« August 2018 »

IVolatility Trading Digest™

Volume 18 Issue 34
TOP 5 [Charts]

TOP 5 [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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After the market review we take a look at the Top 5 scan results in three groups using our ranker services. Then a contrarian long idea to consider for iShares China Large-Cap ETF (FXI) followed by an update and comments on the earnings results reported by Alibaba Group Holding Ltd. ADR (BABA) last Thursday.

Review NotesS&P 500 Index (SPX) 2874.69 added 24.56 points or +.86% for the week closing at an all time high. The bulls were right! The range between 2800 and 2790 continues to provide support followed by the increasing 50-day Moving Average now 2800.96. The operative upward sloping trendline (USTL) from the April low crosses down at 2740. However, since September has been one of the weakest months of the year, for the last six years, it may generate some double top chatter.

VIXCBOE Volatility Index® (VIX) 11.99 declined .65 points or -5.14% 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 less -.18 points or -2.10% to 8.40. Here are the volatility and the S&P 500 Index charts for the last year showing the new closing high.


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 17 trading days until September expiration, the day-weighted premium between September and October allocated 85% to September and 15% to October for a 18.87% premium , well into 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. Previously declines below 10% and advances above 30% were unstable.


Found in the “Rankers and Scanner” section of our home page we regularly feature a complimentary ranker sample at the “Top 5 stocks by implied volatility change” link that goes to an Advanced Ranker sample displaying the top and bottom five stocks and ETFs in four categories. For ideas, we often look at the top five based on the Implied Volatility Index Mean vs. the 30-day Historical Volatility (IV Index Mean vs. 30D HV). Here they were Friday.


Using options with at least 30 days to expiration, when the ratio of the IV Index Mean divided by the 30D Historical Volatility exceeds 2, the potential for a large move in the underlying increases.

Since the earnings reporting dates for both GERN and AKRX are both in late October something other than earnings are responsible for the current high implied volatility. For ORCL, one of our Volatility Kings™ (see Digest Issue 28 "Volatility Kings 2Q 2018") and GME it's about upcoming early September earnings reports.

HYG seems most unusual since the call IV Index is 4.58% while the put is 3.94%. While the ETF trends higher the puts could be used for hedging and there is no upcoming earnings report involved.

Here is another section from the TOP 5 showing Friday's greatest IV change.


CRON Reports in November, PFE in late October and DF in early November so earnings reports are not likely reasons for increased implied volatility. For VIX options, the increase could be hedging related, but they are not at a level suggesting abnormal activity. Since AMD, another Volatility King, is scheduled to report October 24 the advance is likely about the upcoming earnings report.

For the Top 5 results the search is set up on the Top 200 stocks by options volume. The displayed results and can be expanded to the Top 50 or even Top 100. In addition, it can be set to find the ones with low ratios. Try this unique Advanced Ranker data mining tool.

Big Data? In options we are Big Data!

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Here is one more scan, this time from our Stock Sentiment Ranker applied to the ETF group.


All are related to equity markets at or near all time highs, except FXI. It has been declining since the middle of June and could now be forming a bottom.

iShares China Large-Cap ETF (FXI) 42.60 gained 1.08 or +2.60% for the week including .62 points or 1.48% Friday after the Yuan advanced on news that PBOC was taking steps to stabilized the currency.

With all the trade rhetoric risk along with tariffs being implemented both by the US and China, here is a contrarian long call spread idea to consider with enough time for progress to be announced on at least some issues before the US midterm elections in November. This could be one of those times to buy when there is "blood in the streets," a comment attributed to the late banking opportunist Baron Rothschild.

The current Historical Volatility is 24.50 and 10.81 using the Parkinson's range method, with an Implied Volatility Index Mean of 19.08 at .28 of its 52-week range. Friday's option volume was 112,457 contracts with a 5-day average of 140,960 contracts with reasonable bid/ask spreads.


Using the ask price for the buy and mid for the sell the call spread debit would be .61 about 31% of the distance between the strike prices with 44% of the long call risk hedged by the short call. In the event it opens considerably higher or lower, adjust the strike prices accordingly. Use a close back below 41.50 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.

Alibaba Group Holding Ltd. ADR (BABA) 174.23 gained 1.45 points or +.84% for the week including a 2.00 point advance or +1.16% Friday. The options volume was 1,095,615 contracts versus the 5-day average of 558,430 contracts.

Thursday after reporting it closed down 5.62 points or -3.16%. The August 24 at-the money straddle implied move on August 22 before the report was 5.5%. The August 24 at-the-money Implied Volatility Index was 92.60 while the range historical volatility (PHV) was 24.43 for a IV/PHV ratio of 3.79, suggesting a large move. However, the standard Implied Volatility Index using options with 30 days to expiration was 36.52, making the ratio 1.50, implying a more modest after reporting price change and one that was closer to the actual result. Based on this example and many others, check the IV/PHV ratio using options with at least 30 day to expiration to estimate the after report price change. Those in the TOP 5 chart above are all greater than 2.


Much to the delight of the bulls, the S&P 500 Index made a new closing high despite continuing China trade rhetoric and implementation of more tariffs. With considerable support at 2800 the S&P 500 Index could continue somewhat higher before making the inevitable pull back to retest the breakout that may occur during the seasonally weak month of September. For trade ideas follow our complimentary Top 5.

Twitter Follow us on twitter for more ideas from our scanners and other developments.

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 the plan is to include more market review including a look at the flattening Treasury yield curve.

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".