« October 2015 »

IVolatility Trading Digest™

Volume 15 Issue 42
Breadth Trending Higher [Chart]

Breadth Trending Higher [Chart] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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After a short market review, the spotlight turns to the continuing improvement in market breadth along with updates for China A-Shares ETF (ASHR) and United States Oil (USO), two more of the current “Foremost Six” followed by a short list of Volatility Kings™ reporting this week. While focused on earnings we offer a long idea for Express Scripts (ESRX). Finally, an interesting covered call writing idea from The Blue Collar Investor for Cal-Maine Foods Inc. (CALM) wraps it up.


Review NotesS&P 500 Index (SPX) 2033.11 closed the week up another 18.22 points or +.9% continuing the advance made after the dramatic intraday reversal on October 2 after the nonfarm payroll report. After retesting the August 24 -25 flash crash lows, the rebound and subsequent retest created a potential double bottom activated on a close above 2020.86 that it achieved Thursday with a 29.62 point advance to close at 2,023.86. Accordingly, from a classical barchart perspective, the double bottom upside objective is 2172 measured by the height of the double bottom added to the breakout at 2020.86.

CBOE Volatility Index® (VIX) 15.05, 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, declined another 2.03 last week as the downtrend continues reflecting improving market sentiment.

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 2 trading days until October expiration, the day weighting applied 8% to October and 92% to November as of Friday for a 12.91% 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 lower at 10.82%.

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.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 premium turned negative on August 20 when the long uptrend from October 4, 2011 ended and remained negative until Monday October 5 turning positive with a .85% premium. Last week the premiums ranged from 3.38% Wednesday to Friday’s high at 10.82, just in the 10% green zone.

In the past when the premiums turned positive, it offered a buying opportunity suggesting the pullback was complete however, since the uptrend ended August 20 there was some concern it may no longer be a reliable buying signal but it now seems confirmed after activation of the double bottom pattern Thursday.

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Foremost Six

In last week’s order of perceived importance:

Market Breadth
DBX ETF Trust - Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR)
United States Oil (USO)
iShares Transportation Average (IYT)
US Dollar Index (DX)
ProShares UltraShort 20+ Year Treasury (TBT)

Expanding on the top three of the six once again:

Market Breadth The McClellan Oscillator Summation Index reported by McClellan Financial Publications, advanced another 831.82 points last week to 1593.22 after an incredible 1199.04 point gain the week before when it went from -437.64 to + 761.40. The improving breadth along with the S&P 500 Index reduces concern about any possible divergence. In addition, it has now advanced above the 200-day moving average shown in the chart below giving top billing to market breadth last week.




DBX ETF Trust - Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) 36.19 advanced 2.57 or +7.64% for the week and is now in a defined upward sloping trendline from the lows made on August 24 an 26 during the currency devaluation scare. The modest uptrend seems to be setting the equity stage despite weak China trade data reported Tuesday that added to worries about slowing global economic growth. Data showed Chinese imports fell 20 percent in September due to weak domestic demand, partly reflecting lower prices for imports however, "Import volumes are holding up much better.” Iron Ore and crude oil volumes were slightly higher and much improved from August that had caused concern about a global slowdown.

United States Oil (USO) 15.22 as a proxy for WTI Crude Oil declined .77 or -4.82% for the week as the November WTI futures declined 2.40 or -4.83% closing at 47.26.

While most commentary remains biased towards an oversupplied market scenario those with the most at stake and arguably the most knowledgably, continue covering short positions. Updating the CFTC Commitment of Traders report for October 13 shows the “Managed Money” group continued covering short positions by an additional 18,049 contracts but they also reduced their longs by 6,699 contracts thereby increasing their net long position by 11,350 contracts representing 7.37 % of the open interest up .55 % from last week and up from 3.80% on August 18.

On Thursday, since both pulled back to support at their defined upward sloping trendlines from the lows, crude oil remains near the top of our list and one the most important variables to watch this week.


strategy Improving China sentiment prompted short covering two weeks ago and extended to US equities starting a rotation into value stocks out of high multiple growth stocks.

