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Today


IVolatility Trading Digest™


Volume 18, Issue 39
Crude Oil Positions [Charts]

TOP 5 [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

To add comments or to ask questions please click here (or use the blog "COMMENTS" link at the very bottom of the blog page).

Because crude oil has marched steadily higher since our last our last WTI Commitment of Traders update, it's time to take another look, right after our regular market review.

Review Notes

S&P 500 Index (SPX) 2913.98 drifted lower by 15.69 points or -.54% last week, right on cue following the key reversal made on Friday September 21. Then closing just below the August 29 high at 2916.50 on Tuesday, it continued down to close the pattern gap created by the gap up opening on September 20. Now having retested the breakout and closed the gap, it could resume advancing again this week. In the event it continues declining there is support down at the 50-day moving average, now 2868.18

VIXCBOE Volatility Index® (VIX) 12.12 added .44 points or +3.77% 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, gained .27 points or +3.26 ending at 8.54. This chart for the last year, with the SPX line chart below, shows implied volatility trending lower as SPX advances.

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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 October expiration, the day-weighted premium between October and November allocated 60% to October and 40% to November for a 18.65% premium, in the bullish green zone between 10% and 20%, although slightly lower than last week.

 

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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.

VIXWTI Crude Oil (CL) 73.25 basis November futures gained 2.47 points or +3.49% for the week after Saudi Arabia and Russia decided not to increase production at their meeting on September 23 to offset declining Iranian production due to sanctions. Then, Thursday the US Energy. Secretary, Rick Perry said the Trump administration was not considering releasing crude oil from the Strategic Petroleum Reserve. Result: Green light for traders to push higher prices.
 

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Here are a few selected charts summarizing the Disaggregated Commitments of Traders - Options and Futures Combined report as of September 25, (scroll down the page about one-half way), before Rick Perry's Thursday comments.
 
First, some background. The Commodities Futures Trading Commission (CFTC) publishes the Commitments of Traders (COT) reports providing a breakdown of each Tuesday’s open interest for futures and options on futures markets when 20 or more traders hold positions equal to or above the reporting levels established by the CFTC, reported Friday at 3:30 PM. Between Tuesday and Friday the only available information are futures prices. 
 
The CFTC reports positions for both the ICE and New York Mercantile Exchange. However, since the Mercantile Exchange has four times the open interest it's the primary market and the one we use.
 
There are two versions of the COT report, one for Futures Only the other Futures and Options combined. Some futures reporting services provide data for Futures Only. The combined version includes options and the difference can be significant. For example, in the most recent report as of September 25, the Futures Only version reported Open Interest declined 3,158 contracts while the Combined version reported an increase of 77,229 contracts. Why would anyone want to exclude options positions since a trader could be a net seller of futures while a net buyer of options?
 
There are five reporting categories: Producer/Merchant/Processor/User
(PMP),sometime also called" Commercials," Swap Dealers (Swaps), Money Manager (Managed Money), Other Reportables (Other), and Non-Reportables each with six data points, long, short, net position and change for each. Since the total net longs and net shorts zero out each week, tracking the changes of each group compared to the price change provides some insight especially at turning points
 
Since "PMP" are involved with both producing and processing they should be best informed about current market conditions. With substantial financial risk and a vast information network "Managed Money,” the group that best correlates with crude oil price changes and arguably the most important, speculate on future prices.
 
Representing hedging, this chart shows "PMP" (Producers, Merchants, Processors and Users) and "Swaps" (Swap Dealers) net short contracts with 20.08% of the Open Interest and declining.

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This chart shows the net long positions of "Managed Money" (registered commodity trading advisors (CTA), registered commodity pool operators (CPO), or unregistered funds including “hedge funds.” + "Other" (Other Reportables, large traders not defined as "Managed Money, ") called "Large Specs" (Large Speculators) when combined, at 18.96% of the Open Interest and declining.

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Next, this charts show the short position of "Managed Money" as a % of the Open Interest at just .85%.

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At the margin, although small as a percentage of the total open interest, this chart suggests that until "Managed Money" starts to increase shorting, prices are likely to continue trending higher.
 
Why do futures prices matter? Remember Saudi Oil Minister Ali Al-Naimi said in 2008 that prices are determined in the "paper" market.
 
Although , prices tend to decline seasonally in October through January, there are not yet any apparent signs of weakness.
 
Following the advice of Joe Ross, a well-known commodity trader and educator, who said he goes with fundamental strength when it conflicts with a seasonal since it means a strong trend has overcome the resistance of the seasonal tendency, increasing the odds for staying with the trend.
 

Big Data? In options we are Big Data!

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Summary

Last week the S&P 500 Index pulled back to retest the breakout and then closed the pattern gap clearing the way to resume trending higher. Due to concern about reduced supply, crude oil prices continued higher despite the seasonal tendency to decline from October through January.

Twitter Follow us on twitter for more ideas from our scanners and other developments.

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 the plan is to look for more trading ideas from our rankers and scanners.

 

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".