« March 2018 »

IVolatility Trading Digest™

Volume 18 Issue 9
Correction Resumes [Charts]

Correction Resumes [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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The declaration in last week's Digest that the correction was likely over missed the mark by a mile, as the downward continuation pattern changed form. There is more below including a Commitment of Traders update for WTI crude oil and a seasonal trade idea for United States Natural Gas Fund ® LP (UNG)

Review NotesS&P 500 Index (SPX) 2691.25 although it gained 13.58 points or +.51% Friday for the week it declined 56.05 points or -2.04%. Back at the drawing board, it appears, the previous symmetrical continuation pattern seems to be evolving into a bearish rising wedge.


The distance from the February 2 high of 2727.67 to the February9 low of 2532.69 measures 194.98 points. Subtract this from the point where it closes below the lower upward sloping channel to obtain the downside measuring objective. For example, if it were to rebound this week, but then turn lower again up around 2720 the downside objective would become 2525. Alternatively, lower closes early this week will likely redefine the pattern once again, perhaps forming a double bottom around 2533. Stay tuned.

VIXCBOE Volatility Index® (VIX) 19.59 jumped up 3.10 points or +18.80% for the 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 2.61 points or 21.84% to close at 14.56.


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 March expiration, the day-weighted premium between March and April allocated 48% March and 52% to April for a -4.60% premium, well below the bottom of the green zone between 10% to 30%, and negative once again. While good for the bears, not so good for the bulls.

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. At the extremes, declines below 10 and advances above 30 are both unstable.


As the VIX advanced last Thursday the premium turned negative again overriding the more bullish end of correction signal stance from the previous week.

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Crude Oil

Crude OilWTI Crude Oil (CL) 61.25 +.26 or +.43% basis April futures. For the week -2.30 or -3.62%. Since both WTI and Brent crude remain in backdawardation, when near term contract prices exceed deferreds, for WTI 4.65 points or +7.59%, for Brent 3.66 points or +5.69%, the usual seasonal decline that typically begins in late February or March may be delayed or abbreviated.

Now from the perspective of the WTI Commitment of Traders report,

From the Disaggregated Commitments of Traders - Options and Futures Combined report as of February 27, "Managed Money,” the group that best correlates with crude oil price changes and arguably the most important, increased their long position adding 21,292 contracts while decreasing their shorts +164 contracts for a net position increase of +21,456 contracts representing 14.37 % of the open interest up from 5.00% for the week ending August 29, 2017at the last pivot.


"Managed Money" now has 465,825 net long contracts vs.147,303 net long contracts or 5.00% of the open interest at the last pivot for the week ending August 29,2017. Last year they began reducing their net long position at the end of February after reaching 413,637 net long contracts or 15.16% of the open interest. From a seasonal perspective, the current high position at 14.37% of the open interest suggests seasonal selling could soon get underway once again.

On the other hand

United States Natural Gas Fund ® LP (UNG) 22.58 +.36 or +1.62% for the week. This ETF owns natural gas futures contracts in an effort to track the percentage movements of natural gas prices. While futures are in contango creating roll loss, the difference is relatively minor for short term positions. For example, on Friday April futures were 2.695 while May were 2.727 or 1.2% higher. Seasonally natural gas usually bottoms before the middle of March then advances into April.


With a well defined upward sloping trendline, USTL it looks as if the bottom may be in place. If not, the USTL provides a good place to close the trade should it decline.

Here is a seasonal directional trade idea to consider that should move independent to crude oil or the S&P 500 Index.

Since the current Historical Volatility is 32.56 and 21.02 using the Parkinson's range method, with an Implied Volatility Index Mean of 26.03 almost at the bottom of the 52- week range at .01. The implied volatility/historical volatility ratio using the range method is 1.24 so option prices are about right relative to the recent movement of the ETF. Friday’s option volume was 15,954 contracts with the 5-day average of 14,670 contracts with reasonable bid/ask spreads.


At 27% of the distance between the strikes, using the ask price for the buy and bid for the sell the debt would be .53. Use a close back below the USTL, shown above 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.


While implied volatility remains relatively high consider Iron Condors, selling out-of -the-money call spreads along with out-of-the-money put spreads on stocks and ETFs near the middle of their recent trading ranges, ones with high options volume and reasonable bid /ask spreads. Use March expiration options or even weekly options where available to gain from time decay. Two Foremost Indicators to watch this week.

Two Foremost Indicators to watch this week.

US Dollar Index (DX) & DXY, $USD 89.91

The recent chatter about rising interest rates could be working here on the US Dollar Index. Already above the operative downward sloping trendline, DSTL, from the December 13 high at 94.10, it looks as if a double bottom or perhaps a H&S Bottom could be forming.


Any further advance creates a headwind for US big cap multinationals, emerging markets, and commodities especially crude oil.

iShares 20+ Year Treasury Bond ETF (TLT) 118.35 up .46 points or .39% for the week , but still below the downward sloping trendline from the December 15 high at 127.79. Although a bottom formation appears underway, as a favorite rotation trade, it could be more about trading out of equities and into an oversold bond ETF with good liquidity, than long-term interest rates.


As the correction resumed, the declaration in last week's Digest that it was likely over, proved premature missing the mark by a mile, although the consolidation pattern changed form. The VIX romped higher closing back above the futures curve turning the premium negative once again. All good for the bears, not so good for the bulls as equities rotate into sectors perceived to have less exposure to international trade.

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Next week our market review will update more Foremost Indicators and report on the progress of the S&P 500 Index consolidation pattern underway.

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.


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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".