« January 2010 »

IVolatility Trading Digest™

Volume 10, Issue 1
Continue Marching

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Continue Marching

Here at the start of 2010 our reference to marching is obviously about the continuation of equities as they set new highs for this advance. In this Digest, we update our Head & Shoulders Bottom chart from the March 2009 low and include a volatility chart to complement the equity chart. Then we offer some thoughts about changing the Digest format this year. We begin with the first market review of the year.

Market Review

S&P 500 Index (SPX) 1144.98. In the three weeks since our last Digest on December 21, 2009 SPX gained another 42.51 points as it cleared resistance at 1120 and overcame the pressure of a higher dollar and higher long- term interest rates.

We are reaffirming our minimum upside objective at 1233.29 shown in our updated Head & Shoulders Bottom chart presented in strategy section below.

E-mini S&P 500 Future (ESHO9) 1141.50. Since the close on December 18 the March E-mini future contract gained 43.75 points on light holiday volume although open interest increased by 78K contracts as it continues supporting the bullish view.

S&P 500 Index Implied Volatility (IVXM). With the continuing rise of equities, our Implied Volatility Index Mean declined 2.50 and is now at 15.95 while the VIX declined 3.55 to end the week at 18.13. The last time the VIX approached these levels was on June 2, 2008 when it closed at 17.83 while the SPX was 1440.24. The Historical Volatility is now 11.48 another new 52-week low.

The January VIX Futures contract closed at 19.90, a 1.77-point premium over the cash at 18.13. February was 22.55 or a 4.42 -point premium. Using Larry McMillan’s day-weighted average between the first and second months, we calculated the weighted premium to be 3.93 points or 21.7% compared to a premium of 2.60 points or 12% on December 18. When the futures are at a premium, they are giving a sell signal and presumably the strength of the sell signal and the market risk increases as the premium increases. Using this short- term measure the strength of the sell signal increased in the last three weeks as the market continued higher suggesting increased hedging activity using VIX futures.

The adjusted implied volatility of the at-the-money VIX January call based upon the futures increased to 94.06 from 69.60 and the put IV increased to 88.68 from 65. However, the February call declined to 48.60 from 61.17 and the put declined to 52.31 from 61.45. The Historical Volatility based upon cash increased from 90.57 to 93.83.

In the strategy section below, we offer some additional comments and show the SPX volatility chart.

US Dollar Index (DX) 77.47. Since December 18, the net DX decline was .35 points as equities and crude oil continued higher and gold began turning higher again. This could be an early indication of a change in the recent relationship between the dollar, equities, gold and crude oil suggesting the possibility they may all begin advancing together.

iShares Barclays 20+ Year Treasury Bond (TLT) 89.29. Since December 18, TLT declined 3.50 points as the equivalent long-term Treasury yield increased 24 basis points to 4.69%. TLT now looks as if it will test the lows set on June 10 at 87.56 and June 11 at 87.69. Lower lows from here could support a higher dollar, but it will eventually begin to erode support for equities. In the event it continues lower, TLT will likely become the most important leading indicator. The alternative to consider is a rally from the lows setting up a possible double bottom.

NYSE McClellan Summation Index 1007.95. Since out last visit the NYSE breadth indicator improved another 411.77 points and is trending higher, while the oscillator is above the zero line. While now above 1000, a level considered neutral, there is a divergence since the NYSE Index is at new high but the advance - decline line is lagging as fewer issues are making new highs. For now, this divergence is a reason to continue flying the caution flag. caution flag  

Baltic Capesize Index (BCI) 3733. Over the past three weeks, our preferred Baltic dry-bulk shipping rate index for the larger ships continued declining by another 833 points or 18% and is now back to the October lows. In the tanker segment, the Capital Link Tanker Index increased by an additional 182.04 points or 7.8% to 2512.50. Further weakness in the dry-bulk trade is being offset by continued strength in the tanker market. Until we see some improvement in the dry-bulk rates, we continue flying the caution flag. caution flag


With rising long-term interest rates and a higher dollar index some analysts are proclaiming the S&P 500 Index is overbought and due for an inevitable decline, but it continues higher closing well above the 1120 resistance level. Economic sensitive sectors such as oil and gas, oil services, crude oil tankers, engineering & construction and the emerging markets help push the index higher in as the volatility declined. While the advance is losing momentum we believe it will continue until it reaches the our Head & Shoulders Bottom minimum measuring objective of 1233.29 that we detailed in IVolatility Trading Digest™ Volume 9, Issue 36, Unrepentant Bull, dated September 14, 2009.

