« November 2018 »

IVolatility Trading Digest™

Volume 18 Issue 47
Technical Score [Charts]

Technical Score [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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The picture turned dreary for the bulls last week as the information technology and energy sectors pulled the S&P 500 Index down again. From a technical analysis perspective an appraisal of six significant technical developments that have occurred in the last six weeks follow our regular market review along with a hedge idea to consider using SPDR S&P 500 ETF (SPY).

Review NotesS&P 500 Index (SPX) 2632.56 dropped 103.71 points or -3.79% last week increasing the probability of testing the October 29 low at 2603.54 this week, as a potential Head & Shoulders Bottom pattern faded away. Details follow in Technical Score section below.

VIXCBOE Volatility Index® (VIX) 21.52 jumped up 3.38 points or +18.63% 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 3.07 points or +19.39% last week ending at 18.90. The one year volatility and SPX line charts follow.


Compared to the spike up in February, the current range for the IVXM between 12.75 and about 22, will likely be broken if the SPX continue lowers. However, a close back below 12.75 would suggest support and a possible Double Bottom pattern.

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 17 trading days until December expiration, the day-weighted premium between December and January allocated 85% to December and 15% to January for a -4.93% premium vs. 1.14% last week ending November 16. Now well 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.


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!

Cyber Monday Data Sale all this week.

Digest Issue 43 "Bear Flag [Charts]" reported indicators from the futures and options markets had not reached extreme negatives associated with previous bottoms. This equity only put/call ratio chart update at .78 vs. 74 last week now shows more put activity than during the February decline.


However, the next chart of options open interest on VIX futures now 9.2 million contracts remains well below the level reached February 9 at 14.4 million. This could mean less current hedging activity using options on VIX futures that will rise on a further SPX decline, or it could reflect less carry trade put selling activity.


Technical Score

Now for an S&P 500 Index trendline update along with recent technical analysis developments.


The operative upward sloping trendline, USTL above, from the March 2016 low was broken October 10, marked 1 at the arrow above. Then pulling back up to retest the trendline it made a Bear Flag detailed in Digest Issue 43"Bear Flag [Charts]" meeting the minimum measuring objective at 2665 and continuing down to 2603.54 on October 29.

Next the gap up opening, 2 above, looked like a possible bullish Breakaway Gap, featured in Digest Issue 44 "The Gap [Charts]."  Then the next upside gap at 3 above, looked like a Measuring Gap another bullish indicator covered in Digest Issue 45 "Another Gap [Charts]." However, SPX then retested the top of the Flag and the trendline, turned lower and closed both gaps converting them to Pattern Gaps found inside a developing pattern that initially looked like a potential Head & Shoulders Bottom, then that gave way on the Pattern Gap open lower at 4 above.

After the Bear Flag, both the potential bullish Breakaway and Measuring Gaps failed and then the Pattern Gap ended a potential Head & Shoulder Bottom leaving a potential Double Bottom. However, a close much below the October 29 low of 2603.54 will likely end this possibility leaving a 5th wave headed for the April 2 low at 2553.80.

The technical analysis score with a buy the dip bullish bias is three wins: close below the upward sloping trendline, Bear Flag, Pattern Gap and three fails: Breakaway Gap, Measuring Gap, potential Head & Shoulders Bottom , with the potential Double Bottom yet to be determined.

With this less than encouraging score, perhaps it's time to consider hedging just in case the potential Double Bottom also fails.

S&P 500 Index Hedge

SPDR S&P 500 ETF (SPY) 263.25 down 10.48 points or -3.83% for the week.

Market sentiment has changed dramatically in the last six weeks reflected by bearish calls from prominent banks and brokers, perhaps enough to get the attention of contrarians. However, until there is solid evidence that the potential Double Bottom will hold, hedging longs seems prudent.

Many times in the past during the long bull run, hedges were suggested just as the markets were about to recover from an oversold pull back and this could be another one of those times, but that's what hedges are for: unexpected continuing declines. Like buying flood insurance after heavy rain begins. Unlike traditional insurance policies that charge premiums even when the sun shines, option strategies provide downside insurance only when it seems necessary. However, since implied volatility typically rises as the underlying declines options are exposed to sudden declines in implied volatility so consider using spreads to partially offset volatility and price risk.

With a current Historical Volatility of 20.49 and 17.73 using the Parkinson's range method, the Implied Volatility Index Mean is 20.20 at .53 of the 52-week range. The implied volatility/historical volatility ratio using the range method is 1.14, so option prices by this measure are reasonable relative to the recent movement of the ETF.

Friday 1.6 million contracts traded with the 5-day average of 2.9 million contracts with reasonable bid/ask spreads, and open interest of 22.8 million. Good volume and liquidity here.


Using the ask price for the buy and mid for the sell the long put spread debit would be 1.64 about 33% of the distance between the strike prices with 76 % of the long put price risk hedged by the short put. Until the potential Double Bottom question is resolved the objective is hedge further downside. Use a close back up above 270 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

Strategy Adjustment

Review Notes
Hedge further downside. Too soon for contrarian thoughts.


Buy the dip bullish biased technical analysis since October 10 has a 50/50 record with a potential Double Bottom to be determined. With this record, hedging further downside seems prudent.

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 update selected portions of the WTI Crude Oil Commitment of Traders report and the potential Double 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 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".