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IVolatility Trading Digest™

Volume 17 Issue 43
3 Foremost Indicators [Charts]

3 Foremost Indicators [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Review NotesAfter reviewing all our Foremost Indicators, this issues includes updates for Market Breadth, US Dollar Index (DX), and CBOE S&P 500 Skew Index (SKEW), the three that seemed most noteworthy last week along with our regular market review and commentary about the continuation of this remarkable bull run.

Review NotesS&P 500 Index (SPX) 2581.07 ripped 20.67 points or +.81% higher Friday on earnings news from big tech ending the week up 5.86 points or .23% abruptly finishing an overdue pullback that begin with last Monday's key reversal on just average volume. Back into overbought territory again pullback risk now seems even greater with the 50-day moving average at 2508 providing solid downside support.

VIXCBOE Volatility Index® (VIX) 9.80 ticked down .17 points or -1.71% for the week while our similar IVolatility Implied Volatility Index Mean, IVXM that uses four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option now 6.60 advanced .11 points or +1.69%.

VIX Futures Premium

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

With 12 trading days until November expiration, the day-weighted premium between November and December allocated 60 % to November and 40% to December for a 19.90% premium, right about the middle of green zone between 10% and 30%.


The premium measures the amount that 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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Updating our SPX options volume and open interest charts shows put open interest in the second chart remains high indicating continued hedging activity.


breadthMarket Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that factors out the number of issues traded, and reported by McClellan Financial Publications, turned lower since our last look in Digest Issue 40 "Bullish Foremost Indicators [Charts]" declining 160.05 points last week to close at 732.38 after peaking at 930.32 on October 16. Although the S&P 500 Index along with the other major Indexes advanced into new territory, participation by fewer issues makes this divergence noteworthy especially as it approaches the 50-day moving average in blue, now at 602.64. Based upon this indicator a broad market pullback is underway and the divergence will be resolved either by improving breadth or the major indexes pulling back.


US Dollar Index (DX) 94.82 advanced 1.24 points or 1.33% for the week closing above the dotted green line at 94 noted in Digest Issue 40 "Bullish Foremost Indicators [Charts]" as the key resistance area to confirm a turn higher. While the large capitalization multinationals, especially in the tech sector are reporting better than expected results helped by currency translation tailwinds for the last two quarters any further dollar advance will create currency translation headwinds during the fourth quarter.


Now above 94 the conditional suggestion in Digest Issue 40 "Bullish Foremost Indicators [Charts]" looks timely.

Power Shares DB US Dollar Index Bullish Fund (UUP) 24.68 up .33 or +1.33% for the week. Friday, the December 24 call ask price was .75 while the December 25 call ask was .16. Use a close back below 24.40, the equivalent to 94 in the $USD or DX chart above as the SU (stop/unwind) in the event it turns lower.

CBOE S&P 500 Skew Index (SKEW) 138.73 down 10.08 points or -6.77% for the week SKEW measures 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 indicates greater expectations for an extreme S&P 500 Index decline. The values are calculated from weighted out-of-the-money S&P 500 Index options measuring "tail risk" or the risk of outlier returns two or more standard deviations below the mean of a lognormal distribution and rise higher as investors become more fearful of a negative "black swan" event. A SKEW value of 100 means the perceived distribution is normal, and the probability of outlier returns is therefore negligible. As it rises above 100, the left tail of the S&P 500 Index lognormal distribution acquires more weight, and the probabilities of outlier returns become more significant. It usually ranges between 100 to 150 with quick spikes above 140 often associated with specific events. Beginning June 2, this chart shows an uptrend from 124.23 suggesting increasing out-of-the-money put activity.


StrategyWhile implied volatilty remains relatively low this could be a good time to begin considering hedging strategies for an overdue pullback , one had begun but was delayed by Friday's unexpected advance on better than expected earnings reports from big multinatinal tech companies.


Although the S&P 500 Index along with the other major indexes advanced into new high territory once again boosted by better than expected earnings reports, Market Breadth has been diverging, the US Dollar Index turned higher along with increasing signs of hedging activity suggesting an increased possibility of a pullback before the seasonal year-end advance gets underway.

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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 always, 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



I'm long a few UUP 25 jan 18 calls.
Will the FEDs December move give me a
boost? Plus the DX should pull the UUP up
25 by year end...What do you think?

Posted by Paul on October 30, 2017 at 06:04 PM EDT

Thanks for your UUP question.

While it's not so clear what the Fed will do, all interest rate instruments and their derivatives are involved in rotation game, getting pushed to one extreme and then the other by Algo traders and systems. Run 'em up, sell 'em, then run 'em back down again.

The chart of DX (DXY) ($USD) shows a bottoming process underway having made a small Head & Shoulder Bottom, with a new upward sloping trendline USTL underway as shown in the chart.

Since the correlation with UUP is .99 if DX goes higher UUP will go up as well.

Currencies have strong seasonal tendencies and the seasonal charts show November is the strongest month of the year for DX, up 89% of the time with an average gain of 1.5% for the last 10 years, up 100% of the time with an average gain of 2.1% for the last 5 years.

For DX carefully watch 94, the equivalent of 24.40 for UUP.

Based upon the technicals including the seasonal tendency a further advance is quite likely unless interrupted by an unforeseen macro event.


Posted by Jack ( on October 31, 2017 at 04:04 PM EDT

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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".