« September 2015 »

IVolatility Trading Digest™

Volume 15 Issue 39
Flash Crash Ready & SPDR S&P 500 [Chart]

Flash Crash Ready & SPDR S&P 500 [Chart] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Beginning with the regular bi-weekly market review followed by a “just in case” hedge strategy idea using VIX options, this week’s Digest reviews all of the current “Foremost Five” along with a revised downside-measuring objective for the active classical barchart Rising Wedge using the SPDR S&P 500 ETF.


Review NotesS&P 500 Index (SPX) 1931.34 closed the week down 26.74 points or -1.37% including a weak advance Friday after Thursday’s reversal from the low made on the Caterpillar (CAT) 64.98 retrenchment news. From a classical barchart perspective, the activation of a bearish rising wedge occurred on the close September 18 as detailed last week in Digest Issue 38 "US Dollar Index & S&P 500 Index [Charts]". A new downside-measuring objective at 1812.50 replaces the previous one computed from a higher breakdown point than from the earlier symmetrical triangle. See the SPY chart below.

CBOE Volatility Index® (VIX) 23.62, based on real-time prices of options on the S&P 500® Index, constructed to reflect investors' consensus view of future (30-day) expected stock market volatility, was up 1.34 for the week and above 20, the apparent current support level.

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.




With 17 trading days until October expiration, the day weighting applied 68% to October and 32% to November as of Friday for a -6.14% premium shown above. Our alternative volume-weighted average between October and November regularly found in the Options Data Analysis section on our homepage was slightly higher at -5.69%.

While day-to-day VIX changes offer little forecasting insight following the VIX futures premium helps since it measures expectations of tactical professional traders and money managers using VIX futures and options for hedging long portfolio risk.

Premiums for normal term structures during uptrends are 10% to 20% while premiums above 20% are unsustainable suggesting a lack of enthusiasm for VIX hedging often occurring around market highs suggesting overbought conditions associated with pullbacks. Alternatively, premiums less than 10% suggest caution and negative premiums indicate oversold conditions. The volume-weighted premiums turned negative on August 20 when the long uptrend ended and remained negative for the past 6 weeks, expect for on positive day on Friday September 11 at 1.13% however, the day-weighted was still slightly negative.

There have been longs periods of negative premiums before. For example, in 2010, they were negative for 5 weeks, and in 2011, there was a 7-week period of negative premiums followed later by another 2-week period. In 2014, they were negative twice for 2 weeks, the first in late January followed by the second in October. Since the just ended uptrend that began on October 4, 2011, at the 1074.77 low, the most recent 6-week period has been the longest. In the past when the premiums turned positive, it offered a buying opportunity suggesting the pullback was complete, however since the uptrend ended it may no longer be a reliable buying signal.

VIX Options

With a current 30-day Historical Volatility of 214.78 and 187.01 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.




Compared to the current range historical volatility of 187.01 both October and November at-the-money options are inexpensive relative to recent movement of the VIX futures. The next two out-of-the-money high volume calls were October 25 at 1.83 with IV of 125.04 and October 27 at 1.45 with IV of 130.77 both below the range historical volatility.


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.


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SPDR S&P 500 ETF Rising Wedge

Here is a chart with details for the updated downside-measuring objective.




The long-term uptrend that began on October 4, 2011, at the 1074.77 low, ended August 20 indicated above as USTL Ends. The distance from the August 24 flash crash low of 182.40 to the August 28 retracement high equals 17.43 points and when subtracted from the top of the September 18 breakdown bar at 198.68 the downside-measuring objective becomes 181.25 as indicated by MO in the lower right. An alternative using the August 25 low without the influence of the flash cash is slightly higher at 185.66, however since there could still be another flash crash the lower objective seems preferable.

Referring to flash crashes, after the first one on May 6, 2010 it was reasonable to assume it had been a onetime event and corrective measures had resolved the problem. However, after the second that occurred on August 24, it’s becoming apparent there could be a fundamental structural problem. High frequency traders with no obligation to make orderly markets who simply remove their bids during unanticipated periods of high macro risk have obviously displaced market makers that had an obligation to make orderly two-way markets. Interestingly, the May 6, 2010 flash crash also occurred during a correction when the VIX futures premium had been negative like now. Accordingly, until there is a well-defined market bottom, flash crash risk seems elevated.

