« August 2018 »

IVolatility Trading Digest™

Volume 18 Issue 33
Endless Rotation [Charts]

Endless Rotation [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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The pace of rotation out of cyclical sectors, also called "Risk On," into staples sectors, also called "Risk Off," accelerated last week boosted by nonstop trade and tariff rhetoric. The market review includes charts to help tell the story along with a Commitment of Traders update for WTI crude oil followed by a progress report on Alibaba Group Holding Ltd. ADR (BABA) with earnings scheduled for Thursday.

Review NotesS&P 500 Index (SPX) 2850.13 gained 16.85 points or +.59% for the week. The range between 2800 and 2790 continues to provide support followed by the increasing 50-day Moving Average now close to 2800 at 2792.81. Finally the operative upward sloping trendline (USTL) from the April low crosses down about 2740. Since both August and September have recently been seasonally weak months the ability to stay above the 50-day Moving Average should encourage the bulls. Watch for a close below 2800.

As for "Risk Off" this updated XLY/XLP chart shows accelerating rotation out of cyclicals.


VIXCBOE Volatility Index® (VIX) 12.64 declined .52 points or -3.95% 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 about the same -.51 points or -5.61% to 8.58. This six month chart with SPX below, shows IVXM trending lower as SPX advances.


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 just 2 trading days until August expiration, the day-weighted premium between August and September allocated 8% to August and 92% to September for a 12.34% premium.


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.

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Foremost Indicators

CBOE S&P 500 Skew Index (SKEW) 146.01 declined 3.19 points or -2.14% for the week, after reaching 159.03 last Monday following the previous Friday's SPX gap lower on contagion worries from Turkey.

SKEW measures purchases of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions.

In the past brief spikes above 140 were usually associated with specific events, but now with several closes above 150, it looks like the events indicator level needs revising and may also be trending higher.


Market BreadthMarket Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, declined 65.72 points or -13.34% last week including a slight gain of 15.25 points Friday. Declining market breadth should worry the bulls.



This important sector reflects concern that the cycle has ended. If so, others in the tech sector could also come under selling pressure.

VanEck Vectors Semiconductor ETF (SMH) 102.83 down 2.80 points or -2.65% for the week.


With a potential Head & Shoulders Top (two left and two right shoulders) working and having closed below the upward sloping trendline (USTL), a close below the Neckline would created a downside measuring objective at 80, below the low on this chart. Since this represents a significant risk to the entire tech sector it should be watched carefully for at least the next six weeks. Watch for a bearish close below the Neckline around 98 or a reversal on increased volume indicating that the rotation selling now underway has ended.

Crude OilWTI Crude Oil (CL) 65.91 basis September futures declined 1.72 points or -2.54% for the week after an unexpected inventory increase of 6.8 million barrels including increased imports. While the increase doesn't seem like much compared to the 5-year range the market reaction as immediate since expectations were for another inventory decline. Another concern: the summer driving season ends soon.


This chart show a potential Head & Shoulder Top pattern already activated with multiple closes below the Neckline suggesting a measuring objective back at 60 where it began the advance last March.

Summary for the Disaggregated Commitments of Traders - Options and Futures Combined report as of August 14 before the EIA inventory report on Wednesday, shows both "Managed Money" often called hedge funds and "PMP" defined as Producers, Merchants, Processors and Users, reduced their long positions by a combined 52,034 contracts..

The chart below shows the "Managed Money" net long position combined with the long only position of "PMP" along with the upward sloping trendline (USTL). Should either "Managed Money" or "PMP" continue closing long positions or "Managed Money" begins increasing their shorts then this uptrend will end.


From this perspective watching the "Managed Money" net short position should be a useful indicator, since when they start aggessively shorting, prices will drop quickly. For now they seem content to reduce their long exposure; consistent with a modest seasonal price decline like to one suggested in the price chart above.


21,285 short contracts vs. 22,498 short contracts week ending August 7, 2018

Calendar Spread Update

Last week Digest Issue 32 "Finding Spreads" detailed the results from the RT Spread Scanner for Alibaba Group Holding Ltd. ADR.

Alibaba Group Holding Ltd. ADR (BABA) 172.78 declined 7.23 points or -4.02% for the week and since it declined 2.33 points or -1.29% on Monday August 13, the calendar spread idea in Digest Issue 32 "Finding Spreads" was shelved since the assumption that the stock would advance into the earnings report became doubtful.

However, since the earnings report will be released Thursday before the opening here is an update for the big move risk measure.

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 172.50 calls are 60.82 and the puts are 59.95 for an average of 60.39. With the range historical volatility of 24.11makes the ratio 2.50. 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. At some previous reporting dates the 30- day IV Index Mean has exceeded 40 and Friday it was 39.38.

Although it may not be a good comparison, Tencent Holdings Ltd. (TCEHY) reported revenue and earnings last Wednesday that were below consensus estimates sending the stock 7% lower on the close, but recovered almost all of the decline by Friday's close. Nevertheless, if traders and strategists are concerned about slowing growth in China the implied volatility of the August 24 BABA options could continue increasing.

For contrarians, one strategy to consider for high implied volatility is a short out-of-the money put spread with BABA now back to April and May lows. There is assignment risk of the stock closes below the short put strike however, the loss would be limited using a put spread. The more bullish contrarian trade would be a short out-of-the money August 24 put along with a long out-of-the- money call spread in September or October.


Trade and tariff rhetoric has begun to take its toll on equities reflected by continued rotation into "Risk Off" sectors although the S&P 500 Index remains well above its 50-Day Moving Average and continues advancing toward the previous January high. However, deteriorating market breadth along with weakness in the semiconductor sector and perhaps crude oil are reasons for concern. Since both August and September are seasonally weak the situation could change in October especially if there are some trade and tariff agreements.

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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 it's back into the data base looking for more trade ideas.

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 Action - Actionable Options Daily ? Help would be appreciated Thanks Heike Collins

Posted by Heike Collins on August 20, 2018 at 10:17 AM EDT

Heike, Great question, thanks for asking. On our home the two most recent are located about one-third of the way down in the IVolatility Trading Digest section, on the right side under the IVolatility News heading. All of the others going way back can be found under the News heading at the top of our home page, just left of center. Jack

Posted by on August 20, 2018 at 12:22 PM EDT

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