« September 2019 »

IVolatility Trading Digest™

Volume 19 Issue 37
Crude Oil Jolt [Charts]

Crude Oil Jolt [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Crude oil returns to the spotlight after a Saturday attack on Saudi crude oil processing facilities. Along with China trade news and the upcoming FOMC meeting on Wednesday, this should be a busy week. Assuming the crude oil risk premium increases, spread ideas for SPDR S&P Oil & Gas Exploration & Production ETF (XOP) follow the Market Review.

Review NotesS&P 500 Index (SPX) 3007.39 gained another 28.68 points or +.96% last week but failed to close above resistance at the upward sloping trendline, USTL shown in the chart below. Should it continue tracking the trendline higher it will soon encounter more resistance from the previous July 26 high at 3027.28 marked with a blue arrow. Because pullbacks have followed new highs since the June correction, another seems likely and may begin soon if crude oil prices increase dramatically.


The measuring objective for the breakout from the range above 2940 is determined by adding the height of the pattern to the breakout [(reversal point 2 high 2943 - Aug 5 low 2822) + 2940)] =3061. However, assuming it overcomes potentially higher crude oil prices, the previous high at 3027.98 makes a tempting selling target.

VIXCBOE Volatility Index® (VIX) 13.74 declined 1.26 points or -8.40% 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 1.04 points or -8.64%, ending at 11% vs. 12.04% for the week ending September 6, below the recent 15-20 range heading back down toward 10%.

Previously when reaching 10% it quickly rebounded as if it's too hot to handle as the SPX turns lower. As the SPX struggles with resistance from the upward sloping trendline and the prior July 26 high, reasons to believe it will be any different this time are limited. Message here: prepare for another pullback soon.


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 two trading days until September expiration, the day-weighted premium between September and October allocated 10% to September and 90% to October for a premium of 20.83%, well into the bullish green zone between 10%-20% compared to 14.76% for the week ending September 6. It has a tendency to be higher than normal on Fridays before upcoming front month expirations and September futures expire on Wednesday with Tuesday the last trading day.


The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the VIX at expiration on Wednesday.

For daily updates, follow our end-of- day volume weighted premium version located about halfway down the home page in the Options Data Analysis section on our website.

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Crude Oil

The attack on Saudi crude oil processing facilities will likely increase the Brent risk premium. On Friday, WTI crude oil closed at 54.85 basis October futures while November Brent futures closed at 60.22 for a 5.37 premium. Although the damage may be quickly repaired, both Brent and WTI crude oil prices and the premium over WTI should increase at least temporarily, since the US can quickly release crude from the Strategic Petroleum Reserve (SPR).

States Oil Fund LP (USO) 11.44 down .33 or -2.80% last week. Although currently in the lower part of a trading range, options volume and available strike prices are limited. Since implied volatility will likely rise from 33.46, at least temporarily, spreads are needed to partially offset changing implied volatility and selections are too limited.

Review NotesSPDR S&P Oil & Gas Exploration & Production ETF (XOP) 23.42. After reaching oversold territory it came to life last week bouncing up 1.21 or +5.45%. With implied volatility of 35.56 on Friday and likely to rise, with options volume of 171,595 contracts with narrow bid/ask spreads, consider this long call idea.


Using the ask price for the buy and mid for the sell the call spread debit was .48 on Friday, about 24% of the distance between the strike prices, but since the options will likely open higher adjust the prices accordingly.

Now for a conditional step two.

Assuming implied volatility advances as expected and XOP advances toward the middle of the range (21- 33) to around 26 or 27, consider selling the higher implied volatility since it will likely return to the mean quickly. Using an Iron Condor sell both the top and bottom of the range. Although prices will likely be somewhat different, here they were on Friday.

First, an October call spread near the top of the expected range,


Using the bid price for the buy and mid for the sell the call spread credit was .15 on Friday.

Then an October put spread near the bottom of the range.


Using the bid price for the buy and mid for the sell the call spread credit was .19 on Friday.

Both are conditional on the Implied Volatility Index advancing from 35.56 on Friday to around 45 when the prices will have changed, but the plan is to sell a call spread near the top of the range and a put spread near the bottom. However, disregard this conditional idea should implied volatility fail to advance.

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


VIXThe caution and hedge signs remain operative until the S&P 500 Index clears the operative upward sloping trendline and overcomes resistance from the July 26 high at 3027.98. The potential for a spike in crude oil prices joins concerns about China trade tariff news along with speculation about an interest rate cut at the upcoming FOMC meeting on Wednesday

In the meanwhile, last week's suggested SPDR S&P 500 ETF (SPY) put spread in Digest Issue 36 "Buffeted by Trade Winds [Charts]" remains active.

On the other hand, positive indicators include the spread between the US Treasury 10Year Note and the 2-Year Treasury note closed +.11. Market breadth measured by the McClellan Summation Index gained every day last week adding 239.33 points and our liquidity indicator introduced in Digest Issue 28"Double Barrel Indicator [Charts]" iShares iBoxx High Yield ETF (HYG) hardly skipped a beat closing the week at 87.16 up .02.


Although the S&P 500 Index advanced along the upward sloping trendline it has yet to close above it and with the possibility for higher crude oil prices early in the week, it may continue struggling. In addition to crude oil prices, the markets will need to contend with the continuous stream of China tariff news and the upcoming FOMC meeting on Wednesday. Until the S&P 500 Index closes back above the important upward sloping trendline, keep hedging long positions and expect increasing volatility in the crude oil complex.

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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.

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