Volatility Trading Digest - More Volatility Kings
Two weeks ago, anticipating 3Q earnings reports that begin this week, we introduced Volatility Kings, our list of underlying stocks that in the past experienced significant increased options implied volatility going into their reporting dates. This week we add to the list those scheduled to report earnings in November.
We begin with a brief strategy comment followed by an update of our VIX futures premium.
S&P 500 Index (SPX)
The September employment report was just enough to keep the media supplied with new controversial material, but not enough to reverse the near term uptrend. The challenge now is the September 14 resistance high at 1474.51 where we suspect it will encounter some selling.
In the absence of negative news from Europe, that could upset the best-laid plans of mice and men, chances are the markets will now start focusing attention on 3Q earnings reports.
Then, between now and year-end we continue to think another important influence will be underinvested mutual and hedge funds chasing performance since they risk the loss of assets under management if their year-end performance lags the S&P 500 Index. With some additional help from declining crude oil prices, which will help the important transportation sector, we think the S&P 500 Index could reach 1500 by the end of the year.
S&P 500 Index Implied Volatility (IVXM)
At the end of last week, the Implied Volatility Index Mean had declined from 12.89 to 11.96, while the CBOE Volatility Index® (VIX) declined from 15.73 to 14.33.
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.
The day weighting applied 35% to October and 65% to November resulting in the average premium of 2.38 or 16.62% shown above. Our alternative volume weighting between October and November is a 15.00 % premium. Last week the day-weighted premium was 8.35% and the volume weighted was 8.63%. Fridays' volume was 120,720 contracts with an open interest of 407,720 contracts compared to 103,032 and 384,291 contracts the Friday before. Open interest peaked at 429,193 contracts on September 14, just before the September expiration as contracts rolled over.
For this short-term indicator the premium to the cash is a SPX sell signal suggesting professional expectations for the cash to increase toward the futures price. In the past premiums in excess of 20%, have usually preceded corrections, although not a precise timing tool it appears to be a good way to measure professional hedging sentiment, which is now back into the normal range.
November Volatility Kings
Est Date needs verification since they vary depending upon the source
IVXM is Friday's Implied Volatility Index Mean
IVXM Est is the estimated Implied Volatility Index Mean it could reach by the next report date using a volatility chart.
IV Est/IV is the ratio between the current implied volatility and the expected implied volatility at the report date.
As we explained two weeks ago, straddles or strangles are two alternatives to use going into the reporting dates with plans to close them just before the report. The estimated implied volatility at the report date is a guideline based upon the most recent reports and may not be relevant in the current quarter. The actual reporting dates need scrutiny since they vary by the data source and are subject to change by the reporting companies.
Implied volatility reflects uncertainty or the width of the possible stock price distribution. While these companies have experienced increasing implied volatility when they previously reported, the level of uncertainty for the current report may not be comparable. Indeed some companies are on the list one quarter and not the next while others remain quarter after quarter.
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