« October 2018 »

IVolatility Trading Digest™

Volume 18, Issue 40
UST10Y Yield Scare [Charts]

TOP 5 [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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This week the plan was to fire up the rankers and scanners looking for more trade ideas but paraphrasing Mike Tyson, everybody's got a plan 'till they get punched in the mouth. Once again, the punch was a rapidly rising 10-Year Treasury Note yield, scaring equities just as it did eight months ago, as reported in Digest Issue 5 "All About Interest Rates [Charts]." Therefore, an updated long-term interest rate chart follows a brief market review.

Review NotesS&P 500 Index (SPX) 2885.57 declined 28.41 points or -.97% with most of the decline occurring Thursday as the 10-Year Treasury yield added another 6 basis points to a10 basis points gain Wednesday, ending the week at 3.23%. The chart below shows support around the current level from both the January 26, high at 2872.87 and the 50-day moving average at 2877.14, then more support at the upward sloping trendline, USTL1 at 2800. Should it continue lower, watch USTL2 now about 2788.


So far the decline looks quite modest compared to the one that began in mid-June.

VIXCBOE Volatility Index® (VIX) 14.82 gained 2.70 points or +22.28% 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 +2.66 points or +31.15% to 11.20 shown below along with a SPX line chart to compare previous declines to the advancing IVXM


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 October expiration, the day-weighted premium between October and November allocated 35% October and 65% to November for a 4.22% premium vs. 18.65% last week ending September 28, well below the bottom of the green zone between 10% to 20% . Caution.
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.


For daily updates, follow our end-of- day volume weighted premium version located about half-way down the home page in the Options Data Analysis section on our website.

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10-Year Treasury Note Yield

Last week's 18 bps advance turned equities lower, especially interest sensitive sectors such as real estate and home builders, but interestingly, not utilities.

An update of the semi- log scale chart first displayed in Digest Issue 5 "All About Interest Rates [Charts]" suggests the downtrend from the November 7, 1994 high at 8.05% remains intact, based upon the downward sloping trendline DSTL, until the yield on the 10-Year Treasury Note closes above 3.5%.


Contrarian Conundrum

Contrarians, as the name implies attempt to do the opposite of the consensus assuming markets are usually wrong at both extreme lows and highs. The obvious challenge is getting the timing right, so it's necessary to limit risk until the consensus changes. As Warren Buffet said, "You can't buy what is popular and do well."

iShares 20+ Treasury Bond ETF (TLT) 113.04 down 3.97 points or -3.39% for the week and down 4.06 points or -3.47% since appearing in Digest Issue 38 "Contrarian Ideas Continued [Charts]." According to the plan that trade would have been closed last Wednesday when it declined 2.03 points closing at 114.83, well below the SU (stop/unwind) at 116.

Since it gapped open lower Wednesday it may have been difficult to unwind the spread, turning it into a loser. However, the loss is limited to the initial debit.

It was oversold before and now really oversold and once again, if the set up looked good before, it looks even better now. According to the UST10Y chart above interest rates still remain in a downtrend until the yield exceeds 3.50%. Eventually, the trend will change, but with non-commercial futures short positions at an extreme, short covering by our "algo rotator" friends could begin at anytime thereby delaying the trend change once again.

Now what? One alternative is to close it at a loss and move on. Another is to hold and hope it will bounce from the extreme oversold condition providing an opportunity to possibly recover some portion of the initial debit. Other possibilities include a long call spread, or a risk reversal by adding a short put to a call spread, or even selling a put spread, however, all involve assuming additional risk and getting the timing right.


Although the S&P 500 Index decline has been limited so far, market breath as measured by our preferred indicator, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, declined 215.23 points or -94.91% last week closing at just 11.54. For comparison, during the June - July market pullback it declined it down to 521.32 on July 3 before turning higher. Based solely on market breadth, it appears the current pullback may be more severe than the one last June.

Last Wednesday noted contrarian Howard Marks, co-chairman of Oaktree Capital, said his firm is selling more assets than it’s buying, expressing a cautious approach to markets.


Like earlier in the year, rapidly rising 10-Year Treasury Note yield turned equities lower and they will likely continue downward until interest rates stabilize or begin turning lower. In the meanwhile, look for the S&P 500 Index to find support around 2875 then more support at 2800.


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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 we will update our Volatility Kingslist for third quarter earnings reports.

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.

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".