« May 2018 »

IVolatility Trading Digest™

Volume 18, issue 21
Interest Rates & Crude Oil [Charts]

Interest Rates & Crude Oil [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Last week abrupt changes in two important and widely watched sectors serves as a stunning reminder that it remains all about trading. The market review below explains along with an interest rate trade idea for ProShares UltraShort 20+ Year Treasury (TBT) to consider.

Review NotesS&P 500 Index (SPX) 2721.33 meandered higher by 8.36 points or +.31% last week, remaining above the previous downward sloping trendline described in Digest Issue 19 "Correction Update." While there is some support at 2700, both the 50-day Moving Average at 2673.65 and the previous downward sloping trendline at the same level should provide solid support for any decline. From a medium term perspective it continues to languish below the operative upward sloping trendline from February 11, 2016.

VIXCBOE Volatility Index® (VIX) 13.22 slid .20 points or -.1.49% last week while 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 .60 points or -5.74% ending at 9.85 near the bottom of the new recent range.


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 12 trading days until June expiration, the day-weighted premium between June and July allocated 48% to June and 52% to July for 9.89% premium, just below the bullish green zone between 10% and 20%


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.

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All About Trading

Our adaption to "Whac-a mole" called" Whac-a Sector,” with high frequency traders, called “Algo Rotators” doing the whacking, returned to prominence again last week. Just as many were convinced the fundamentals for interest rates and crude oil justified their upward trajectories, both abruptly reversed supporting the view that trading opportunities continue playing a central role. For interest rates, Treasury Notes and Bonds were oversold; for crude oil it was the upcoming OPEC meeting on June 22 and the seasonal tendency to decline in late May or early June.


Chart of the Week

iShares 20+ Treasury Bond ETF (TLT) 119.62 advanced 2.41 points or 2.06% for the week after making three gap up openings in the last three days.


The widely followed 10-Year Treasury Note yield started the week at 3.06%, then declined 13 basis points to end at 2.93. Should TLT advance to the top of the recent range at 122 it would imply a 10-Year Treasury Note yield back around 2.75% near the level it reached on April 2.

Consider this trade idea.

ProShares UltraShort 20+ Year Treasury (TBT)) 37.43 dropped 1.52 points or -3.90% last week. Presuming TBT stays in an inverse but similar range as TLT, the April 2 low of 35.87 makes a reasonable options trade objective.

The current Historical Volatility is 17.59 and 10.23 using the Parkinson's range method, with an Implied Volatility Index Mean of 17.22 at .05 of its 52-week range.

The implied volatility/historical volatility ratio using the range method is 1.68 so option prices are relatively high compared to the recent movement of the ETF. Friday’s option volume was 13,773 contracts traded compared to the 5-day average volume of 18,210 contracts with reasonable bid/ask spreads.

Consider this vertical put spread with ample time to expiration.


Using the ask price for the buy and mid for the sell the put spread debit would be .59 about 30% of the distance between the strike prices with a slight implied volatility edge. Use a close back above 38.50 as the SU (stop/unwind).

The spread suggestion above is based on the 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.

Runner up for "Chart of the Week"

Crude OilWTI Crude Oil (CL) 67.88 basis July futures declined 3.49 or -4.89% for the week after Saudi energy minister Khalid Al-Falih said discussions with Russia and other OPEC participants were underway about a production increase announcement at the June 22 OPEC meeting. While any increase may be gradual the price adjustment in the futures market will be immediate as demonstrated Friday.

While only runner up "Chart of the Week" in terms of timing coming at the end of the week, it certainly was as significant as declining interest rates.


Look for support around 67- 66 from both the 50-day Moving average at 67.27 and the operative upward sloping trendline.

Summary for the Disaggregated Commitments of Traders - Options and Futures Combined report as of May 22, shows "PMP" defined as Producers, Merchants, Processors and Users reduced both longs and shorts as the June contract expired. "Managed Money" increased shorts 7,387 contracts but not enough to change the trend while "Others" were on the wrong side decreasing their shorts more than their longs. "Managed Money" and "Others" together are often referred to as "Large Speculators." Nothing in last Tuesday's report suggests any speculative activity before Al-Falih's Friday comments about production increase discussions underway. This week's report scheduled for Friday June 1, despite the Memorial Day Holiday, will reflect last Friday's changes as crude prices declined. Look to see how much "Managed Money" increased their short position.

From a seasonal perspective it appears the high was reached last Tuesday May 22, at 72.90 three days earlier than last year when the high was made on May 25.


With the rapid decline in crude oil prices the S&P 500 Index will no longer have support of equities in the oil and gas sector. The US Dollar Index (DX) (DXY) continued higher last week adding .55 or +.59% to 94.19 although it could soon find resistance from previous highs at 94.22 from last December and even more at 95. Since trading remains important, DXY could soon turn lower along with interest rates and crude oil providing some support for the S&P 500 Index, especially the tech sector including semiconductors, a sector that needs to advance in order to avoid activating a potential Head & Shoulder Top pattern. In the meanwhile, the markets seem impervious to both trade negotiations and North Korea news, subject to change at any time.


Advancing Treasury Notes and Bonds, therefore declining interest rates, as well as crude oil, attracted the attention of traders after both reached extreme levels in what appears as more sector rotation activity. In the meanwhile, the S&P 500 Index lingers below the operative upward sloping trendline but has solid support just below the current level.

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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 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".