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IVolatility Trading Digest™

Volume 17 Issue 48
Anxious Rotation Returns [Charts]

Anxious Rotation Returns [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Review NotesAfter another record week of new intraday and closing highs along with some rotation out of high multiple big cap stocks political news, first negative and then positive, on Friday created an wide anxious trading range. More details follow along with a brief update from the latest Commitment of Traders report for WTI crude oil along with trade ideas for the United States Oil Fund, LP (USO) and SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

Review NotesS&P 500 Index (SPX) 2642.22 added another 39.80 points or +1.53% for the week making new intraday highs every day except Friday and new closing highs Tuesday and Thursday. Friday's early decline that was quickly reversed, resulted in a loss of 5.36 points on high volume but less than Thursday as it made new intraday an closing highs. Just in case, the first support would be at the short-term upward sloping trendline at 2590 and then the 50-day moving average at 2568.

VIXCBOE Volatility Index® (VIX) 11.43 jumped up 1.76 points or + 18.20% for the week while our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, now 8.84 gained 1.89 points or +27.19%.

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 December expiration, the day-weighted premium between December and January allocated 48% to December and 52% to January for a 10.31% premium near the lower band of the green zone.


Using a different calculation method to measure the distance from the futures to the VIX, the volume weighted VIX premium calculated end of day and regularly found in the Options Data Analysis section on our homepage was 8.80%.

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. At the extremes, declines below 10 and advances above 30 are both unstable.

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Crude Oil

Crude OilWTI Crude Oil (CL) 58.36 +.96 or +1.67% Friday basis January futures, reversed a modest decline after the announced and widely expected OPEC agreement to extend production cuts until the end of 2018. The initial decline was consistant with a "buy a rumor sell the news" event, but Friday's quick upside reversal was a susprise.

Since the Commitment of Traders report was delayed for Thanksgiving a brief update follows.

From the Disaggregated Commitments of Traders - Options and Futures Combined report as of November 28 "Managed Money," the group that best correlates with crude oil price changes and arguably the most important, increased their long position adding 26,766 contracts while reducing their shorts +25,878 contracts for a net position increase of +52,644 contracts representing 12.48% up from 10.89 for the week ending November 21 and up from 5.00% for the week ending August 29, 2017 at the last pivot.


Represents 396,484 contracts vs. 147,303 contracts at the last pivot for the week ending August 29,2017.

On the other side Swap Dealers increased their short position 32,982 contracts selling to "Managed Money" while complicating the analysis since they could represent "speculative traders, like hedge funds, or traditional commercial clients that are managing risk arising from their dealings in the physical commodity." However, with rising prices traditional commercial client hedging by producers is the most likely source.

One thing seems clear "Managed Money" were believers that OPEC would agree to extend production cuts for 2018 and that inventory levels will continue declining.

While it reamins to be determined if prices can go higher as it retests the previous Friday intraday high, here are two conditional trade ideas should it break out and continue higher early next week.

United States Oil Fund, LP (USO) 11.67 -.12 or -1.02% for the week.

With a current Historical Volatility of 19.41 and 16.53 using the Parkinson's range method, the Implied Volatility Index Mean is 20.74 at the 52-week low. The implied volatility/historical volatility ratio using the range method is 1.25 so option prices are reasonable relative to the recent movement of the ETF and inexpensive relative to the 52 week IVXM. Friday’s option volume was 109,625 contracts with the 30-day average of 134,610 contracts with favorable bid/ask spreads.


The March 12 call will have very little time dacay loss over the holidays while providing good delta. If implemeted on a breakout above the previous recent high watch when it pulls back to retest the breakout and use a close below 11.50 as the SU (stop/unwind) if necessary.

The suggestion above is based on the ask price Friday. Monday’s option prices will be somewhat different due to the time decay over the weekend and any ETF price change.

SPDR S&P Oil & Gas Exploration & Production ETF (XOP) 36.43 up 1.11 or +3.14% for the week. This ETF for smaller and midsize E&Ps has been in an uptrend since the lows in late August and a favorite for long speculators and hedgers with the most options volume and open interest compared to other ETFs in the oil & gas sector meaning more liquidity and closer bid/ask spreads.

With a current Historical Volatility is 28.34 and 21.81 using the Parkinson's range method, the Implied Volatility Index Mean of 27.15 at .37 of the 52-week range. The implied volatility /historical volatility ratio using the range method is 1.24 so option prices are reasonable compared to the recent movement of the stock. Friday’s option volume was 161,122 contracts traded compared to the 5-day average volume of 138,610. Here is a long call spread with a short put to consider.


At the ask price for the buy and middle for the sell, the call spread debit is 1.09 (1.91 -.82) about 36% of the distance between the strike prices. Adding a short put at the bid price of .84 reduces the net debit to .25 providing a lot of bang for the buck if crude oil continues higher into the spring when it usually benefits from seasonal strength. Use a close back below the upward sloping trendline from the August low now about 33.50 as the SU (stop/unwind).

StrategyThe combination of multiple new highs along with evidence of profit taking in selected high multiple growth stocks in the tech sector apparently created apprehension about protecting gains. However, unless there is a lasting unexpected political or macro event it seems likely pull backs will be limited as manages will want to show the big winners in their yearend portfolios. While they may not sell their long positions hedging activity could increase so look for SPX put open interest, and puts on individual stocks to increase along with VIX option activity to remain high.


Last Friday's wide trading range demonstrated just how sensitive the markets have become to political news along with concerns about locking in gains before the end of the year while continuing to rotate into sectors considered to have more upside potential. Since December is a seasonally good month for equities look for more intraday and closing highs into yearend.

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Next week we will update selected Foremost indicators along with our market review.

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



Copy of a reply to Digest Issue 47


Thanks for the bitcoin question. Since the objective is to avoid taking unlimited risk we suggest waiting until the regulators examine the issues involved with listing futures and options and give their blessings. Presuming they give the go ahead, there will be plenty of time to look for strategies with limited and defined risk.


Posted by Jack ( on December 04, 2017 at 12:03 PM EST

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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".