In the updated weekly version of the chart below, we note the resistance in the 1200 to 1300 area where it traded for 3 months in 2008. After reaching this area and meeting the minimum measuring objective we are expecting to see resistance that could create a range bound market as long-term interest rates continue rising.

SPX Head&Shoulders BOttom

This pattern has been developing since the 2009 March low. It was set off after forming the right shoulder with the July 10 low at 872.81 and then breaking out as it crossed above the neckline from the January 6 high at 943.85 to the June 6 high at 956.23 shown above.

We calculate the minimum upside measuring objective by taking the distance from the low of the Head at 666.79 on March 6, 2009 from the average between the January 6 high of 943.85 and the June 11 high of 956.23, a slightly rising neckline, or 950.04 (950.04 - 666.79) which is 283.25 points. When added to the neckline value of 950.04 the result is the Minimum Measuring Objective of 1233.29 indicated by the small arrow in the right margin.

The slope of the active upward sloping trendline from the March low is an estimate of the expected rate of increase. At the current rate, the minimum objective could be met by the end of the first quarter presuming there are no serious earnings setbacks caused by quarterly reports beginning this week.

Supporting the continuation of the S&P 500 Index here from our Advanced Historical Data service is the current volatility chart showing the trend of both implied volatility in orange and historical or realized volatility in blue. The declining volatility measures are consistent with expectations for a continuing rise of the index.

HV and IVIndex vx Price

Readers Survey

HV and IVIndex vx Price

We thank all of our readers who responded to our request for improvement suggestions and ideas. We will include some suggestions using options on futures and different strategies on the same underlying.

After keeping a detailed trading record for the entire 2009 year, we are considering eliminating this for 2010. We spend considerable time keeping the records and since we did not receive any comments or questions about it, we wonder if it adds any value to the process. In addition, this will allow us to offer long and short suggestions on the same underlying without concern that it may have a negative effect on the portfolio record. Next week after checking the last few entries, we are expecting to release the results for last year. Your opinions on this proposal are welcomed.

Since we received several favorable comments about continuing to publish the Digest on the weekend and in order to offer more suggestions we propose to alternate the Digest content weekly. In the first week, we plan to feature the market review in detail. Then in the second week, we plan to feature just trading suggestions. This will provide us with more time to focus on the trading suggests that have recently been subordinated to the time required to produce the market review each week.

Over the next few weeks, we will be trying a few different formats and ideas so we encourage you to continue providing your feedback and ideas.

Visit us on twitter for more ideas from our scanners and portfolio updates, including positions closed or unwound during the week.

IVolatility.com IVolatility.com Bookstore. In addition to the vast number of articles on our web site, take a browse through our bookstore for more reference information and material.

In next week’s issue, we are planning to provide our 2009 year-end portfolio report and offer several new trading suggestions.

Previous Issues and Reader Response Request

Finding Previous Issues and Our Reader Response Reques

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.

As usual, 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. Use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com Website. . If you would like to receive the Digest by e-mail let us know at Support@IVolatility.com.


I have clearly understood that I have subscribed to a free newsletter on another page.
Please tell me clearly if it is to buy some tools for options trading ?
What i prefer is to have infos on the stocks themselves, and to beter know the influence of IVolatility.
Thanks for your free paper.

Posted by galant on January 11, 2010 at 12:04 PM EST

You wrote:
After keeping a detailed trading record for the entire 2009 year, we are considering eliminating this for 2010. We spend considerable time keeping the records and since we did not receive any comments or questions about it, we wonder if it adds any value to the process.

I never saw that « tradinf record ».
Where is it?


Posted by Jackie on January 11, 2010 at 09:08 PM EST


Thanks for the question about the trading record. After receiving numerous requests for a track record in the past, we decided to create our Model Portfolio for 2009 to demonstrate how volatility can be used and how risk can be managed in options trading. We have a complete accounting record for all of the suggestions made in 2009. We made our initial report reflecting the first 6 months in Digest Issue 26 on July 6, 2009. Then in Digest Issue 39 on October 5, 2009, we updated the record by adding the third quarter results.

Next week’s Digest Issue 2 on January 18, 2010 we will complete the record by adding the fourth quarter with a summary for the year. The current open positions report is available from a link in the Digest section of our home page. The complete Excel accounting record is available by request to support-AT-ivolatilty-DOT-com


Posted by Jacktrader ( on January 14, 2010 at 01:35 PM EST

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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.

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".