« September 2018 »

IVolatility Trading Digest™

Volume 18 Issue 36
Pullback Update [Charts]

Pullback Update [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Based upon September's record of seasonal weakness, last week Digest Issue 35 "How's the Bull? [Charts]" proposed the S&P 500 Index had run out of gas and was about to pullback to retest the breakout above the August 24 high. Now what, after making six consecutive days of lower highs and lower lows? One options indictor suggests it may be time to start looking for a reversal. Then our Top 5 ranker discovered some interesting option activity in Amarin Corp. PLC and Geron Corp. to consider.

Review NotesS&P 500 Index (SPX) 2871.68 declined 29.84 points or -1.03% for the week, making lower highs and lower lows every day. First support is around 2850 and then the 50-day Moving Average now 2827.32 with considerable support between 2800 and 2790. The operative upward sloping trendline (USTL) from the April low crosses at 2760. Here is the chart including an update for the 10-day VIX correlation indicator at the bottom.


As the VIX increased last week the SPX declined so the correlation turned negative again. When the SPX turns higher the VIX will start declining again so the correlation will continue declining. By the time, it returns to -.90 the SPX should be advancing again. Look for the SPX to make a reversal day, defined as a lower low with a higher close on increased volume. Since some services don't display SPX volume use high SPY volume as an alternative.

VIXCBOE Volatility Index® (VIX) 14.88 increased 2.02 points or +15.71% 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, advanced slightly less, adding +1.53 points or +10.25% to 10.30, shown in this three month chart followed by the SPX line chart.


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 September expiration, the day-weighted premium between September and October allocated 35% to September and 65% to October for a 6.93% premium , below the bullish green zone between 10% and 20%. For the week ending August 31 it was 12.38%. This week it reflects the pullback underway and the upcoming September futures expiration.


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. Previously declines below 10% and advances above 30% were unstable.

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TOP 5 Another Look

Found in the “Rankers and Scanner” section of our home page we regularly feature a complimentary ranker sample at the “Top 5 stocks by implied volatility change” link that goes to an Advanced Ranker sample displaying the top and bottom five stocks and ETFs in four categories. For ideas, we often look at the top five based on the Implied Volatility Index Mean vs. the 30-day Historical Volatility (IV Index Mean vs. 30D HV). Friday it revealed some interesting activity.


Using options with at least 30 days to expiration, when the ratio of the IV Index Mean divided by the 30D Historical Volatility exceeds 2, the potential for a large move in the underlying increases.

At the top of list AMRN at 6.76 and 6.81 using the range method for the historical volatility, the story is about an expected release of an 8,000 patient study started in 2011 for their omega3 pill Vascepa. Now at 3.15, the stock price is up from 2.70 in the last two weeks and with positive results the stock should go higher. The implied volatility ratio suggests the potential go much higher. Should the results disappoint it could also go much lower as well. Despite the results of the study the options implied volatility will decline. With the potential for large price change in either direction, avoid strategies with short gamma, such as long calendar spreads, that is short near term options and long deferred options. Here are the volatility and price charts.


An out-of-the-money put credit spread has defined and limited risk, but also with an upside limited to the initial credit. Should be study results be delayed it will expire and the credit will be earned. However, the high IV Index/HV ratio suggests the results will be released soon.


Using the ask price for the buy and mid for the sell put spread credit would be .33, about 33% of the distance between the strike prices. An alternative would be to also sell and out-of-the-money call spread creating an Iron Condor. Should one side be reached the other side will expire.

GERN, a cancer -drug company is next on the list at 3.05 and 3.41 using the range method for the historical volatility, also expects to release news before the end of the month about Johnson & Johnson's (JNJ) decision regarding imetelstat, a blood disorder therapy. Once again the high IV Index /HV ratio suggests the potential for a large price move. Closing Friday at 6.08 there are more strike prices to consider , but remember large price moves are not friendly to short gamma positions.

ORCL, number four on the list is one of our regular Volatility Kings™ (see Digest Issue 28 "Volatility Kings 2Q 2018") . The implied volatility is advancing in anticipation of their upcoming 1Q earnings report on September 17 after the close, while the stock pulls back with the market.

This section from the Friday's TOP 5 shows those with the greatest IV change.


AMRN at the top here suggests the news could be released soon.

For the Top 5 results, the search is set up on the Top 200 stocks by options volume and can be expanded to display the Top 50 or even Top 100. In addition, it can be set to find those with low ratios. For many new ideas, try our unique Advanced Ranker options data mining tool.


Upon completion of the current pullback, that could occur at any time, consider using September seasonal weakness to add or open new long call spreads or other hedged long positions anticipating further advances in October though December.

As a contrarian idea, watch the iShares China Large-Cap ETF (FXI) 40.91 down 1.48 or -3.49% for the week. Despite all the China tariff chatter last week it remains above the August 15 reversal low of 40.04. However, should this low fail, then close any remaining long positions and wait for a new bottom formation. Following the trade plan in Digest Issue 34 "Top 5 [Charts]" the call spread would have been closed last Wednesday when it closed below the SU (stop/unwind) at 41.50.


Watch the S&P 500 Index for a reversal day on increased volume that could come at any time. With support at 2850, and 2827 and considerable support at 2800, look for a reversal soon since the pullback to retest the recent breakout appears nearly complete. In the meanwhile, there are many option trading ideas available using our rankers and scanners.

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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.

Next week's market review will again update the progress of the pullback.

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 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".