« July 2018 »

IVolatility Trading Digest™

Volume 18, issue 27
Turning Up [Charts]

Turning Up [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Despite the imposition of tariffs by both the US and China equities turned higher last week helped by previously oversold interest sensitive sectors such as consumer staples and utilities continued higher. Volatility Kings™ had been scheduled for this week, but after recent suspicious market action we decided an expanded market review was more important. Our exclusive quarterly Volatility Kings™ will be featured next week just as Q2 earnings reporting really get rolling. First our market review followed by an update on last week's PayPal Holdings Inc. (PYPL) idea and some iShares MSCI EAFE ETF (EFA) options data.

Review NotesS&P 500 Index (SPX) 2759.82 advanced 41.45 points or +1.52% after breaking out of an unusual symmetrical triangle reversal pattern within the context of a larger trading range on "Tariff Friday," although on lower volume. Support at both 2700 and the 50-day Moving Average held. See the small triangle reversal pattern and the current operative upward sloping trendline labeled USTL below.


VIXCBOE Volatility Index® (VIX) 13.37 quickly dropped 2.72 points or -16.90% last week. 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, declined 2.25 points or -18.35% closing at 10.01.


In addition, here is the Historical Volatility chart for the S&P 500 Index comparing point and range computations, with the lower more accurate range method in orange, at 8.23% vs. 7.82% last week ending June 29.


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 July expiration, the day-weighted premium between July and August allocated 35% to June and 65% to August for a 13.07% premium, back into the bullish green zone between 10% and 20%. Score one for the bulls.


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.

Now for a measure of less hedging enthusiasm take a look at the VIX options volatility chart showing the Implied Volatility Index Mean at 89.05 vs. 105.48 last week.



PreviousIssuesBulls can breathe a big sigh of relief as the S&P 500 Index broke out above resistance and congestion around 2740. However, since sector rotation remains a challenge, let's call it a rotating bull. Some selected reasons for a more bullish view include:

Market breadth as defined by the McClellan Summation Index turned positive Thursday, adding 18.34 points and then another 37.17 points Friday to close the week at 576.87.

US Dollar Index (DX) 93.77 -.45 points or -.48% Friday after turning lower on June 29. For the week lower by .58 or -.61%. Encouraging double top pattern activated.

Invesco QQQ Trust (QQQ) 175.61 gained 2.69 points or +1.56% Friday for a 3.96 point gain or 2.31% for the week.

Health Care Select Sector SPDR Fund (XLV) 86.01 up 1.22 points or +1.44% Friday. For the week +2.55 points or 3.06%. XLV has recently been rising faster than the SPX.

iShares Nasdaq Biotechnology ETF (IBB) 116.21 +4.23 points or +3.78% and +6.39 points or +5.82% for the week.

High Yield Corporate Bond ETF (HYG) 85.33 reversed July 2, adding .63 points or +.75% for the week, closing above the 50-day Moving Average.

Shanghai Composite makes a reversal Friday closing at 2747.23 gaining 13.35 points or +.49%, but remains oversold.

The bears reply:

SPX volume light at 1.6m when 3.5m would be considered high. SPY volume 66.5m when 140m would be considered high. How can you trust breakouts on light volume?

Closely watched US Treasury Note 10 Year - 2 Year spread narrows to .29.

Financial Select Sector SPDR Fund (XLF) 26.67 +.13 points or +.49% Friday and only .08 points or +.30% for the week, stuck at the bottom of its range. Representing about 15% of the market capitalization, how can the markets go much higher without help from the financial sector? Big banks start reporting this Friday.

VanEck Vectors Semiconductor ETF (SMH) 104.95 +1.32 points or +1.27% Friday, up 2.28 points or +2.22% for the week, but a potential H&S Top remains unresolved. How can equities continue much higher if this group lags?

SPDR S&P Homebuilders ETF (XHB) 40.24 +.11points or +.27% Friday, but lagging with financials , although it tested previous May lows and could be forming a double bottom pattern.

Big Data? In options we are Big Data!

RT Options Scanner and RT Spread Scanner Live

Information on these two money makers: RT Options Scanner - RT Spread Scanner.

Hedging Report

Last week's "just in case" SPDR S&P 500 ETF (SPY) hedge idea, proved unnecessary like many before during this long bull run, but that's what hedges are for: unexpected continuing declines.

Turn Around Candidate

Update on last week's long idea in Digest Issue 26 "Yellow Flag"

PayPal Holdings Inc. (PYPL) 85.94 gained 2.67 points or +3.21% for the week although implied volatility remained unchanged.

Using Monday July 2 closing prices, the July 20 long 84 call gained .77 or 39% in four days.

The July long call spread alternative gained .19 or 19% with hedged price risk.

The August long call spread did better gaining .37 or 20%.

According to the plan they should be closed on or before the July 25 report date to avoid a large price move.

European ETF

Before we go...

We received a request to look for a European Index candidate. While there are many with traded options on various European markets few trade in the US with very much liquidity. The leader is more global representing large and mid cap developed market equities not including US and Canada.

iShares MSCI EAFE ETF (EFA) 67.58 advanced .61 points or .91% for the week; includes Europe, Australia , Asia and The Far East.

The current Historical Volatility is 14.98 and 7.09 using the Parkinson's range method, with an Implied Volatility Index Mean of 10.57 at .21 of its 52-week range.

The implied volatility/historical volatility ratio using the range method is 1.49 so option prices are somewhat expensive compared to the recent movement of the ETF. Friday’s option volume was 133,324 contracts traded compared to the 5-day average volume of 86,830 contracts with reasonable bid/ask spreads and substantial open interest in many strike prices suggesting considerable spread activity.


The outlook for equities improved significantly last week despite the imposition of tariffs by both the US and China. The S&P 500 Index broke out above its recent trading range while other leading sectors gained more as previous laggards advanced suggesting ongoing rotation activity. The VIX futures premium indicator closed back above the important 10% level and market breadth improved as well. While it could have been "sell the tariff rumors and buy the news," earnings reporting that begins this week may have also been an important consideration. For now, the bulls are once again on the move.

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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 will feature our Q2 Volatility Kings™ list of companies with a regular tendency for increasing options implied volatility as earnings dates approach.

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




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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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