"The lunatics are running the asylum." – Michael Lewitt

"After an incessant flow of bad economic news from both the U.S. and abroad, investors decided that ‘bad news is good news’ and they should bid up stock prices."

Based upon clearly deteriorating US economic fundamentals from industrial production to rail traffic this comment seems about right, however for the time being since the momentum is up it seems best to "don’t fight the tape," as they say.

Volatility Kings™ Reporting

From our Volatility Kings list in Digest Issue 40 "Volatility Kings 3Q 2015", here are the companies scheduled to report earnings this week.




Unless analysts have the consensus estimates right shown in column four, Friday could be a rough day, but the implied volatilities are not yet suggesting concern.

Earnings Idea

Express Scripts Holding Company (ESRX) 86.22 up 1.59. Scheduled to report 3Q earnings Tuesday October 27 after the close with a consensus estimate of 1.44 the same amount they reported July 28. Friday it broke out above resistance at 85 as implied volatility advanced making it our number one ranked advancing implied volatility leader, up 5.68 or +23.94%.

The current Historical Volatility is 16.25 and 20.84 using the Parkinson's range method, with an Implied Volatility Index Mean of 29.40 up from 25.67 the week before. The 52-week high was 35.25 on August 25, 2015 while the low was 13.78 on November 25, 2014. The implied volatility/historical volatility ratio using the range method is 1.41 so option prices are slightly expensive relative to the recent movement of the stock. Friday’s option volume was 53,437 contracts traded compared to the 5-day average volume of 19,270.

Here is a short-term call spread idea for next week based upon the breakout above the resistance and increasing implied volatility before the earnings report. The trade plan assumption is both the stock price and the implied volatility will advance into the earnings report. However, since both may decline after the report the plan is to close the position Friday October 22 before the options expire.




Using the ask price for the buy and mid for the sell the call spread debit would be .36 about 18% of the distance between the strike prices with a slight implied volatility edge. Since both options are out-of the- money with just one week to expiration the spread partially hedges time decay and implied volatility. Should it decline back below 85 early in the week close it out sooner, otherwise the plan is to close it Friday.

The above suggestion uses Friday’s ask price for the buy and middle price for the sell presuming some price improvement is possible. Monday’s option prices will be somewhat different due to the time decay over the weekend and any price change.

strategyNovember Covered Call Writing Idea

Cal-Maine Foods Inc. (CALM) has been performing admirably in this volatile market and has a great story. Selling the November 62.50 monthly option with the current share price at 60.40 will generate a 1.8% initial return with an opportunity to add another 3.5% if share price moves up to the strike price by expiration for a potential 5.3% one-month return.




Be prepared with an exit strategy should the stock move too far in either direction.

To learn about mastering the skill of selling options and much more information on becoming an elite covered call writer and put-seller, click on The Blue Collar Investor.


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The advances made two weeks ago apparently began with short covering after the nonfarm payroll report and continued higher when minutes from the FOMC meeting seemed to confirm the Federal Reserve is less likely to increase interest rates anytime soon. The continuing market breadth improvement along with help from China and crude oil kept the “risk on” upward momentum on track although there was ample evidence economic conditions in the US and elsewhere are deteriorating. With more than a 100 S&P 500 Index companies along with many in the DJ Industrial Average reporting this “all about earnings” week the upward momentum could stall if they come in short of already reduced expectations.


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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.


Next week’s issue will include an update of all our market indicators.


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


can you send me and understandig on volatility.

Posted by thomas morman on October 19, 2015 at 01:39 PM EDT


Thanks for the volatility inquiry. There are many volatility references on our website, see the Knowledge Base and News tabs at the top of the home page.

In addition, here is a link on a recent August 31, 2015 Digest Issue on the subject.

Give it a try. If you will send your e-mail address to support-AT-IVolatility-DOT-com we will also send it to you directly.


Posted by Jack on October 19, 2015 at 02:43 PM EDT

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