« December 2017 »

IVolatility Trading Digest™

Volume 17 Issue 49
Rapid Rotation [Charts]

Rapid Rotation [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Review NotesAfter making a key reversal last Monday and a lower low Tuesday the brief rotation pullback ended Thursday after just 4 days while the previous pullback that began November 8 lasted 5 days. There are more details are in the Market Review along with updates for the US Dollar Index (DX) and the United States Oil Fund, LP (USO) followed by a new SPDR S&P 500 ETF (SPY) suggestion.

Review NotesS&P 500 Index (SPX) 2651.50 rebounded 9.28 points or +.35% last week to make a new closing high Friday after turning higher last Thursday. Last Monday began with a key reversal that ended on "Turn Around Thursday." The first support is now just above 2600 and then the 50-day moving average at 2581.36. Another upside breakout requires a close above last Monday's high of 2,665.19.

VIXCBOE Volatility Index® (VIX) 9.58 retreated 1.85 points or -16.19% 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 6.97 dropped 1.87 points or -21.15%.

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 7 trading days until December expiration, the day-weighted premium between December and January allocated 28% to December and 72% to January for a 24.47% premium near the middle of 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 ended the week at 20.74% up from 6.39% Monday.

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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Hedge Indicator

Although most indicators remain positive and the historical December record is positive some increase in hedging activity seems likely. From Advance Historical Data this chart shows put open interest for the last month advancing modestly, with total open interest ending last week at 16,750,264 contracts.


VIXChecking the file cabinet here are two noteworthy updates.

When we last looked at the Dollar Index in Digest Issue 47 "Bulls Still in Charge 2.0 [Charts]" it had closed below the 50-day moving average, heading lower. Since then it made a pivot and rebounded.

US Dollar Index (DX) 93.87 +1.03 points or 1.11% for the week. Now back knocking on the 94 door once again it could continue higher much to the dismay of many large capitalization multinationals, especially in the tech sector that are helped by currency translation tailwinds. The other possibility should it turn lower from here would be a potential Head & Shoulder Top. A close below the neckline NL, shown in the chart below, would imply a retest of the September lows and continue supporting the large cap multinationals. However, from a technical pattern analysis perspective the record for DX following the script is mixed, not sure why, perhaps due to size of the several currency markets involved.


Last week from Digest Issue 48 "Anxious Rotation Returns [Charts]"

United States Oil Fund, LP (USO) 11.49 -.18 or -1.54% for the week. After pulling back it also turned higher Thursday reviving the possibility it could still breakout above the previous high activating the delayed conditional trade idea.


Briefly from the from the Disaggregated Commitments of Traders - Options and Futures Combined report as of December 5.

While Producer/Merchant/Processor/User, (Commercials ) or "PMP" where modest net buyers, "Managed Money" stopped buying and "Swap Dealers" stopped selling as reflected in the slight decline in the cash prices as of December 5 to 57.66 while January futures closed at 57.36 Friday, both firm for this time of the year.

IDEASPDR S&P 500 ETF (SPY) 265.61

With most indicators positive and with a December seasonal tailwind it would take a serious unexpected event to derail the SPX and SPY between now and year end. Even if there should be another rotation driven pullback attempt, it will likely only last a few days. Now with the holidays approaching trading ranges could narrow along with declining volume. Since last Wednesday's low made a well defined pivot it makes a good SU (stop/unwind ) level. Consider a long call spread with plenty of time to expiration. First the chart.


January Call Spread


With a limited and defined risk of 1.03 and 34% of the distance between the strike prices, use a close below the December 6 pivot low at 262.71 as the SU (stop/unwind).

This suggestion is based on the ask price for the buy and mid for the sale presuming some price improvement between the bid/ask prices. Monday’s option prices will be somewhat different due to the time decay over the weekend and any ETF price change.

StrategyThe recent short rotation attempts probably reflect the desire of some large fund managers to book gains in their winners before year end. However, since they may also want to show the same stocks in the year-end statements hedging activity is likely to continue increasing. This could be the time to "put on a hedge and go away for the holidays."


Since the last two rotation pullbacks were short lived, the bulls are clearly in charge and grinning, helped by news that tax reform could be completed before the end of the year. December has a good seasonal record for equities so more intraday and closing highs can be expected before year end.

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Next week we will look for more trade ideas going into year end.

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



Larry Mc Millan has described in his books how to profit from increasing implied volatility or the opposite decreasing implied volatility.
Could you propose such deals which involved calculation in order to determine how many options should be bought or sold on a stock with the objective of beeing delta and gamma neutral and getting profits without taking care of the varaition of the underlying.
Thanks a lot for your suggestions of such deals

Posted by christian morio on December 11, 2017 at 04:35 PM EST


Thanks your question and continuing interest. It requires a lot more space than we have available here to tackle delta neutral strategies. There are several books available that we can suggest including Advanced Options from The Options Industry Council www.OptionsEducation.org . Another good book is Option Volatility & Pricing by Sheldon Natenberg. Give these a try. If you need more suggestions let us know.


Posted by Jack ( on December 14, 2017 at 04:11 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.

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