« February 2018 »

IVolatility Trading Digest™

Volume 18 Issue 6
Unlikely Top [Charts]

Unlikely Top [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Once again the January Barometer data table update has been deferred for more pressing issues as equities continued to decline. Some claim the high for this bull market was reached January 26 before the employment report on February 2 that turned a modest pull back into something more serious. The market review below, including volatility charts, concludes that rushing to judgment about the market top may be premature. Then some high implied volatility trade suggestion thoughts.

Review NotesS&P 500 Index (SPX) 2619.55 continued lower declining 142.58 points or -5.16% last week. Although previous support levels were not very useful last week, there is a band of support between 2520 and 2500 that may end the pullback while the 50-day moving average along with the operative short-term upward sloping trendline, USTL are both well above at 2719.

Most market commentary seems to agree the pullback accelerated on Friday February 2, after the January employment report, triggered by the 10-Year Treasury interest yield jumping up to 2.84%. Suddenly equities have become more sensitive to Federal Reserve asset sales since doubling to $20 billion per month in January and one analyst claims it was all done in the last week of the month creating a liquidity event.

Based on historical records tops are a process not a single point so odds are it may take several weeks or more to complete having just begun. Tops are typically identified by Head & Shoulders patterns or Double Tops as previous highs need challenging before it's finally over. The presumption that it could be different this time defies the way large active markets behave. Even then, from an Elliot Wave perspective the current decline will just be a correction to the long uptrend that began in March 2009. Here is an updated weekly semi-log chart from the low with channels and wave counts. From this perspective a 5 wave top has yet to be reached. Compared to the chart in Digest Issue 47 "Bulls Still in Charge 2.0 [Charts]" the current decline puts it back at the center of the channel where it was last November, so it takes a further decline to test the upward sloping trendline of the lower channel.


VIXCBOE Volatility Index® (VIX) closed last Monday at 37.32, declined Tuesday and Wednesday them jumped up again Thursday before closing the week at 29.06 up 11.75 points or +67.88%. 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 8.33 points or + 60.94% to close at 22.00 after reaching 31.81 last Monday.


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 just 2 trading days until February expiration, the day-weighted premium between February and March allocated 10% February and 90% to March for a -27.41% premium, below the bottom of the green zone between 10% to 30%.

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.


The entire VIX futures curve remains below the VIX suggesting expectations are that the VIX will not stay at the current higher level very much longer. Tuesday will be the last day for trading February futures when they settle Wednesday at the VIX level. Since the futures are currently lower they will rise up to the VIX should it also rise Monday and Tuesday offering some edge for the long iPath®S&P 500® VIX Short-Term FuturesTM ETN (VXX) 50.03 that could quickly vanish when the VIX turns lower. Follow our end-of- day volume weighted premium version on our website home page.

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Here are some indicators to watch this week.

VIX10-Year Treasury Note Yield (TNX) and SPX

CBOE Volatility Index® (VIX) and VIX Futures Premium.

VIX -VXST Spread (VIX minus the short-term 9 day VIX) now negative. Gives a buy signal when it turns positive.

ProShares Short VIX Short-Term Futures ETF (SVXY) 10.86 will regain the contango edge once the VIX closes back below the futures.

iShares iBoxx $ High Yield Corporate Bond ETF (HYG) 84.95. A reversal gives a buy signal.

NYSE McClellan Summation Index (Ratio Adjusted) Index -54.79. Lagging breadth indicator useful to confirm a turn higher.

Volatility Strategy Ideas

VIXIn a high implied volatility environment when it's expected to decline consider selling or credit spread strategies. Sell an out-of- the money call and buy another farther OTM since the risk is to the upside. When the stock or ETF appears to be making a bottom around well defined support do same using puts where the risk is to the downside. For those in the middle of a recent range consider doing both sides creating an Iron Condor. While it involves more commission cost Iron Condors have an advantage since at expiration the underlying can't be at both extremes. Remember to check for the next earnings report date.

Here are two ideas without near term earnings reporting risk, but with same sector rotation risk.


Three with added near term reporting risk listed in upcoming reporting date order.


IVXM was Friday's Implied Volatility Index, < 30 IVXM one month ago, IV/PHV was the Implied Volatility/Range Historical Volatility ratio. For the three with upcoming earnings reports some portion of the increased implied volatility is reporting related.


Rapidly rising 10-Year Treasury Note yield after the employment report Friday February 2 accelerated a pullback from the January 26 high that was exaggerated as the VIX quickly advanced triggering short covering in VIX futures followed by further equity selling in all sectors. Some stability could be possible and perhaps likely after February VIX futures expire Wednesday. While currently oversold there is no reason to begin buying until the indicators give clear signals that the pull back has ended. In the meanwhile look for option trades that benefit from declining implied volatility.

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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.

"The best volatility charts in the business."

Next week we will suggest trades from our ranker and scanners and perhaps update the January Barometer unless sidetracked once again by other more important developments.

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



I am looking for vstoxx volatitility on regular basis, as well as futuree stoxx (eurex) please send me link, instructions and conditions , for three months trials.. rgds Gabri

Posted by gabri on February 16, 2018 at 12:55 PM EST

Gabri, Thanks for your interest in volatility. Since your request is not clear please e-mail support-AT-IVolatility-DOT-com so we can get some additional information. Thanks, Jack

Posted by Jack Walker ( on February 20, 2018 at 02:07 PM EST

Permalink Comments [2]

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.

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