« November 2015 »

IVolatility Trading Digest™

Volume 15 Issue 48
Seasonal Preview [Chart]

Seasonal Preview [Chart] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Along with the holiday season beginning the last week of November continuing through the first week of January there are also some corresponding tendencies in the financial markets that usually occur this time of year. As market activity slows along with volume, implied volatility usually drifts lower. Seasonally, crude oil also declines in December and January. Details on both these seasonal patterns follow along with a contrarian trade idea for United States Oil (USO). First, a brief market comment.


Review NotesS&P 500 Index (SPX) 2090.11 advanced .94 points or .05% for the shortened week with low volume. The double bottom upside measuring objective at 2172 remains the upside target. In addition, a new upward sloping trendline from the September 29 low at 1871.91 could be underway, but first it needs to close above the November 3 high of 2116.48. For now, it remains just a potential upward sloping trendline.

CBOE Volatility Index® (VIX) 15.12 down .35 for the week, 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.

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 12 trading days until the December monthly expiration, the day weighting applied 60% to December and 40% to January for a 15.81% premium shown above. Our alternative volume-weighted average between December and January regularly found in the Options Data Analysis section on our homepage was slightly lower at 15.55%.

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. Last week the volume-weighted premium began in the negative red zone at -1.07% remained negative Tuesday at -.81%, then turned positive Wednesday at 1.88% returning to the green zone Friday at 14.16%.


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S&P 500 Index Seasonal Volatility

Here is the volatility chart with the closing prices below for the last two years.




In December 2013, at the far left, the Implied Volatility Index IVXM declined as usual reaching 10%. However, last year it spiked higher as SPX made a sharp decline starting December 8 and continued lower until reaching 1972.74 on December 16 only to make two days of back-to-back 40 + gains December 17 and 18 and then continue up to a high of 2093.55 on December 29 when the implied volatility began declining back toward 10%.

This year as December begins, implied volatility should continue declining, unless interrupted by an unexpected event, such as a continuation of Friday’s -199.25 or -5.48% point decline in the Shanghai Composite closing at 3,436.30 on news that some brokerages are under investigation for activities during last summer’s market decline. The China A- Shares ETF (ASHR) declined -2.75 or -7.27% closing at 35.10, breaking below the active low sloping upward trendline. While it could be negative for the US markets early this week, it is unlikely to be long lasting unless there is more negative news.

Two other considerations are the nonfarm payroll report on Friday and the FOMC meeting on December 15 and 16 when a modest interest rate hike announcement seems likely. However, since the Federal Reserve has made numerous statements warning of an upcoming a rate hike, the markets have already adjusted, most notably in the US Dollar Index (DX) 100.20 now overbought and vulnerable to selling on the announcement. If so, it could relieve pressure on commodities, especially crude oil. More details about the dollar-commodity relationship are here.


strategyUnless derailed by a continuing decline in the Shanghai Composite the S&P 500 Index double bottom upside measuring objective at 2172, will likely be reached by yearend. Accordingly consider long strategies with defined and limited risk in large capitalization liquid market leaders with high large options volume and narrow bid/ask spreads as short-term momentum strategies for stocks such as AMZN, BAC, FB, GE, GOOGL, INTC, and MSFT. However, at the objective, begin closing or unwinding, as valuations remain high as the market rotates from sector-to-sector.


On the premise that the long dollar short commodities positions will reverse on the interest rate hike announcement here is an idea to consider.

United States Oil (USO) 13.03 up .10 or +.77% for the week.

The current Historical Volatility is 33.74 and 26.39 using the Parkinson's range method, with an Implied Volatility Index Mean of 44.58 up from 42.18 the previous week, but likely to decline back toward 30-35 if USO turns higher. The 52-week high was 60.92 on February 5, 2015 while the low was 27.98 on June 26, 2015. The implied volatility/historical volatility ratio using the range method is 1.69 so option prices are moderately expensive relative to the recent movement of the ETF. Last Friday’s option volume was 64,764 contracts traded compared to the 5-day average volume of 215,980.

Consider this long call spread idea using February options with enough time to expiration to get beyond the seasonally weak December - January period, but in place if crude oil should turn higher on short covering after the interest rate hike announcement.




Using the ask price for the buy and mid for the sell the call spread debit would be .44, about 22% of the distance between the strike prices. Although without volatility edge, at only 22% of distance between the strikes, the risk is defined and limited and there is enough time for the normal spring seasonal crude oil upswing to begin. Although already near the low in what appears to be an Elliott 5th wave bottom it could still go lower so use a close back under the August 24 low at 12.37 as the SU (stop/unwind).

The suggestion above 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.


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Assuming no lasting affect from the Shanghai Composite decline or surprises from the nonfarm employment report Friday and Federal Reserve announcing a modest interest rate hike on December 16 reaching the double bottom upside measuring objective up at 2172 for the S&P 500 Index seems quite likely. Since the US Dollar index appears overbought and commodities oversold be aware of a possible commodities short covering rally on the Fed announcement that should also add support for equities and help it reach the upside objective.


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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 plan to review all our market indicators with special attention on crude oil.


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 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".