« November 2019 »

IVolatility Trading Digest™

Volume 19 Issue 44
AMD Volatility Trade Report [Charts]

AMD Volatility Trade Report [Charts] - IVolatility Trading Digest™

This week follows up on bullish semiconductor sector activity, reporting on the results of two Advanced Micro Devices (AMD) volatility trades suggested in Digest Issue 43"Semiconductor Sector Brightens Outlook [Charts]". First, our regular Market Review showing a new upward sloping trendline for the S&P 500 Index followed by an overdue WTI Crude Oil Commitment of Traders report update.

Review NotesS&P 500 Index (SPX) 3066.91 advanced another 44.36 points or +1.47% last week closing at a new high just below a new intraday high of 3066.95. Applying the rules for drawing trendlines, the closing above the July 26 high at 3027.98 formed a new operative upward sloping trendline, USTL from the December 26 low, shown in the chart below.


Now in overbought territory, on a pullback, look for a test of the July 26 high around 3028 and support from the 50-day Moving Average (blue line) and the open gap, followed by the new USTL around 2895. However, the ability to close above the previous high and form a new upward sloping trendline changes the question from can it breakout– to how high can it go before pulling back to test the breakout? For now, as John Bercow, the Speaker of the House of Commons of the United Kingdom might say "The Bulls Have It."

Review NotesCBOE Volatility Index® (VIX) 12.30 continued lower declining .35 points or -2.77% 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, declined .58 points or -5.53% to end the week at 9.90% vs. 10.48%, for the week ending October 25, shown in the chart below, and now at the lower end of the range prompting thoughts of mean regression, perhaps near 15.

However, based on this chart, it could remain near the low end of the range for several months like March and April or July. If the S&P Index continues higher reflecting a possible China trade agreement along with ample liquidity provided by the Federal Reserve it will likely remain at a lower level until sentiment changes or something unforeseen goes wrong.


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 November expiration, the day-weighted premium between November and December allocated 48% to November and 52% December for a premium of 25.49% well above the top of the green zone versus last week ending October 25 at 25.48%. Although the entire futures curve declined slightly more than the VIX, the premium was greater than 20% all last week.


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. Typically, a normal upward sloping futures premium curve above VIX by 10% - 20% correlates well with a rising SPX.

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.

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

WTI Crude Oil (CL) 55.51 cash on October 29, up 1.04 for the week in a seasonally defined range between the December 24 low of 42.68 and April 23 high at 66.32 marked with the green arrows.


The Disaggregated Commitments of Traders - Options and Futures Combined report as of October 29 shows "Managed Money,” the group that best correlates with crude oil price changes began reducing their short position after reaching an extreme. Although they also slightly reduced their long position, closing more shorts turned the net long position up after reaching an extreme low.


Perhaps optimism about a China trade agreement along with a better than expected China manufacturing PMI along with other improving fundamentals caused Managed Money to conclude they pushed the price as low as possible, at least for now.

However, this chart showing declining open interest suggests speculators are losing interest while producers have fewer reasons to hedge forward production.


AMD Volatility Trade Report

Advanced Micro Devices (AMD) 34.89 up 2.18 points or +6.66% for the week after reporting earnings last Tuesday October 29.

Last week Digest Issue 43"Semiconductor Sector Brightens Outlook [Charts]" included two volatility trade ideas to consider before the report.

The first, a long calendar spread (long a December 20 35 call and short a weekly November 1 35 call). At the close Tuesday, before the report, the December 35 call was 1.74 with an implied volatility of 49.80 while the November 35 call was .86 with an implied volatility of 135.13 for a spread debit of .88.

Closing the spread Wednesday, one day later the December 35 call was 1.17 and the November 35 call was .05 for a credit of 1.12, resulting in a net gain of .24.

The second, an Iron Condor.

First leg: short a November 1 36.50/35 call spread (long the 36.50 call with an implied volatility of 130.28 and short the 35 call with an implied volatility of 135.13) for a .40 credit.

Second leg: short a November 1 28.5/30 put spread (long 28.5 put with an implied volatility of 134.51 and short the 30 put with an implied volatility of 138.14) for a .29 credit.

Next day the call spread cost .02 to close for a .38 gain while and the put spread cost .03 to close for a .26 gain. Total one-day gain of .64.

Result: the Iron Condor gained more than two times the Calendar Spread.

The indicators suggesting AMD would not move in either direction enough to cause losses include the implied volatility index, IVXM mean (orange line) declining into the report date. See the volatility chart at the close last Tuesday before the report.


The implied volatility index mean closed at 56.34. Compared to the historical volatility, also called the realized volatility, using the range method or IV/PHV, the ratio was 1.86 well under the caution level guidance of greater than two.

This next day volatility chart shows the implied volatility index, IXVM (orange line at the right margin at the green arrow) declining 18.46 to 37.88.


In terms of return on investment, the Iron Condor only required margin for the leg with most risk and closed after only one day, with the opportunity to close it earlier in the day. Alternatively, the calendar spread offered the opportunity to hold onto the long December 35 call that ended Friday at 1.89 representing a 1.01 gain by taking additional direction risk.

While they don't always work out this well, there are many trade ideas like this in our quarterly Volatility Kings™ list.


With the S&P 500 Index breaking out to the upside and creating a new upward sloping trendline eliminates the need to hedge long positions for now. Supported by improving fundamentals including a monetary policy the Fed calls accommodative, along with a better than expected employment report for October along with encouraging comments about a partial trade deal with China, all suggest it can continue somewhat higher, presuming no unexpected surprises, of course.


A breakout to the upside by the S&P 500 Index accompanied by favorable indications from the futures and options accompanied by a somewhat more supporting crude oil futures positioning suggests firming energy demand and more potential upside going into year-end. Last week's earnings report by Advanced Micro Devices (AMD) made a good case study for declining implied volatility strategies. For now, most indicators including the seasonal tendency support higher prices.

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 including another report on the S&P 500 Index's new upward sloping trendline.

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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