Foremost Five

Here are the current Foremost Five in their perceived order of importance.

US Dollar Index (DX) 96.27 was up .28 Friday and up 1.14 or +1.49% for the week, although interest rates declined adding credibility to the risk reduction market mood as Treasury buying supports the dollar as interest rates decline. From the August 24 flash crash low of 92.62, it has been trending modestly higher. Lacking clear direction the markets swing back and forth between “risk-on” and “risk-off” after each statement from the Federal Reserve with more scheduled this week. One respected market commentator said the Feds’ lack of confidence and flip-flopping was like watching the Rocky Horror Picture Show from years ago.

United States Oil (USO) 14.72 as a proxy for WTI Crude Oil, advanced .10 or +.68% for the week.

Updating the CFTC Commitment of Traders report for September 22 shows the “Managed Money” group continued covering short positions by an additional 6,015 contracts but of equal importance, they added 15,669 longs thereby increasing their net long position by 21,140 contracts representing 6.95% of the open interest up from 3.80% on August 18. Based upon the actions of the "Managed Money," it appears 14 for USO and 45 basis cash and near futures is the current line of support. However, the dollar index will need to cooperate or they could quickly withdraw. For details on the importance of the "Managed Money," see Digest Issue 37 "Waiting for the Fed & S&P 500 Index [Chart]".

DBX ETF Trust - Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) 31.88, up .28 or +.89% for the week, as it seems to have found support at 32 despite a weak August PMI report released last Wednesday. With undefined VW liabilities looming, perhaps some risk concerns will shift to Europe at least temporarily.

Market Breadth The McClellan Oscillator Summation Index reported by McClellan Financial Publications, gained slightly last week, adding 38.31 points, but still negative at -163.77, but up substantially from the August 28 low of -952.81. Further gains should soon start adding some market support.

ProShares UltraShort 20+ Year Treasury (TBT) 44.86 up .22 or +.49% for the week but now declining from the flash crash retracement high made September 16 at 97.38. Interestingly the retracement high from the August 24 flash crash low of 40.31 brought it up to the downward sloping trendline from the June 26 high of 52.25 before turning lower. Based upon past patterns any advance before the nonfarm payroll report Friday will quickly reverse.

iShares Transportation Average (IYT) 140.99 down 3.66 or -2.53% for the week, like many other individual stocks and ETFs this leading indicator retraced the August 24 flash crash low as far as the downward sloping trendline that begins the March 20 high of 165 and then turned lower once again confirming the current sell the rally market sentiment.

strategyWith the current market modus operandi of sell the rallies, the risk remains to the downside at least until reaching the SPY Rising Wedge measuring objective at 181.25. In the meanwhile, as long as the VIX futures premium remains negative there is risk of another flash crash. While there are several hedging alternatives available, few have greater potential than call options on VIX futures. On August 24 as VIX spiked to 53.29 after opening at 28.03 and closing at 40.74 up 12.71 on the day, the September VIX futures opened at 20 reached 27.50 and closed at 25.13, up 5.23 or +25.75% on the day, although the actual flash crash was very brief.

Consider this “just in case” insurance idea.

As shown in the above the historical volatility for the VIX options was 187.01 Friday.

Here are two hedge ideas using October options with October 20 the last trading day.

CBOE Volatility Index® (VIX) 23.62, October futures 22.32




The implied volatility IV numbers are calculated using the mid price so they are somewhat higher at ask price, but still less than the historical volatility. While the Oct 27 costs a bit less, it also has less delta and gamma. Δ = Delta, Γ = Gamma or rate of delta change.

In the event of another flash crash, be prepared to sell the calls on the first day. Alternatively, use a close back below 18 basis October futures as the SU (stop).


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From a classical barchart perspective, the Rising Wedge active S&P 500 Index chart pattern indicates more downside to come. In addition, until there is a well defined market bottom, the risk of another flash crash remains elevated. The nonfarm payroll report due Friday usually creates interest rate speculation in both directions and with several Fed officials scheduled to speak this week expect confusion and uncertainty to continue and remember keep watching crude oil prices.


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ActionActionable Options™

We now offer daily trading ideas from our RT Options Scanner before the close in the News section of our home page based upon active calls and puts with increasing implied volatility and volume.


For next week's issue we will update the Volatility Kings™ list for the third quarter reporting season about to begin.


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.

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 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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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".