Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
This week the market review includes and updated chart showing the convergence of the long and short trendlines and the VIX futures premium along with VIX options data along with updates for selected other “Foremost Indicators” including the US Dollar Index, iShares Transportation Average Index, WTI Light Sweet Crude Oil, and Market Breadth.
S&P 500 Index (SPX) 2091.58 up 10.85 or +.52% for the week, closing on the upward sloping trendline from the February 11 double bottom low after exceeding the minimum measuring objective at 2084. The six-month chart below shows the convergence of the long-term downward sloping trendline, DSTL from the May 20, 2015 at 2,134.71 and the current active upward sloping trendline, USTL from February 11?suggesting the trendline overhead resistance has yet to be overcome.
The downward sloping trendline, revised from previous charts begins at the May 20, 2015 high with the second point coming sixty-two days later on July 20, 2015 producing a trendline with a negative .03 slope per day crossing Friday at 2124.35 about 1.57% higher.
Friday?s close was on the current USTL and unless it gets some help from earnings reports this week it could close lower and begin a pull back to support at 2000 or make another somewhat lower pivot before making another run at the overhead resistance.
CBOE Volatility Index? (VIX) 13.22 closed down .40 for the week after making an intraday low of 12.50 Wednesday approaching the 52-week low of 11.95 made July 17, 2015. Based on real-time prices of options on the S&P 500? Index, VIX reflects investors’ consensus view of future (30-day) expected stock market volatility.
The table below shows the VIX cash compared to the next two futures contracts as well as our calculation of Larry McMillan?s day-weighted average between the first and second months.
With 17 trading days until the May monthly expiration, the day weighting applied 85% to May and 15& to June for a 24.48 % premium shown above. Our alternative volume-weighted average between May and June regularly found in the Options Data Analysis section on our homepage was slightly higher at 26.95%
While day-to-day VIX changes offer little forecasting insight following the VIX futures premium helps since it measures expectations of tactical professional traders and money managers using VIX futures and options for hedging long portfolio risk.
The premium measures the amount the futures trade above or below the cash VIX at expiration when they converge. Depending on the time to expiration premiums for normal term structures during uptrends are 10% to 20% and decline when the VIX advances faster than the nearest future as the market declines and/or the futures contract nears expiration. Premiums less than 10% suggest caution and negative premiums indicate oversold conditions. Last week the premium was 14.46% Tuesday, the last trading day for April, then jumped up to 19.00% Wednesday when May became the new front month although the S&P 500 Index only increased 1.60 points for the day.
VIX Options
With a current 30-day Historical Volatility of 96.12 and 82.83 using Parkinson?s range method,the table below shows the Implied Volatility (IV) of the at-the-money VIX calls and puts using the futures prices based upon Friday?s closing option mid prices along with their respective month?s futures prices, since the options are priced from the tradable futures.
Compared to the current range historical volatility of 86.83 May at-the-money options are about right while the June options are inexpensive relative to recent movement of the VIX futures.