« September 2020 »

IVolatility Trading Digest™

Volume 20 Issue 36
Speculative Crescendo [Charts]

Speculative Crescendo [Charts]- IVolatility Trading Digest™

After the S&P 500 Index made a series of new closing and intraday highs, the top came last Wednesday after making a gap up at the open. The entire advance above 3500 should probably be labeled a speculative crescendo or perhaps a blow-off top as traders might say. As the Invesco QQQ Trust began to stall out it didn't take much to turn the tide since the VIX correlation indicator was flashing bright red. The Market Review explains along with some thoughts about what to expect this short week.  

Review NotesS&P 500 Index (SPX) 3426.96 dropped 81.05 points or -2.31% last week after making a new intraday high at 3584.90 last Wednesday before heading south Thursday blowing right through the upward sloping trendline that provided zero support. The next test comes at the 50-day Moving Average now 3298.91.

Invesco QQQ Trust (QQQ), 283.58, called "the decider," tumbled 8.95 points or -3.06% last week after making new closing and intraday highs on Wednesday. Like the SPX, the upward sloping trendline failed to slow the decline and with the 50-day Moving Average down at 269.19, near Friday's intraday low, a test of support should come quickly. Watch "the decider" closely this week.  

Review NotesCBOE Volatility Index® (VIX) 30.75 spiked up 7.79 points or +33.93% 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, gained 7.45 points or +43.98% ending at 24.39%.    

Review Notes

The implied volatility indicators no longer support a bullish interpretation of the current situation. So far the decline can be described as a modest pullback however, there could be more to come. The IVXM chart shows a modest advance and the SPX chart shows a modest decline.   


VIX Futures Premium

This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts as of last Friday.  

With 6 trading days until September expiration, the day-weighted premium between September and October allocated 35% to September and 65% to October for a premium of 10.67%, diverging from the volume weighted version at 5.91% and the open interest weighted version at 9.47%. Seems confused, perhaps less bullish than the Day-Weighted version indicates. While the VIX advanced, the October futures contract at 36.28 was substantially higher than September at 29.85 and with 6 days to expiration, most the weight was allocated to October. Nevertheless, for consistency and with reservations, the chart follows.  


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 the next monthly futures expiration on Wednesday September 16, 2020.   

The relationship of the futures curve to the VIX, as measured by the premium, makes a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds who bid October futures significantly higher last week.

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.

Foremost Indicators

VIX 10-day Correlation Indicator

Last week Digest Issue 35 "New Highs Everyday [Charts]'' explained the inverse relationship between the SPX and VIX and the significance when it turns positive.

This chart shows it provided ample warning of the upcoming decline, as it turned positive on August 26, as noted last week.


Now back into negative territory at -.08 it will likely continue declining while the VIX advances and the SPX declines.

Review NotesMarket 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, continued declining last week by another 130.26 points or -19.31% ending at 544.47 on a downward slope and well below the 50-day Moving Average at 741.13 and approaching the important 200-day Moving Average at 387.64. In the past, advances above and declines below, the moving averages, first the 50-day and then the 200-day have been good leading trend change indictors.

Big Data? In options, we are Big Data!
For a comprehensive review and reminder, check this out
Options: Observations of a Proprietary Trader  

Speculative Crescendo

This long-term chart from The Daily Shot shows excessive speculative out-of-the-money SPX call buying as of Wednesday last week. 


Of course, without considerable research it is difficult to tell how many calls were hedged by selling further out-of-the money calls or with puts, but it does help explain the advancing VIX 10-day correlation indictor. Unhedged call buying in any time frame come with time decay risk, and near term calls have the most.   

Equity Only Put/Call Ratio


Since the absolute low occurred on June 8 at .37, understandably the most recent low on August 27 at.38 could be dismissed as just another in a series of lows, but the rapid advance last Thursday and Friday seems close to reversing the downtrend so prepare for increased single equity put activity.

SPX Skew and Kurtosis

One more indicator suggesting the pullback may have more downside.

Skew and Kurtosis measures price movements compared to the assumptions made by options pricing models.


Friday's Skew -2.2712 with Kurtosis at 8.4460.

Notice as Skew (blue line) declined as Kurtosis (orange line) advanced at the first arrow on the left creating a spread of 9.7149. Now at the second arrow on the right the same spread widened a bit more to 10.7172.

This chart shows the spread with both spikes.


Without making a claim of causation this indicator from the options universe suggests previous episodes were associated with the start of market declines, some more important than others. Enough to call it a bell ringer.


For reference Digest Volume 19 Issue 17 "3 Caution Signs [Charts]" includes an explanation of Skew and Kurtosis with readings from October 10, 2018.


In bull markets, the strategy is to stay long equities and/or ETFs and then tactically hedge declines as soon as they begin developing, since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

Rather than waiting to see if a pullback will become a more serious downturn, consider hedging as soon as the first signs appear and consider it like the cost of insurance. If not needed, existing long portfolio positions will continue higher and the insurance protection can be cancelled. In addition, by watching and managing a put spread it will keep attention focused should the pullback develop into something more serious requiring even more put spreads.

Admittedly early, the Digest began suggesting increasing hedging in Issue 34 "A View from the TOP [Charts]." Now with clear evidence of an active pullback the time has come to consider adding or starting collars or opening new out-of-the-money put spreads with defined and limited risk. Since implied volatility will likely rise further avoid selling more options than buying strategies that increase vega risk, until there is evidence of a peak in implied volatility.  


The blow off top and the long awaited pullback began last Thursday, as everybody knows. However, nobody knows how long it will last or how much the major averages will decline. At least one indicator suggests it could be similar to the decline that began in October 2018. Increasing hedges before implied volatility spikes higher seems prudent.

By Jack Walker

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.

“The best volatility charts in the business.”

Next week the Market Review will again look at updates for SPX, QQQ.

Finding Previous Issues and Our Reader Response Request


All 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

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