« May 2017 »

IVolatility Trading Digest™

Volume 17 Issue 20
Regression to the Mean [Charts]

Regression to the Mean [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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With a long term average near 20 the current low VIX raises correction concerns since periods of abnormally low implied volatility are followed by increasing volatility, one of the better examples of "Regression to the Mean" assuming the relationship between price direction and volatility remains constant. While correction chatter may be increasing currently there is scarce evidence in the market data to justify concern. Accordingly, following a brief market review results from the Stock Sentiment Ranker set to the ETF group highlights the iShares MSCI Emerging Markets ETF (EEM).

Review NotesS&P 500 Index (SPX) 2390.90 closed the week 8.39 points or -.35% lower after making a new intraday high Tuesday at 2403.87, but then closing down -2.46 points at 2396.92. From a trendline perspective until a close above the March 1 intraday high at 2400.98, it remains in a range below the upward sloping trendline from the November 4 low at 2083.79. On the downside, expect support at 2367.60 , the 50-day moving average, and then 2300, followed by the wide support zone between 2285 to 2275.

VIXCBOE Volatility Index® (VIX) 10.40 declined .17 or -1.61% for the week after declining to an intraday low of 9.56 last Tuesday. The comparable IVolatility Implied Volatility Index mean, IVXM now 7.49 ended the week .04 higher or +.54%.

VIX Futures Premium

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

With 2 trading days until the May expiration, the day-weighted premium between May and June allocated 8% to May and 92% to June for a premium of 18.60% up 1.02% from last week when there was more time to expiration. At expiration on Wednesday the May futures premium of .83 or 7.98% will be gone.


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.

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Stock Sentiment Ranker

Here are the results using our Stock Sentiment Ranker set to identify the top ten from the ETF database using My Favorites, our handy complimentary utility program set to scan for stock prices greater than 5 with market capitalizations greater than 1 billion with options volume greater than 2000. The other settings were low volatility, high Call/Put ratio, and high exponential moving average EMA, relative strength RSI and with positive Chaikin Money Flow, CMF.


Of the top five, three are in the emerging markets, EWZ, EEM, FXI with iShares MSCI Emerging Markets ETF (EEM) 41.22, number three, having the most volume and liquidity.

For those who may want to get really down into the weeds, clicking on the symbol provides additional details including adjustable charts for Exponential Moving Average, Relative Strength and Chaikin Money Flow.

Here are some other selected extracts:


The Price Bands Calculator estimates standard deviations set at 31 days approximately to the June 16 expiration, using the Range Method to calculate the Historical Volatility at 6.51 vs. 11.08% in the table above. After this adjustment the Implied Volatility/Historical Volatility ratio changes from 1.25 to 2.13 meaning options are expensive relative to the movement of the underlying ETF.


What's not considered using standard deviation methodology is any trend component and the chart above shows a well defined trend that began December 22. In addition, there is a high correlation with the PowerShares QQQ ETF (QQQ) 138.60, listed as number seven in the Ranker Scanner table above and the black line on the chart.

For Buy Write and direction traders this means lower capital requirements for a similar position and expensive options provide edge for option sellers while trend direction traders should spread long calls with short calls to define and limit risk while partially hedging time decay and changes in implied volatility.

Buy Write

Buy 100 EEM at 41.22


Put Sale


Call Spread


With debit of .51, about 26% of the spread distance, use a close back below the last pivot at 40.50 as the SU (stop/unwind).

The spread suggestions above are based on 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.

StrategyOther than "Regression to the Mean" risk from a correction that could be set off by an unforeseen geopolitical event, market indicators remain positive and favor long strategies especially those benefitting from a relatively weaker US dollar such as the emerging markets.


Some stabilization of crude oil prices helped the S&P 500 Index early in the week to reach a new intraday high while most other indictors including those that measure relative strength remain positive increasing the probability that a new closing high will soon be reached.

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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 the plan includes a market update along with crude oil from the perspective of the Commitment of Traders report.

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".