« March 2018 »

IVolatility Trading Digest™

Volume 18 Issue 10
Ides of March [Charts]

Ides of March [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Review NotesPerhaps a better title for this week should be Correction Whipsaw since Friday's advance after the employment report changed the sentiment for equities and the technical outlook once again. However, since March 15 has historical significance back to 44 BC as a day of infamy, having become a metaphor for impending doom, now is its time, although any further market decline now looks a lot less likely. The market review explains, followed by another trade idea for iShares MSCI Emerging Markets ETF (EEM).

Review NotesS&P 500 Index (SPX) 2786.57 was better by 95.32 points or +3.54% for the week and looking again more like the less common symmetrical reversal pattern than a bearish rising wedge described last week in Digest Issue 9 "Correction Resumes [Charts]." With the Nasdaq, QQQ and XLK all breaking out to the upside, a rising wedge seems less likely, but still in the realm of possibility.


VIXCBOE Volatility Index® (VIX) 14.64 dropped 4.95 points or -25.27% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, declined 3.68 points or -25.27% ending at 10.88.


VIX Futures Premium

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

With 7 trading days until March expiration, the day-weighted premium between March and April allocated 28% March and 72% to April for a 10.00% premium, right at the bottom of the green zone between 10% to 30%. Good for the bulls once again.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration. At the extremes, declines below 10 and advances above 30 are both unstable.


Our previous end of correction stance in Digest Issue 8 "Correction Likely Over [Charts]" was renewed as the premium turned positive once again last Wednesday.

VIX Options

Adding some emphasis to changing sentiment here is the VIX volatility chart going from 200 to just under 100 in one month. Now 99.45 vs. 128.35 last week.


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Back on the long side

Rather than suggesting one of the Nasdaq or tech ETFs that have broken out to the upside and may soon retest their breakouts, consider an update for one suggested in Digest Issue 8 "Correction Likely Over [Charts]" that's highly correlated to the S&P 500 Index but lower priced.

iShares MSCI Emerging Markets ETF (EEM) 49.75 up 1.62 points or +3.37% for the week and back to where it was when suggested in Digest Issue 8 "Correction Likely Over [Charts]" Since both the S&P 500 Index and EEM benefit as the US Dollar Index (DX) declines watch the small double bottom that could be underway since any further DX advance would create a headwind.

Option data

The current Historical Volatility is 29.32 and 20.59 using the Parkinson's range method, with an Implied Volatility Index Mean of 17.76 and likely to continue back down toward 16. The implied volatility/historical volatility ratio using the range method is .86 so option prices are inexpensive relative to the recent movement of the ETF. Friday’s option volume was 242,879 contracts with the 5-day average of 403,270 contracts with reasonable bid/ask spreads reflecting high options volume making it one of the better ETFs for option strategies.


Since the implied volatility declined back into the normal zone there it less benefit to using a spread with a lower delta than just a long call. With a .70 debit, use a close back below the last pivot just above 48 as the SU (stop/unwind).

The suggestion above is based on the ask price. Monday's option prices will be somewhat different due to the time decay over the weekend and any price change.


The quick decline in implied volatility and with many leading stocks and selected ETFs breaking out to the upside, along with improving market breadth, attractive Iron Condors will be harder find. Accordingly, its back to the long side, using long calls, call spreads and call spreads in combination with short puts.

Keep an eye on the potential bottoming pattern underway in the US Dollar Index (DX) & DXY, $USD, now 90.07. See the chart in Digest Issue 9 "Correction Resumes [Charts]."


Although whipsaw risk increased last week, it now appears the bulls are taking charge once again, encouraged by Friday's employment report that was described as good for growth without increasing inflation. Already breaking out to the upside, Risk On sectors should continue higher this week.

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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.

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Next week the plan includes more trade ideas from our ranker and scanner tools.

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 always, 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".