolve the overvalue issue based on the long-term price to earnings ratio, but in the current environment equity prices seem to be more influenced by expectations for changing money supply than earnings. For example, according to Etf.com, Jeffrey Gundlach at DoubleLine Capital, said last Monday "Either the Fed dials down its hawkish rhetoric or 'markets will humiliate them by going down.'"


strategyWith VIX in the 20 range, higher implied volatility that may continue for a while creates opportunities to sell option premium while maintaining neutral or near neutral directional risk. Some examples include out-of-the money call spreads on stocks in well-defined downtrends or out-of-the-money put spreads on the more defensive stocks currently in favor, such as telecoms, utilities or consumer staples. An alternative would be out-of-the-money Iron Condors, short both sides and therefore with less directional risk, but at the cost of less return in the event of an unexpected more where one side goes in the money and needs closing before expiration. Look for those with IV/HV ratios, using the range method for HV, of less than 2 as guide for stocks that are unlikely to make large unexpected moves in either direction.


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The Bank of Japan negative interest rate announcement last Friday was a game changer as the yen immediately declined, the S&P 500 Index and the US Dollar Index both made an unusual upside reversals. Now the focus will turn once again to the Federal Reserve to confirm their intention to increase interest rates further or suggest they are willing to reconsider due to changing macro conditions.


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.


In next week’s issue, we will crank up our ranker and scanner looking for more 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.

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


Maybe in this link I can get information about new economy is rising just now with energy nature recourse to replacement oil and all derive or drift, i would like to know which companies name are working on great plan .

Posted by Gerald on February 02, 2016 at 10:01 AM EST
Website: http://yahoo.com

Gerald, Thanks for the new economy question. With good relative strength in the declining market, consider First Solar(FSLR). Jack

Posted by Jack Walker ( on February 08, 2016 at 04:01 PM EST

Permalink Comments [2]

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".