« May 2017 »

IVolatility Trading Digest™

Volume 17 Issue 18
Au Contraire [Charts]

Au Contraire [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Concern that the S&P 500 Index would be able to overcome resistance at the 50-day moving average, presented last week in Digest Issue 17 "Stuck Below the 50 [Charts]" was quickly resolved last Monday as it gapped up at the open after the first round election results from Paris. With the second round scheduled for this Sunday May 7 markets may soon begin reflecting increased uncertainty once again as speculators and hedgers place their bets. Three contrarian hedge alternatives, SPDR S&P 500 ETF (SPY), ProShares UltraShort S&P 500 (SDS) and CBOE Volatility Index® (VIX) follow a brief market review including an update for the CBOE S&P 500 Skew Index (SKEW).

Review NotesS&P 500 Index (SPX) 2384.20 gained 35.51 points or +1.51% for the week closing well above the 50-day moving average at 2368.10 that has become the new first support and then 2300, followed by the wide support zone between 2285 to 2275.

VIXCBOE Volatility Index® (VIX) 10.82 declined 3.81 or -26.04% for the week while the comparable IVolatility Implied Volatility Index mean, IVXM now just 7.93 declined 3.18 or -28.62%.

VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second months.

With 12 trading days until the May expiration, the day- weighted premium between May and June allocated 48% to May and 52% to June for a premium of 17.58%.


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. At 17.58% it's back in bullish territory once again.

The chart above shows once again negative premiums reflected unsustainable oversold conditions associated with reversals.

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CBOE S&P 500 Skew Index (SKEW) 146.98 down 1.44 points for the week after declining to 139.04 last Tuesday it turned higher again Wednesday measuring purchases of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions.


An increase of this index indicates greater expectations for an extreme down move. The CBOE explains further, a Skew value of 100 means the perceived distribution of S&P 500 Index log-returns is normal so the probability of outlier returns is negligible. Calculated from SPX option prices it describes "tail risk." As Skew rises above 100, the left tail of the distribution acquires more weight increasing the probability of outlier returns.

With the second French election round on Sunday May 7 it seems as if SKEW is alive and well and living in Paris. Those who may have been in New York during the late 60s and early 70s perhaps remember the popular musical Jaques Brel is Alive and Well and Living in Paris that ran for an extended engagement at the Village Gate off-Broadway.

StrategyAlthough the polls, pundits and markets seem to have concluded Emmanuel Macron will triumph over Marine Le Pen on Sunday recent experience suggests the result will likely depend upon the turnout. Should voters not bother to vote because a Macron win is most likely it could tip the balance in favor of Le Pen. The first round result last week was a reminder how important geopolitical events are for both currencies and equities

ideaConsequently here are three low cost contrarian hedge ideas to consider this week in the event SKEW continues higher as expected.


With most market indicators positive, for low probability contrarian binary events the objective is to limit the amount at risk. Generally, when implied volatility is relatively low and expected to rise long option strategies have the advantage.

SPDR S&P 500 ETF (SPY) 238.08 has the liquidity advantage with narrow bid/ask spreads, but a lower delta and the lowest Gamma (Gam) above, or rate of delta change.

ProShares UltraShort S&P 500 (SDS) 13.19 near the bottom of its 52-week range and with its Implied Volatility Index at a 52-week low along with a high delta and the highest Gamma. The calls increase in value as SPX declines.

CBOE Volatility Index® (VIX) May 17 Futures 12.27 with the highest implied volatility and high delta but a lower Gamma. In addition, since the futures will equal the cash VIX at expiration on May 17 some additional loss of time value needs considering.

The suggestions above are based on Friday's prices. Monday’s option prices will be somewhat different due to the time decay over the weekend and any price change.

Geopolitical events could swamp favorable earnings reports underway and remember starting this week the old adage "Sell in May" will be widely disseminated by the financial media.


The importance of geopolitical events for both currencies and equities was on display last week, and along with mostly favorable earnings reports propelled the S&P 500 to close well above its 50-day moving average resistance. Now near the previous all time high and with another potential market moving event on the schedule Sunday perhaps a defined and limited risk low cost hedge could have value.

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 IVolatility News section of our home page based upon active calls and puts with increasing implied volatility and volume.

"The best volatility charts in the business."

Next week we plan on expanding our market review to include the US Dollar Index along with WTI Crude Oil.

Finding Previous Issues and Our Reader Response Request

PreviousIssuesAll 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




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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".