« August 2018 »

IVolatility Trading Digest™

Volume 18 Issue 32
Finding Spreads [Charts]

Tech and Trade [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

To add comments or to ask questions please click here (or use the blog "COMMENTS" link at the very bottom of the blog page).

Until Friday, S&P 500 Index trading activity was like watching paint dry, trading ranges were narrow with relatively low volume. Then news of more sanctions on Russia along with Turkey suddenly turned sentiment negative. There is more below in the market review along with a calendar spread idea from our RT Spread Scanner for Alibaba Group Holding Ltd. ADR (BABA) with earnings scheduled for August 23.

Review NotesS&P 500 Index (SPX) 2833.28 lost 7.07 points or -.25% for the week despite dropping 20.30 points Friday. The range between 2800 and 2790 continues to provide support followed by the increasing 50-day Moving Average now down at 2784.85. Finally the operative upward sloping trendline (USTL) from the April low crosses down about 2730.

VIXCBOE Volatility Index® (VIX) 13.16 added 1.52 points or +13.06% 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, increased 1.10 points or +13.77% to 9.09. Based on percentage, both increased about the same although the increase hardly shows on this chart.


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 August expiration, the day-weighted premium between August and September allocated 28% to August and 72% to September for a 8.75% premium, back below the bullish green zone between 10% and 20% once again, disappointing the bulls.


8.75% vs. 22.03% last week ending August 3, 2018

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. Previously declines below 10% and advances above 30% were unstable.

Calendar Spreads

As historical also called realized volatility declines long calendar spreads become more attractive since there are fewer large moves, although the premiums are also somewhat lower.

Following that thought, we fired up our RT Spread Scanner.

This scanner saves time by quickly finding spreads using defined inputs for 14 different strategies from straddles and strangles to naked puts and everything in-between.

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Among the many possible variables, two are most important. Begin by setting the Strategy to Long Calendar Spread. Then at the Stocks tab set the field labeled "Stock Universe" to "Top 200 Options by Open Interest" or "Top 200 Options by Volume." This insures the results will have sufficient options volume and reasonable bid/ask spreads for multiple leg strategies. Otherwise the results could look attractive but impracticable to implement. Next at the Options Tab set the IV difference > 4. There are many other combinations available, but this one quickly discovered one of our Volatility Kings™ listed in Digest Issue 28 "Volatility Kings 2Q 2018," scheduled to report earnings on August 23.

Alibaba Group Holding Ltd. ADR (BABA) 180.01 declined .83 points or -.46% for the week after making a reversal Friday adding 2.82 points or +1.59%.

With a current Historical Volatility of 26.05 and 24.17 using the Parkinson's range method, the Implied Volatility Index Mean is 37.19 at .71 of the 52-week range. The implied volatility/historical volatility ratio using the range method is 1.54, so option prices are moderately high relative to the recent movement of the stock. Friday’s option volume was 306,536 contracts with the 30-day average of 310,890 contracts with reasonable bid/ask spreads. The volatility chart shows the rising implied volatility anticipating the earnings report. The price chart below doesn't clearly show Friday's reversal.


Since the price reversal suggests it may continue higher into the report an out-of- the- money call calendar was selected from the several alternatives discovered by the scanner.


Using the ask price for the buy and mid for the sell the call spread debit would be 1.20 with some implied volatility edge.


Since the scanner assumes the ask price for the buy leg and bid for the sell leg the debit would be 1.25; this is the debit used for the Greeks above, and Simulator results below, that are included with the scanner results.


Since this is a short term trade the Time Steps on the horizontal axis were set at 5 days and the price changes set at 5% increments on the Underlying vertical axis.

If the assumption that Friday's reversal is correct and the stock advances into the earnings report, the potential results are shown in the last three green rows. However, the implied volatility of the short near term option will likely continue rising until the report date. There is always some risk.

As with all long calendar spreads with negative gamma shown above, large moves of the underlying will cause a loss. One measure of this risk is to compare the implied volatility of the at-the-money options to the range historical volatility. Currently the implied volatility of the August 24 at-the-money 180 calls are 44.63 with the range historical volatility of 24.17 for a ratio of 1.85. In the past ratios much over 2.00 have been fairly reliable indicators that the large move risk has increased. Since there is still more time before the report date the implied volatility could increase more and indeed before some previous reports the 30- day IV Index Mean has exceeded 40 as shown in the volatility chart above.

Other strategies that could fit the situation include a short out-of-the money put spread with the assumption the near short put could be assigned if the stock declines after reporting however, the loss could be limited using a put spread.

Monday’s option prices will be somewhat different due to the time decay over the weekend and any price change.

The RT Spread Scanner with 14 possible strategies and numerous possible scan combinations increases profit making opportunities while defining risk. Start improving your win/loss ratio and bottom line using this unique and powerful tool. A two week free trial along with detailed instructions are included. Start now!

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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.

Next week will include an expanded market review along with a WTI Commitment of Traders update.

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



where do i find the daily options trades posts ?

Posted by tindip41 on August 13, 2018 at 01:28 PM EDT

tindip41, Thanks for your question. Typically we offer option trade suggestions or ideas for further research in the weekly Digests sent on Monday. All of the previous suggestions can be found on the web site on each opened Digest page. At the top right there is a small calendar indicating every day that a Digest issue was posted during the month. Click on them in light blue to open the Digest for that date. In addition, using the double arrow at the top will take you back to the previous month for more issues. Jack

Posted by Jack ( on August 13, 2018 at 03:25 PM EDT

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".