« November 2016 »

IVolatility Trading Digest™

Volume 16 Issue 43
Comparable Uncertainty [Charts]

Comparable Uncertainty [Charts] - 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).

Last week with the Presidential election approaching, signs of increasing uncertainty began appearing similar to pre-Brexit in June as the S&P 500 Index broke down below 2120. While some indicators look comparable, others are diverging explained below as we continue transitioning from tables and text to more charts for the comparison.

Review NotesS&P 500 Index (SPX) 2085.18 lost 41.23 points or -1.94% for week as support at 2120 failed Tuesday 11-1 closing 14.23 lower at 2,111.72. On June 23, before the Brexit surprise it closed up 27.88 for the day at 2113.32.

VIXCBOE Volatility Index® (VIX) 16.19 up 2.85 points or + 21.35% most occurring in afternoon Friday after news of a new Hillary Clinton e-mail investigation by the FBI was underway.


VIX Futures Premium

The premium measures the amount the futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration. Depending on the time to expiration, premiums for normal term structures during uptrends are 10% to 20% and decline when the VIX advances faster than the nearest future as the market declines and/or the futures decline as the front month expiration approaches. Premiums less than 10% suggest caution and negative premiums indicate oversold conditions when the VIX is higher than the futures and are usually associated with reversals.


On June 24, the premium was -12.72 compared to -15.15 Friday. With two more days to go before the election results, it could continue somewhat lower. Watch for the premium turning positive as a signal to consider reducing hedges.

VIX Options

The current Historical Volatility of 105.83 and 119.43 using Parkinson's range method, the chart below shows the Implied Volatility Index Mean (IVXM ) using the futures prices based upon Friday closing option mid prices since pricing of the options are from the tradable futures. Friday the IVXM closed at 133 comparable, but somewhat above the close on June 24 before Brexit.


Friday’s option volume, another good indicator was 1,411,906 contracts compared to 990, 521 on June 24, both higher than the normal daily volume between 400K and 600K contracts.

Custom-design an options strategy to fit your market outlook

… Or your outlook on market volatility. This guide goes beyond the basics to help you
understand how to evaluate a strategy’s risk as well as its reward.

Download your complimentary Options Trading Strategies guide now.

Two others tell a somewhat different story

Crude OilWTI Light Sweet Crude Oil (CL)44.07 basis December futures declined 4.63 or -9.51% for the week and looking oversold after reaching an intraday high of 52.22 on Wednesday October 19. Declining earnings from this sector, underscores the important role of crude oil to earnings estimates for the S&P 500 Index and helps explain why the S&P 500 Index responds to crude oil prices changes. Comparison with June 24 is complicated by efforts of producers to support prices before the November 30 OPEC meeting in Vienna during normal seasonal weakness.

The weekly Commitments of Traders reports from the CFTC as of Tuesday November 1, shows activity by "Managed Money," the group that best correlates with crude oil price changes and arguably the most important, sold 28,098 longs and slightly increased shorts by 5,565 for a net change of -34,063 representing 8.82% of the open interest shown here. 


Both "Managed Money" and "Other Reportables" reduced long positions, but did not significantly increase shorts. Perhaps they are leery of being caught in a short squeeze by more comments from the producers attempting to support prices before the November 30 OPEC meeting in Vienna.

breadthMarket breadth has been deteriorating since July 22 when our preferred breadth measure, the ratio adjusted McClellan Summation index was 1256.15, see the arrow in the chart below. Now at -277.74 represents a 1,533.89-point decline, almost straight down with just three attempts to slow the downward momentum, and now significantly below the June 24 level of 700, now approaching negative territory from February. By the way, the 50-day moving average in blue below does a good job indentifying the trend.

More on the McClellan Summation Index, reported by McClellan Financial Publications is available here.


StrategyWith risk measures elevated, there is a case for uncertainty lingering until the end of the month. Accordingly, maintaining a hedge position like the SPY put spread suggested last week in Digest Issue 42 "Halloween Trendline Check [Charts]" seems appropriate until money returns to growth stocks, the VIX futures premium turns positive and market breadth improves, while crude oil remains an important consideration. Remember, "There are old traders, and there are bold traders. But there are no old, bold traders."

IVolatility’s Holiday Data Sale

30 % off on Option and Implied Volatility data in November
16 years of data for US, Europe and Asia markets


With risk measures elevated to levels comparable in late June before Brexit concluding the markets are likely to respond in a similar manner after the election results may not be such a good assumption due to deteriorating market breadth as growth stocks suffer profit taking rotation although financials and transports are holding up well. Due to the importance of crude oil prices and the efforts of OPEC crude oil producers, along with Russia to support prices until the November 30 OPEC meeting, uncertainty may linger beyond the election results until the end of the month.

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

Actionable 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.

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

Next week the plan is to use our rankers and scanners to identify more opportunities.

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.

CommentAs 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




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".