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Today


IVolatility Trading Digest™


Volume 18 Issue 38
Contrarian Ideas Continued [Charts]

TOP 5 [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

To add comments or to ask questions please click here (or use the blog "COMMENTS" link at the very bottom of the blog page).

Additional details about iShares 20+ Treasury Bond ETF (TLT) and iShares China Large-Cap ETF (FXI), two contrarian ideas from last week, follow our customary weekly market review. Then, due to all the recent activity and excitement in Canadian agriculture, we include an idea to consider for those interested in a short position, using the ETFMG Alternative Harvest ETF (MJ).

Review NotesS&P 500 Index (SPX) 2929.67 advanced 24.69 points or +.85% for the week, after a gap up opening Thursday followed by a new intraday high of 2940.91 before making a key reversal Friday. A key reversal with an expanded trading range on high volume forecasts a lower low the next day. However, since the trading range Friday was narrow and while the consolidated volume for the 500 stocks in the index was 3.9 billion shares it was not higher than it was on June 15 at 3.5 billion , the last quarterly expiration of options and futures. Using SPY, the volume was 105.5 million shares Friday vs. 120.5 million on June 15. At best Friday made a weak key reversal day, but likely enough to retest the August 29 high at 2916.50 and then close the gap created by last Thursday's gap up opening.
In the event the key reversal is entirely ignored for the next few days, and SPX continues higher, making higher highs and higher lows it will only delay the retest of the August 29 high at 2916.50. For new long positions consider waiting for completion of the retest process.

VIXCBOE Volatility Index® (VIX) 11.68 declined .39 points or -3.23% 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 .24 points or +2.99%. This one year chart shows a steady decline from the February high above 30%, back into the range before last January's correction shown in the SPX line chart below.

table

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 October expiration, the day-weighted premium between October and November allocated 85% to October and 15% to November for a 23.48% premium, above the bullish green zone between 10% and 20%, thus confirming what the bulls already know.

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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.


Big Data? In options we are Big Data!

Intraday Historical Options Data Sale

More information or just fill in this data form to request a quote.


Contrarian Ideas Continued

Now for some additional details along with updates for two ideas, iShares 20+ Treasury Bond ETF (TLT) and iShares China Large-Cap ETF (FXI) from last week.

iShares 20+ Treasury Bond ETF (TLT) 117.10 down another 1.45 points or -1.22% for the week having closed below 117.50 last Tuesday, the SU (stop/unwind) suggested last week. According to that plan it would have been closed.

If the set up looked good before, it looks even better now since the Federal Reserve will likely confirm another interest rate hike Wednesday. Presuming "buy the rumor sell the news" remains valid again this time, as it has on some previous rate hikes, then interest rates will decline.

When attempting to find a bottom it's not unusual to take several attempts. The replacement trade idea follows the option details.

The current Historical Volatility is 7.61 and 4.76 using the Parkinson's range method, with an Implied Volatility Index Mean of 8.99 at .13 of its 52-week range. The implied volatility/historical volatility ratio using the range method is 1.89 so option prices are moderately high relative to the recent movement of the ETF. Using a long call spread limits and defines the risk to the cost of the spread while partly hedging the relatively high cost options . Friday’s option volume was 74,793 contracts with the 30-day average of 96,310 contracts with reasonable bid/ask spreads

 

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Using the ask price for the buy and mid for the sell, the call spread debit with limited and defined risk would be .48 about 24% of the distance between the strike prices with 34% of the long call price risk hedged by the short call. Use a close back below 116 as the SU (stop/unwind).

iShares China Large-Cap ETF (FXI) 43.12 up 1.89 or +4.58% last week. Since there is some risk that it may make another test of the bottom near 40, creating a potential Head & Shoulders bottom, this idea suggests going out to November options similar to the suggestion in Digest Issue 34 "Top 5 [Charts]" to allow some additional time.

As for the fundamental reason for last week's advance, it was reported that China is planning to cut tariffs on the majority of its imports as soon as next month. If so, perhaps this gesture could help resolve the trade and tariff issues with the US.

Option details,

The current Historical Volatility is 23.13 and 12.19 using the Parkinson's range method, with an Implied Volatility Index Mean of 20.77 at .35 of its 52-week range. The implied volatility/historical volatility ratio using the range method is 1.70 so option prices are rather high relative to the recent movement of the ETF.

 

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Using the ask price for the buy and mid for the sell the call spread debit with limited and defined risk would be .82 about 27% of the distance between the strike prices with 26% of the long call price risk hedged by the short call. Use a close back below 40 as the SU (stop/unwind).

As for options liquidity, Friday's volume was 293,700 contracts with the 30-day average of 234,120 contracts, as these charts from our Advanced Historical Data service show.

table

 

Next consider one going in the other direction.

ETFMG Alternative Harvest ETF (MJ) 39.50 higher by 3.73 points or +10.43% last week including a 3.51 point decline Friday on what appears as a reversal. This ETF holds many of the recently hot stocks with limited liquidity in the alternative Canadian agriculture sector.

Since some part of the recent advances could be due to short squeezes, their option prices are high with unusually wide bid/ask spreads making multi-leg options strategies impractical. However, using the ETF reduces the individual stock price risk and helps resolve the bid/ask price issue while creating a position that will benefit on the downside.

First, the option details,

The current Historical Volatility is 62.13 and 55.99 using the Parkinson's range method, with an Implied Volatility Index Mean of 73.87 at .61 of its 52-week range. The implied volatility/historical volatility ratio using the range method is 1.32 so option prices are reasonable relative to the recent movement of the ETF using this measure. A long put spread limits and defines the risk to the cost of the spread. Friday’s option volume was 10, 754 contracts with the 30-day average of 18,890 contracts with wider but somewhat reasonable bid/ask spreads considering the options volume.

table

Using the ask price for the buy and mid for the sell the put spread debit with limited and defined risk would be 1.77 about 35% of the distance between the strike prices with 32% of the long put price risk hedged by the short put. Use a close back above 42 as the SU (stop/unwind). Should it open lower, as suggested by Friday's trading, adjust the strike prices lower.

The spread suggestions above are based on the ask price for the buy and middle price for the sell presuming some price improvement is possible. Monday’s option prices will be somewhat different due to the time decay over the weekend and any price change

 

Strategy

While closely watching Friday's the potential key reversal by the S&P 500 Index, continue considering contrarian rotation prospects as they test their lows. Admittedly, a strategy that requires some patience and may require a few unsuccessful attempts.

Summary

Although the S&P 500 Index didn't encounter much resistance at the previous high and then easily broke out, making a gap up opening Thursday, Friday's potential key reversal could be the start of a retest as it attempts to close the gap. While waiting, consider long Treasury Bond and China big cap positions along with a downside idea in Canadian alternative agriculture.

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 our regular market review will include a WTI crude oil update from Commitment of Traders report.

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".