Options Trading & Analysis

Volatility Trading Digest - Seeking Relative Strength


Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.

Last week speculated the reaction last Wednesday’s FOMC meeting announcement on interest rate hikes could be another "Buy the rumor sell the news" event similar to the one after the nonfarm payroll report on March 10. That was the market reaction. The US Dollar Index and interest rates declined after the FED hiked the Fed Funds target rate 25 basis points while confirming expectations only two more rate hikes are likely this year making last week’s SPDR S&P 500 ETF (SPY) put spread hedge suggestion unnecessary. After brief market update and commentary, we have the results for one of the best sectors using our trustworthy Stock Sentiment Ranker set to scan Health Care Select Sector SPDR (XLV) stocks.

Market Review

S&P 500 Index (SPX) gained 5.65 points or +.24% for the week after testing both support at 2350 and the upward sloping trendline, USTL from the November 4 low. While 2350 remains the first support, the next is down at 2300 and then 2275 going all the way back to December 13.

CBOE Volatility Index® (VIX) declined .38 or -3.26% for the week while the comparable IVolatility implied volatility index mean, IVXM 8.05 declined .81 or -9.14%.

VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second months.

With 2 trading days until the March expiration, the day- weighted premium between March and April allocated 8% to March and 92% to April for a 16.67 % premium as the VIX declined slightly but less than the declining front month futures contracts.

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Market Strategy

Here are updates for two hedge indicators currently in focus. Although the US Dollar Index and interest rates declined after the Fed announcement these two indicators imply consider hedging activity continues. First updating the S&P 500 Index (SPX) put open interest that been trending higher. The Put/Call chart for the last two years shows the put open interest did not decline after the Fed announcement as it did in December instead it continued rising.

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While put open interest always exceeds call open interest, spikes higher correspond with periods of increased uncertainty. Now put open interest remains high at more than 10 million contracts with total open interest in excess of 16 million contracts.

Next updating the total options VIX futures open interest suggests considerable hedging activity persists.

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Friday’s open interest was 11.6 million contacts with the average for the week at 11.2 million shown above.

Perhaps these charts reflect an increasing risk perception due to a changing investment landscape from one of extreme monetary accommodation to a tighter monetary policy.

Relative Strength

Focusing once again on the continuing challenge of keeping up with sector rotation an updated relative strength review confirmed health care as one of the better sectors despite all the recent media attention relating to the new health care proposal underway.

With early advancing "Trump Stocks" now in retreat its seems like the current strength has more to do with rotation trading than it does with expectations of improving fundamentals or the sector will not be as disadvantaged as initially presumed.

Following the methodology used previously we again fired up our Stock Sentiment Ranker. This time for the Stock list, we created a new group in My Favorites from the stocks in the Health Care Select Sector SPDR (XLV) to identify the top twenty set to scan for stock prices greater than 5 with market capitalizations greater than 1 billion with options volume greater than 2000. The other settings were any volatility, high Call/Put ratio, and high exponential moving average EMA, relative strength RSI and with positive Chaikin Money Flow, CMF. Results:

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Set to show 20 only 9 qualified using these criteria and none have a high bullish rank but the sector is trending higher relative to the SPX.

Crude Oil COT Brief

Crude OilWTI Light Sweet Crude Oil (CL) basis April futures recovered .29 for the week in what appers to be the start of a countertrend consolidation as a pattern begins developing. It could evolve into a continuation down or an unusual reversal pattern.

 

Summary

The Fed interest rate hike announcement created another "Buy the rumor sell the news" event as the US Dollar Index and interest rates declined but some hedging positions remained in place reflecting a perception of increased risk due to a changing investment landscape from one of extreme monetary accommodation to a tighter monetary policy. For equities, sector rotation continues to be more important than fundamentals.


About Ivolatility


IVolatility.com is based upon the concept of providing affordable options analytics over the internet. We provide options volatility data arranged and interpreted in a manner that creates predictive qualities. Over the years we evolved into the premier provider of analytics, tools and data all delivered over the internet. IVolatility.com clients are represented in all segments of the global derivatives market. More than half of the top 30 options market makers and US options brokers use IVolatility.com financial data services. In addition, IVolatility.com clients include 3 out of 5 of the largest US banking institutions and more than half of the top 50 investment banks. We offer solutions at every level, from beginner to expert professionals at institutional firms and hedge funds.

Author's web site: http://www.ivolatility.com


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The Options News Rundown

Your source for the most important news and information from the world of options.

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The Options Insider Radio Network

All of our radio programs in one convenient place.

The Options Insider Radio Network

Options Insider Radio

The original options podcast. Features interviews with leading options figures.

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The Long And Short Of Futures Options

Your source for futures options information.

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The Advisor's Option

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Options Boot Camp

Get into peak options trading shape.

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Options Insider Special Events

Compelling panel & special event recordings from the options world.

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OIC's Wide World of Options

A dynamic mix of current events, investor resources, & strategy insights.

OIC's Wide World of Options

Trading Tech Talk

We break down all the amazing technology that takes your trades from the click of a mouse to the clearinghouse.

Trading Tech Talk

Options Playbook Radio

Break down cutting-edge options strategies and learn how to incorporate them into your portfolio

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Options Oddities

We track all the unusual options trading activity on Options Oddities.

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