« November 2018 »

IVolatility Trading Digest™

Volume 18 Issue 46
Crude Oil & Gas [Charts]

Crude Oil & Gas [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Last Weeks' unusual activity in both crude oil and natural gas captures the limelight while an update to the gap story gets relegated to the Strategy section below. First our regular market review includes comments about a potential S&P 500 Index Head & Shoulders Bottom pattern. Then trade ideas to consider for both United States Oil Fund, LP (USO) and United States Natural Gas Fund ® LP (UNG).

Review NotesS&P 500 Index (SPX) 2736.27 declined 44.74 points or -1.61%, closing back below the 200-day Moving Average at 2760.69. Thursday's reversal followed by a higher high and higher low Friday increases the probability that a potential Head & Shoulders Bottom pattern could be underway. More below.

VIXCBOE Volatility Index® (VIX) 18.14 back up .78 or +4.49% 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, added 1.46 points or +10.16% last week to end at 15.83. The six month and SPX line charts follow.


The IVXM appers to be forming a new range between 12.75 and about 22, so a close back below 12.75 would support the possible Head & Shoulders Bottom interpretation.

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 2 trading days until November expiration, the day-weighted premium between November and December allocated 8% to November and 92% to December for a 1.14% premium vs. 1.59% last week ending November 9. Still below the bottom of the green zone between 10% to 20%.

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.


Remains in the "Risk Off" zone.

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.

Big Data? In options we are Big Data!

Our Black Friday Data Sale is underway

In Digest Issue 43 "Bear Flag [Charts]" we said indicators from the futures and options markets had not reached extreme negatives associated with previous bottoms. This equity only put/call ratio chart, now .74 vs. .66 last week ending November 9, suggests one such an extreme maybe close, or perhaps already in place, presuming the potential Head & Shoulders Bottom continues developing.


Strategy Update

Since the gaps described in Digest Issue 44 "The Gap [Charts]" and Digest Issue 45 "Another Gap [Charts]" were both filled, contrary to expectations for Breakaway and Measuring Gaps, they became pattern gaps as the S&P 500 Index declined attempting to retest the October 29 low at 2603.54. Should it now continue higher and close above 2812 it will form an almost perfect symmetrical Head & Shoulder Bottom with a minimum measuring objective about 3020, as unlikely as that seems. First it needs to close above 2812 to activate the pattern. Until then it's just wishful speculation by the bulls.Review Notes

Supporting the potential Head & Shoulders Bottom premise, market breadth continues improving as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, gaining 39.62 points or +8.78% for the week; advancing every day except Wednesday, ending at -411.56 with the 50-day Moving Average, now -175.85.

Last week's sector score: score: "Risk On" one day, "Risk Off" four days.

Review NotesWTI Crude Oil (CL) 56.46 basis December futures down 3.41 points or -5.70% for the week, including a 4.24 decline last Tuesday closing at 55.69. Although oversold it could be in the process of making a consolidation before heading lower again. However, further downside could be limited until after the December 6 OPEC meeting when oversupply and production cuts are on the agenda.

Last week Digest Issue 45 "Another Gap [Charts]" included an update to the
Disaggregated Commitments of Traders - Options and Futures Combined report (COT) by the CFTC as of November 6. This week's report as of November 13 shows"Managed Money,” the group that best correlates with crude oil price changes and arguably the most important, decreased their longs more than they increased their shorts for the week to November 13, including last Tuesday's 4.24 point decline.

Here are charts showing "Managed Money" long and short positions as of November 13. While the long position was reduced to 7.78% from 8.20% of the open interest on November 6, the short position increased to 2.96% from 2.81%. Other noticeable changes include Swap Dealers reducing their net short position from 18.17% of the open interest to 16.40% by slightly increasing their longs while covering 21,310 short contract positions.

First "Managed Money" longs


Next "Managed Money" shorts


While the position changes alone are probably not sufficient to conclude an oversold bounce is likely the upcoming OPEC meeting along with announcements from the Saudis and Russians going into December 6 could set off a short covering bounce.

Tradable Bounce

United States Oil Fund, LP (USO) 12.07 ended the week down .63 or -4.96% and down 4.17 points or -25.68% from the October 3 high at 16.24. Even a casual observer of the chart would likely conclude it looks oversold and due for counter trend bounce.

With a current Historical Volatility of 29.66 and 25.14 using the Parkinson's range method, with an Implied Volatility Index Mean of 36.65 at .58 of its 52-week range, the implied volatility/historical volatility ratio using the range method is 1.46, so option prices are somewhat expensive compared to the recent movement of the ETF. Friday’s option volume was 361, 519 contracts traded compared to the 5-day average volume of 564,290 contracts with tight bid/ask spreads. Plenty liquidity here.

Consider this synthetic long spread idea.


Adding a short put to the long call spread debit of .23 provides some implied volatility edge and reduces the net debit to .01 using the bid, but also increases the risk of assignment should it close below 11 at the December expiration.As a trade for an expected bounce the plan is to close all or part on or around   December 6.


Based on fundamentals, here is one that looks likely to continue higher.

United States Natural Gas Fund ® LP (UNG) 35.43 up 5.19 points or +17.16% for the week. This ETF owns natural gas futures contracts to track the percentage movements of natural gas prices. This is a supply and demand cold-weather and LNG export story with natural gas inventories at a 15-year low. As RBN in Houston explains "...gas storage inventories are functionally much lower than they seem relative to historic norms, because gas consumption is so much higher now than it was a few years ago."

From a technical perspective the gaps and retracement look like it's in the early stages of forming a potential symmetrical triangle continuation pattern. If so, here is an idea to consider.

The current Historical Volatility is 94.70 and 38.78 using the Parkinson's range method, with an Implied Volatility Index Mean of 98.26 at .92 of the 52- week range. The implied volatility/historical volatility ratio using the range method is 2.53 so option prices are expensive relative to the recent movement of the ETF. Friday’s option volume was 34,034 contracts with the 5-day average of 86,840 contracts with reasonable bid/ask spreads.


At 30% of the distance between the strikes, using the ask price for the buy and bid for the sell the debt would be 1.52 with 67% of the long call hedged . Use a close back below 31 as the SU (stop/unwind).

Monday's option prices will be somewhat different due to the time decay over the weekend and any price change.


The market decline that began after the S&P 500 Index made a small double top on October 3, appears to have bottomed October 29, rebounded and then retested the low and may now be in the process of forming a Head & Shoulders Bottom that would be activated on a close back above 2812. In the meanwhile, crude oil looks oversold and likely to bounce while low natural gas inventories also suggest higher prices.

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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 the plan is to report on crude oil, natural gas and a potential S&P 500 Index Head& Shoulders Bottom pattern.

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".