« May 2020 »

IVolatility Trading Digest™

Volume 20 Issue 18
Rising Wedge Review [Charts]

Rising Wedge Review [Charts]- IVolatility Trading Digest™

COVID-19 caused unprecedented global demand destruction continues while the rebounding S&P 500 Index advanced until last Thursday and then gapped open lower Friday, potentially activating a redrawn bearish Rising Wedge. The Market Review includes an updated chart followed by a crude oil related trade idea for North American Tankers Ltd. (NAT).

Review NotesS&P 500 Index (SPX) 2830.71 slid 6.03 points or -.21% last week after declining Thursday and then headed for the declining 50-day Moving Average at 2758.52 shown by the red line in chart below. Friday's gap open lower set off a new potential Rising Wedge shown below as Rising Wedge V2.


The impulse wave down to 2192 on March 23, marked with a 3 label (Elliott 3-wave). On the rebound, it created two possible Rising Wedges, the first after reaching the 50% retracement level and a second gap open lower on April 21, below the dotted upward sloping trendline. After the first potential Rising Wedge, it reversed and climbed up to 2939.51 (small blue arrow) last Wednesday April 29, closing just above the Fibonacci 62% level at 2937, marked with an Elliott 4-wave label. Friday's gap open lower, the third for this rebound, set off another potential Rising Wedge, with a measuring objective below the initial low on March 23.

Review NotesCBOE Volatility Index® (VIX) 37.19 added 1.26 points or +3.51% 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 1.31 points or +4.25%, ending at 32.14%

The spike up to 77.15% on Monday March 16, the day SPX declined 324.89 points, will likely mark the top for this market decline. Considering the COVID-19 demand destruction uncertainty it may stay somewhat elevated for some time.


VIX Futures Premium

This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts as of last Friday.

With 12 trading days until May expiration, the day-weighted premium between May and June allocated 48% to May and 52% to June for a premium of -1.39%, back into the bearish red zone vs.1.73% for the week ending April 24

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 the next monthly futures expiration on Wednesday May 20.

The relationship of the futures curve to the VIX, as measured by the premium, makes a good real-time sentiment indicator.


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  

Crude Oil Production Opportunity

For ideas go to the top 5 stocks based on IV Index Mean vs. 30D HV located in the Rankers and Scanner section on our home page at the right side.

The first section lists the Top and bottom 5 stocks based on IV Index Mean vs. 30D HV. The second section shows the "Top and bottom 5 stocks within IV Index Mean Range." Friday's top two,


Here are the details and a trade idea from the second one in the top 5 within the Index Mean Range.

North American Tankers Ltd. (NAT) 6.12 gained .27 points or +4.62% for the week after reaching as highs as 9.00 on Tuesday April 28. For the week, trading volume exceeded more than 277 million shares.

The volatility and price charts:


First some information about this special situation. When crude oil supply greatly exceeds demand near-term futures trade below the deferred months, creating a condition called contango. When the differential exceeds transportation, storage and related costs traders attempt to earn the spread by buying cash crude oil and selling futures at a higher price, taking delivery and storing it for delivery against their short futures contracts.

Increasing tanker demand to use for storage, as traditional land based storage at fills up, increases demand and bids up daily charter rates. The Baltic Exchange reported VLCC rates peaked at $250,000 a day on March 16. Since then rates declined to around $100,000 a day as of last Thursday, still very high considering daily tanker operating cost are about $9,000 a day.

For as long as it lasts, this represents an unusual opportunity for tanker operators with available capacity.

These Bloomberg quotes help explain.

 “The second quarter of 2020 now looks like it will be one of the greatest quarters in history for large crude carriers, and while there will be a hangover at some point, this party is totally worth it,” Eirik Haavaldsen, head of research at Pareto Securities, told Financial Times last week.

"Frontline Ltd. boss Robert Hvide Macleod says ships will keep storing and the amount of oil on the water -- up 18% this year by his reckoning -- will keep on rising even when the output cuts do start to result in fewer cargoes."

The play here is a bet that Brent crude oil contango will last for more than a few months resulting in considerably higher margins for the tanker companies including NAT, operating 23 Suezmax tankers and scheduled to report 1Q earnings on May 18 with a consensus estimate of .25 per share. As of February 18, " So far in 1Q2020 about 70% of the trading days of our 23 Suezmax units have been booked at an average TCE of $53,000 per day per ship. ... Our operating costs are about $8,000 per day per ship."

According to Capital Link as of May 1, Suezmax Average Earnings were $68,971 per day down from $84,336 per day the previous week.

Consider this risk reversal with a call spread, also called a "mambo combo."

With a current Historical Volatility of 147.67 138.58 using the Parkinson's range method, with an Implied Volatility Index Mean of 155.12 at .80 its 52-week range, the implied volatility/historical volatility ratio using the range method is 1.12 so option prices are somewhat inexpensive compared to the recent movement of the stock . Friday’s option volume was 46,169 contracts traded compared to the 5-day average volume of 126,150 contracts with reasonable bid/ask spreads.


On Friday, the net credit was .40 (.85 -.50 -.75). Use a close below 5 as the SU (stop/unwind) or be prepared to receive the stock on June 19.


Since the second potential Rising Wedge shown above appears underway, maintaining a SPY out-of-the-money put spread will provide some insurance with defined and limited cost. Since SPX stalled and turned lower at the 62% Fibonacci ratio a further decline will form an Elliott 4-wave, followed by a slower decline into a 5-wave bottom. Bear markets typically have three stages: sharp impulse 3-wave down, a reflexive rebound, then a fundamental downtrend.


Last Friday's gap open lower set off a second potential Rising Wedge after the S&P 500 Index retraced up to the 62% Fibonacci ratio before turning lower. Should it continue lower, an Elliott 4-wave would become evident followed by a decline to retest the initial impulse decline at 2192. In the meanwhile, excess crude oil production resulted in a futures market contango creating an opportunity for traders to buy and store crude oil for future delivery along with a profitable storage opportunity for crude oil tanker companies.

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 our Market Review will continue reporting on the progress of the potential Rising Wedge.

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

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).




Comments are closed for this entry.

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".