« April 2017 »

IVolatility Trading Digest™

Volume 17 Issue 16
VIX & Crude Oil [Charts]

VIX & Crude Oil [Charts] - IVolatility Trading Digest™

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On March 21the S&P 500 Index closed below the upward sloping trendline from the November 4 low ending the "Trump" trade from a trendline perspective. Then last Tuesday it closed below the 50-day moving average confirming the trend change. More details follow along with a closer look at the VIX including a short-term special situation idea for ProShares Short VIX Short-Term Futures (SVXY) and then a Commitments of Traders WTI Crude Oil update.

Review NotesS&P 500 Index (SPX) 2328.95 declined 26.59 points or -1.13% for the week closing below the 50-day moving average last Tuesday. The next support is 2300, only 28.95 points lower and then the more important wide support zone between 2285 to 2275 going all the way back to December 13.

VIXCBOE Volatility Index® (VIX) 15.96 gained 2.65 or +24.01 % for the week while the comparable IVolatility implied volatility index mean, IVXM now 12.94 added 3.09 or +25.75%.


The current spike up exceeds the last three since December reflecting increasing uncertainty.

Three month Implied Volatility Index Mean, IVXM and SPX charts below.


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VIX Futures Premium

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

As of Thursday, with 2 trading days until the April expiration, the day- weighted premium between April and May allocated 12% to April and 88% to May for a -3.75% premium.


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. The April futures closed Thursday at 16.33, above the VIX at 15.96 and they will converge Wednesday. However since the next three months futures are all below the VIX once the April futures expire the negative premium will increase assuming the VIX remains constant or increases. The unusual positive premium with only two trading days until expiration seems to reflect a willingness to hold the futures over the Easter weekend although they will converge with the VIX Wednesday. The April futures chart shows the spike higher began last Monday.


The remaining open interest of 148,453 contracts suggests a willingness to hold the futures over the long weekend presumably as a hedge against a geopolitical event.

Referring back up to the Day Weighted VIX Premium chart shows the two previous downward spikes into negative territory quickly reversed as the SPX turned higher. Although negative premiums are usually associated with reversals they can remain negative for some time even though on the last two occasions they recovered quickly.

VIX Futures Term Structure

The unusual VIX term structure may offer a short-term opportunity as the front month April futures expire Wednesday. Of the two inverse ETFs that short VIX futures and advance as the VIX declines, ProShares Short VIX Short-Term Futures (SVXY) 121.32 has listed options with enough volume and open interest to consider. In the unlikely event that the April VIX futures remain elevated above the VIX by the close Monday, an April 21 risk reversal, also called a synthetic long, could capture the return of the April futures to the VIX. Here is one idea using Thursday's prices that will be quite different Monday.


Using the Ask for the call buy and Bid for the put sell the credit would be .37

Crude Oil

Crude OilWTI Light Sweet Crude Oil (CL) 53.18 basis May futures gained .94 or +1.80% for the week. Prices have been advancing since the March 27 low at 47.08 attributable to usual seasonal strength this time of year and speculation that the November production cut agreement will be extended at the May 25 OPEC meeting.


From the Disaggregated Commitments of Traders - Options and Futures Combined report as of April 11, "Managed Money," the group that best correlates with crude oil price changes and arguably the most important, increased longs and reduced shorts for the second week, adding 10,433 long contracts and reducing shorts +31,766 for a substantial net increase of +42,199 contracts or from 8.99% of open interest to 10.27 %.


"PMP" (Producer/Merchant/Processor/User) often referred to as "Commercials" followed the same plan adding 22,071 contracts while reducing their shorts by +9 for a net addition of 22,062, thereby reducing their net short position to 7.06% of the open interest down from 7.91% the week before.


Declining short interest by the "Commercials" seems consistent with expectations for higher prices.

This week once again it seems "Managed Money" followed the "Commercials" as they continue reducing their net short position after reaching a high of 10.68% of the open interest on February 21, 2017 now 7.06%.

For the second week "Non Reportables" and undefined "Others" were on the wrong side, "Others" by -27,562 net and "Non Reportables" by -9,081 contacts net.

Although usually highly correlated with the S&P 500 Index crude oil may continue advancing into the May 25 OPEC meeting.

StrategyLast week SPX closed below its 50-day moving average confirming the end of the "Trump" trade from the November low. The next pullback test will come at 2300. While the short-term looks discouraging for the bulls, the decline could be no more than a modest pullback soon to be reversed like many others since the March 2009 bottom. Repeating the thought from Digest Issue 13 "Foremost Indicators [Charts]" the proverb, it’s always darkest just before the dawn will likely hold true once again at 2300 or 2285 -2275 support unless overcome by geopolitical anxiety.


Perhaps due to the slowing economy and/or the diminishing likelihood of fiscal stimulus anytime soon, along with increasing geopolitical risk, the S&P 500 Index has begun pulling back as risk increases due to a changing investment landscape from extreme monetary accommodation to a tighter monetary policy that could slow the economy. While the pullback could be modest watch the next two key support levels, 2300 and 2285 -2275.

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Next week will focus on the progress of the S&P 500 Index as it approaches key support levels.

Spring Data Sale

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.

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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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