« November 2019 »

IVolatility Trading Digest™

Volume 19 Issue 46
VIX Correlation Indicator Confusion [Charts]

VIX Correlation Indicator Confusion [Charts]- IVolatility Trading Digest™

Much to the delight of the bulls, the S&P 500 Index made two new intraday highs and three new closing highs last week helped by rotation into previously relatively weaker sectors. Friday's gap up open above 3100 raises a question about a potential island top especially since VIX correlation indicator seems to have gone haywire as shown in the chart below. Then a SPDR S&P 500 ETF long put spread insurance idea follows.

Review NotesS&P 500 Index (SPX) 3120.46 gained another 27.38 points or +.89% last week– making another new closing high and closed on the high. On Thursday, the VIX 10-day correlation indicator flashed a warning as it turned positive, but quickly reversed Friday as the SPX opened gap up.


Thursday the VIX 10-day correlation decreased (more positive) +.72 to end +.13, then Friday increased (more negative) -.70 to end at -.57. It could still be an early warning signal or perhaps it's no longer relevant as in "this time it's different."

Review NotesCBOE Volatility Index® (VIX) 12.05 declined only .02 points or      -.17% 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, also declined .02 points or -.20% to 9.78% vs. 9.80% for the week ending November 8, shown in the chart below, at the lower end of the range. It reached the 52-week low at 9.59 on April 12.


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 two trading days until November expiration, the day-weighted premium between November and December allocated 8% to November and 92% to December for a premium of 23.81%, in the bullish green zone.


The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the VIX at expiration on Wednesday November 20. Premiums on Fridays before expirations on the next Wednesday usually remain high, and then quickly decline on Monday and Tuesday.

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

VIX Option Implied Volatility

Adding to the curious trading activity on Friday, implied volatility of options on VIX futures declined -38.41points or -30.99% from 123.95% on Thursday to 85.54% on Friday ending the week almost where it ended the previous  week at 83.25%. Look at this VIX options volatility chart with the spike up to 123.95 on Thursday. 


"Anyone who isn't confused clearly doesn't understand the situation."
– Edward R. Murrow, an esteemed radio and television broadcaster

Big Data? In options, we are Big Data!
For a comprehensive review and reminder, check this out
Options: Observations of a Proprietary Trader  


Although overbought by many traditional measures, only the bravest contrarians would attempt to trade against this market as it anxiously awaits conclusive news of a China trade agreement. By last Thursday, weakness began appearing, but quickly vanished Friday. However, since a pullback remains overdue, perhaps some insurance makes sense although not actually hedging long positions. For example, consider an out-of-the money SPY put spread.

SPDR S&P 500 ETF (SPY) 311.79 up 2.85 points or +.92% for the week including Friday's 2.24 point advance.   

Unlike traditional insurance policies that charge premiums even when the risk is low or even nonexistent, option strategies can provide downside insurance only when it seems necessary. Like buying fire insurance only in the summer when hot winds are blowing, for example. With that thought in mind how about some insurance just in case the inevitable overdue pullback becomes something more serious.  

With a current Historical Volatility of 8.54 and 6.54 using the Parkinson's range method, the Implied Volatility Index Mean is 9.98 at .01 of its 52-week range; only on April 12 was it lower at 9.71. The implied volatility/historical volatility ratio using the range method is 1.54 so option prices by this measure are reasonable relative to the recent movement of the ETF.

Friday 3.1 million contracts traded with the 5-day average of 2.3 million contracts and with narrow bid/ask spreads, and open interest of 23.7 million. Big volume and good liquidity here.

Since the implied volatility of the at-the-money options for Dec 20 and Jan 17 were nearly equal the extra time premium seems worth the difference in price since it extends into January. With 60 days to expiration, consider this inexpensive insurance.


Using Friday's ask price for the buy and mid for the sell this long put spread debit was  1.75, less than 18% of the distance between the strike prices with 57 % of the long put price risk hedged by the short put. Set the SU (stop/unwind) at 50% or about .85 just in case it continues higher without pulling back.

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

For now, the S&P 500 Index and the SPDR S&P 500 ETF continues trending higher in narrow trading ranges reflecting a growing consensus it will continue. However, be aware of a potential "sell the news" event on any conclusive China trade agreement announcement whenever it comes.  


Based on VIX futures and option activity, it seems Friday's S&P 500 Index gap up at the open caught some position traders on the wrong side as they apparently scrambled to unwind Thursday's positions. As traditional indicators move more into overbought territory, the risk of an overdue pullback increases including a potential island top after Friday's gap up open.

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.

“The best volatility charts in the business.”

Next week another Market Review with a report on this week's SPY put spread idea.

Finding Previous Issues and Our Reader Response Request


All 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 our website homepage.

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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