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Today


IVolatility Trading Digest™


Volume 19 Issue 30
Earnings Playbook [Charts]

Earnings Playbook [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Upside momentum returned with S&P 500 Index reporting about half completed.  Companies with better than expected reports lead the disappointers with increasing signs of rotation into secular growth from cyclical growth. This week it will be more earnings, China trade negation news from Shanghai, and the Fed's interest rate announcement. Option and futures indicators remain bullish as detailed in the Market Review including updates for the WTI Crude Oil Commitments of Traders Report and the Double Barrel Indicator.      

Review NotesS&P 500 Index (SPX) 3025.86 advanced 49.25 points or +1.65 % last week making new closing and intraday highs on both Wednesday and Friday. With considerable support at 2950 on any pullback, the 50-day moving average crosses down at 2915.49 as the uptrend continues.  

VIXCBOE Volatility Index® (VIX) 12.16 dropped 2.29 points or -15.85% 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 1.68 points or -14.63% ending at 9.80.  Now back near the 10% level previously associated with uptrends. The IVXM and SPX charts follow.

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 August expiration, the day-weighted premium between August and September allocated 68% to August and 32% to September for a 22.54% premium, well into the bullish green zone, vs. 10.70% premium for the week ending July19.   

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 August 21, 2019.     

table

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  


The Earnings Playbook

Last week Digest Issue 29 "Hedging Strategies" made the case for hedging market risk in the event lowered earnings expectations disappoint.  However, by Tuesday it was clear the usual earnings playbook that lowers expectations before reporting begins, only to be beaten and push stock prices higher, was alive and well underway. In addition, rotation into secular growth stocks continued after better than expected reports from several leading consumer product companies.   

WTI Crude Oil (CL) 56.20 basis September futures advanced .44 last week.  The  Disaggregated Commitments of Traders - Options and Futures Combined report as of July 23 shows "Managed Money,” the group that best correlates with crude oil price changes and arguably the most important, increased their shorts and slightly reduced their longs, selling to "Commercials" directly and through "Swaps" as August futures expired. This short position chart shows the changes as "Managed Money" turned bearish again.

table

Seasonally it appears the peak in prices occurred on April 23-25 reaching a high of 65.92 basis September futures.  After declining to 50.91 on June 5, WTI now appears trading in a range between 51 and 61, with normal declining inventory in the summer, offset by reduced demand forecasts.  Checking the futures curves, WTI just returned to contango with September 20 futures 1% higher than September 19 indicating supplies are adequate, while Brent remains in backwardation of 4.36% with September 20 futures lower than September 19 indicating a tighter market.

Strategy

Review NotesLast week it was about earnings reports, second quarter GDP, and expectations for an interest rate cut this week, all supporting the bullish view as options and futures indicators show, along with iShares iBoxx $ High Yield Corporate Bond ETF (HYG) 87.17 introduced in Digest Issue 28 "Double Barrel Indicator" as a timing gauge to use for increasing hedge positions. Now above the last pivot at 86.50 and well above the initially defined trigger at 86, it continues trending up with the S&P 500 Index.  Although the transports and small capitalization stocks are not confirming new highs, until this indicator turns lower, delay adding hedges.

Summary

The earnings reporting game continues as better than expected reports push stocks higher, reducing the need to hedge against "selling the news." The S&P 500 Index made new closing and intraday highs twice last week supported by expectations for an interest rate cut announcement along with more favorable earning reports. While some "sell the news" risks remains after the interest rate announcement, until the indicators turn lower, go with the bulls.

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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 will include another regular Market Review focused on earnings reports and indicator updates. 

Finding Previous Issues and Our Reader Response Request

PreviousIssues

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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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".