« January 2013 »

IVolatility Trading Digest™

Volume 13, Issue 1
The Market Tide Turns

Volatility Nuts & Bolts - IVolatility Trading Digest

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

To add comments or to ask questions please click here (or use the blog "COMMENTS" link at the very bottom of the blog page).


The Market Tide TurnsUnderstandably the markets often give conflicting signals, some bullish, some bearish, but that was not the case for shortened last week as the markets discounted improving economic conditions and a somewhat less uncertain fiscal environment in Washington DC. The change was most noticeable in the economically important transportation sector as the iShares Dow Jones Transportation Average Index (IYT) broke out to the upside, rates on the 10-Year Treasury Note increased and gold staggered.

We have more on the transports and gold below as well as new long suggestions for both the iShares Russell 2000 Index (IWM) and iShares FTSE China 25 Index Fund (FXI).


Review Notes Clip ArtS&P 500 Index (SPX) 1466.47. While a potential rising wedge from the November 16 low was in the works, the December 31 upside reversal on large volume ended the minor decline. Then the 36.23-point advance on January 2, again on significant volume sealed the deal. Now the objective is to close above the September 14 high of 1474.51 to confirm the change of trend, which seems likely since both the IWM and the IYT have already broken out to the upside.

S&P 500 Index Implied Volatility (IVXM). For the week, the Implied Volatility Index Mean declined from 19.90 to 12.06, while the CBOE Volatility Index® (VIX) declined from 22.72 to 13.83.

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 35% to January and 65% to February for an average premium of 17.07% shown above. Our alternative volume weighting between January and February is 15.20%. For the first time in many weeks, the premiums over the cash VIX now appear to be back into their previously considered normal ranges.

iPath S&P 500 VIX Short Term Futures ETN (VXX) 27.55. From an opening high of 36.79 on December 31, Friday's closes represents a 25% decline in four trading days. The five-day average volume was 36.9 million shares with 59 million on December 31, the big down day.

VelocityShares Daily Inverse VIX Short Term ETN (XIV) 18.84. The 5-day average volume for the inverse was 23.9 million shares with the largest volume of 37.8 million occurring on January 2.

Increasing volume in both the long VXX and the short XIV appears to be important influences determining the VIX futures premium. The long VXX trades between 1.5 and 2.5 times as many contracts as the short XIV, but increasing relative XIV volume reduces the VIX premium as more futures contract are sold. The 5-day average was 1.55, with Friday's ratio at 1.84. 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 at a higher price.

Fridays VIX futures volume was 140, 344 contracts compared to 139,438 the previous Friday while the open interest increased from 319,922 contracts to 371,670.

VIX Options

With a current 30-day Historical Volatility of 118.62 and 74.65 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 55.63 down from 106.40 the previous Friday, the IV/HV ratio is .47, using the range method for Historical Volatility the ratio is .75 while the VIX put-call ratio at .55 is on the bullish side for VIX, but less so for the SPX since they move in opposite directions. Friday's options volume was 673,295 contracts compared to the 5-day average of 800,530.

The equity only put call ratio was .64 making the spread between the SPX put call ratio and the VIX put call ratio .09. A wider spread is bullish since means the VIX put call ratio relative to the SPX call ratio is lower.

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.

iShares Barclays 7-10 Year Treasury (IEF) 106.49. There has been a significant three-day note price decline as the 10-year rates increased to close at 1.91, the highest since early August. However to turn the trend higher rates will need to close above the March 2012 high at 2.39. While this rally could be an opportunity to sell, it could also be the start of a new uptrend in interest rates.

iShares Dow Jones Transportation Average Index (IYT) 98.56. In addition to being an important Dow Theory indicator the transports deserve close attention as a leading indicator especially when they breakout to the upside. Trucks move goods before retail sales occur while railroads move materials and finished goods months before consumer sales. From this perspective, the breakout above 96, the entire 2012 range, is significant as shown in the chart.



NYSE McClellan Summation Index 533.25. For the short week, the advance was 131.97 points, and moving higher once again, but lagging NYSE Composite Index in high territory creating a divergence that deserves some consideration. Ideally, they should both be at new highs.

SPDR Gold Shares (GLD) 160.44. The seasonal yearend advance did not materialize as expected and the suggestions made in Digest Issue 45 and Digest Issue 47 were closed out according to their trade plans on the decline below 162.30 that occurred on December 18.

Without seasonal help or fiscal cliff chatter and with suggestions of a stronger dollar and higher interest rates gold may not yet have seen the bottom for this decline.

Our friends at The Market Trend Forecast.com have an interesting Elliott wave analysis for gold worth considering for those who may be thinking about some bottom fishing in anticipation of future inflation. However, it should be tuff going if interest rates rise with an improving economy.



StrategyWe suspect underinvestment was the order of the day at yearend waiting the outcome of fiscal cliff wrangling in Washington DC. Accordingly, here are two new long ideas.

iShares Russell 2000 Index (IWM) 87.24. Having already broken out above the September 14 high of 86.96, consider this trend continuation combination.

The current Historical Volatility is 13.81 and 11.19 using the Parkinson's range method, with an Implied Volatility Index Mean of 15.19 down from 23.00 last week. The IV/HV ratio is 1.10 and 1.36, using the range method to calculate the HV. The put-call ratio was in bearish territory at 2.00, but this a hedging favorite so high put-call ratios are the norm. Friday's volume was 387,488 contracts traded compared to the 5-day average volume of 648,660.




The put volatility edge offsets the lack of edge in call spread. Use a close back below the recent pivot at 82 as the SU (stop/unwind).

iShares FTSE China 25 Index Fund (FXI) 41.62

Here an idea we mentioned in Digest 49 as it broke out above 38 on remarks by the new Communist Party leader Xi Jinping. In a well-defined uptrend from the September 5 low at 32 and with good options volume, it is a good way to participate in any further uptrend.

The current Historical Volatility is 18.19 and only 9.62 using the Parkinson's range method, with an Implied Volatility Index Mean of 19.46 down from 23.49 last week. The IV/HV ratio is 1.07 and 2.03, using the range method to calculate the HV. Friday, the put-call ratio was just barely bullish at .68 with 39,253 contracts traded compared to the 5-day average volume of 78,130.

Here is another long call spread with a short put combination to consider.



With a slight put volatility edge use a close back below the 40 support level as the SU (stop/unwind).

The suggestions above use 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.


"Options data with predictive qualities - Nobody does it better!"

"The best volatility charts in the business."

Options data available for the Asian markets


With an agreement from Washington DC on the fiscal cliff, along with indications that Federal Reserve has begun taking about ending more bond purchases, the markets are anticipating a stronger economy on the horizon, so the transportation index broke out of its yearlong range to the upside along with other important broad based indexes. For those who may still be underinvested now is the time to open new long positions.


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.


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


In next week's issue, we will update our Volatility Kings as the earnings reporting season gets rolling.


In preparation for 2013, we would like to receive your ideas and suggestions for improving the Digest. Please forward your comments to us at Support@IVolatility.com

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.

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



Comments are closed for this entry.

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".