« March 2013 »

IVolatility Trading Digest™

Volume 13, Issue 11
Announcing iVolatility Lite

Announcing iVolatility Lite - IVolatility Trading Digest

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Announcing iVolatility LiteLast Thursday as the S&P 500 Index continued higher on low volume, we announced the availability of our mobile options data application for both the iOS and Android operating systems. Now it is possible to check not only prices but also implied and historical volatility while on the go. Before getting into more details, we update our regular market review, check in on the progress of the current market uptrend and offer another iShares Russell 2000 Index (IWM) trend suggestion.


Review Notes Clip ArtS&P 500 Index (SPX) 1560.70. The current uptrend, as measured from the November 16 low at 1343.35, with the December 31 reversal low of 1398.11 making the second trendline point, continues higher however, there are two noteworthy concerns, low volume and the lagging market breadth. Support is now the February 20 high of 1530.94 while the only possible resistance is the old October 11, 2007 high of 1576.09.

The table below shows the VIX cash compared to the next two futures contracts as well as our calculation of Larry McMillan's day-weighted average between the first and second months.


VIX Closing Cash


The day weighting applies 8% to March and 92% to April for an average premium of 28.32% shown above. Our alternative volume weighting between March and April is 19.86%. The last trading day for the March future contract is Tuesday as it expires Wednesday morning. The premiums are now back at the upper end of their ranges.

iPath S&P 500 VIX Short Term Futures ETN (VXX) 20.51. The five-day average volume was 48 million shares up only slightly from the week before at 46.6 million as VXX continues declining.

VelocityShares Daily Inverse VIX Short Term ETN (XIV) 23.22. The 5-day average volume for the inverse was 15.9 million shares compared to 15.5 million the week before making the VXX/XIV ratio 3.02.

When the term structure is in contango, or it slopes upward over time, the advantage goes to a long XIV position since it represents a short futures position and VXX continuously sells the near term contract and buys the next longer term contract at a higher price. The current spread between March and April is -2.13, the largest spread so far this year, compared to the previous week when it was -1.27, while the April - May spread is -1.15.

VIX Options

With a current 30-day Historical Volatility of 137.90 and 95.84 using Parkinson's range method, the table below shows the Implied Volatility (IV) of the at-the-money VIX calls and puts using the futures prices based upon Friday's closing option mid prices along with their respective month's futures prices, since the options are priced from the tradable futures.



Using the IV Index Mean of 62.37, the IV/HV ratio is .45, using the range method for Historical Volatility the ratio is .65. The VIX put-call ratio at .42 is somewhat bullish for VIX, but not for the SPX with a put-call ratio of 1.90, up .60 for the week, since they move in opposite directions.

The CBOE equity only put-call ratio was .56 making the spread between the VIX put-call ratio .14. As the CBOE put-call ratio increases it becomes more bearish while the VIX put-call ratio is more bearish (for the SPX) as the ratio declines making the spread between them wider.

All of the Implied Volatilities along with the Historical Volatilities and Greeks for the VIX options based upon the futures prices are on our Advanced Options page, found by clicking on the "market close" link shown near the top of the page.

CBOE S&P 500 Skew Index (SKEW) 129.12. SKEW measures the purchase of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions. An increase of this index indicates greater expectations for an extreme down move. It is now in the upper quartile of the 113-130 range and very near the important 130 level that it reached on February 15 just before the last correction. We continue to suggest watching for any additional closes above 130.

US Dollar Index (DX) 82.26. The dollar advanced along with equities until Friday when it declined taking equities lower as well but boosting crude oil prices. Until just recently, a lower dollar was associated with higher equity prices, but they now appear to be going in the same direction and may reflect expectations for better economic conditions and higher interest rates in the future.

iShares Dow Jones Transportation Average Index (IYT) 111.86. In Digest Issue 9, we said the transports along with the SPX were approaching an important crossroad. One was a potential double top implying a meaningful decline if set off by a close below 103. The other interpretation had it back to the center of its upward channel thus implying the advance will continue higher. It needed to close above the previous high of 107.46 to confirm the advance alternative, which occurred on March 4 with a close at 107.77. Confirmation came the next day as it gapped up at the open and then closed at 109.40, up 1.63. In addition to being an important Dow Theory confirming indicator, the transports deserve close attention as a leading economic indicator. With its sensitivity to the economy, we suggest checking the transportation index before making any market direction decisions.

NYSE McClellan Summation Index 1009.82. Since our last market review two weeks ago in Digest Issue 9 the breadth indictor improved 136.08, but the advance continues to lag the faster advancing NYSE Composite Index so the breadth divergence continues to be a concern. Ideally, they should be advancing at the same pace.



StrategyWhile giving credit to those claiming the market is overbought, we add it can remain overbought for a long time especially since some large mutual funds are beginning to report increased cash flows out of fixed income and into equities. While the SPX and the June e-mini S&P 500 Future (ESM3) 1553.50 both made key reversals on futures and options expiration Friday, the volume was not high, so we do not expect any decline will last very long. In the meanwhile, continue looking for any key reversal made with increasing volume as it could indicate another attempt to test the upward sloping trendline. Keep in mind the 10% correction that began last April 3 on news reports the economy was slowing since the economy could again experience another slowdown later this spring as sequester spending cuts gain momentum and possibly rolls back recent employment gains.

Since the implied volatility of the S&P 500 Index as measured by the IVXM is under the 52-week low, based upon reversion to the mean consider option strategies that are long more options than short or long vega combinations that benefit from increasing implied volatility. For reference, here is the current SPX volatility chart showing the Implied Volatility Index Mean at 9.49, see the arrow below.



Trend Continuation

iShares Russell 2000 Index (IWM) 94.75.

Using the upward sloping trendline as our guide we closed the long call spread suggested in Digest Issue 3 and subsequently closed the put spread suggested in Digest Issue 7.

Although it may trade lower for a few days, we expect higher equity prices, so we suggest staying with the trend. Accordingly, here is another long call spread combination idea.

First the option data.

The current Historical Volatility is 13.21 and 10.88 using the Parkinson's range method, with an Implied Volatility Index Mean of 13.05, down from 13.19 last week. The IV/HV ratio is .99 and 1.20 using the range method to calculate the HV. The 1.15 put-call ratio is bearish, but since it is a hedging favorite higher ratios are normal. Friday's volume was 739,150 contracts traded compared to the 5-day average volume of 477,350.



With decent volatility edge in the short put and enough time to expiration, the call spread cost is 39% of the distance between the strike prices giving a risk to reward ratio of 1.5 to 1, before considering the short put leg credit of .52. Use a close back below the last pivot at 89, or the upward sloping trendline defined by the November 16 low at 76.13 and the March 1 low at 89.21, as the SU (stop/unwind).

The suggestion above uses the closing middle price between the Friday bid and ask. Monday, the option prices will be somewhat different due to the time decay over the weekend and any price change.


iVolatility Lite

Options Data Mobile Application

Available Now



The equity uptrend continues although by some measures there continues to be overbought signs even after the most recent 3% correction. Last Friday's key reversal may cause a minor delay, however we expect the S&P 500 Index (SPX) will soon surpass the old October 11, 2007 high of 1576.09.


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


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In next week's issue, we will continue searching for more interesting trading ideas.


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 way to find them is the Table of Contents link in the blog section of our website.

Next week's 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.




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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".