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Trading the $VIX Futures Term Structure (Preview)

By Lawrence G. McMillan

The CBOE introduced the Volatility Index ($VIX) in 1993. The calculation of $VIX has changed a couple of times over the years, and due to the complexity of those calculations, $VIX itself cannot be traded.  However, in 2004, $VIX futures were listed, and in 2006, $VIX options were listed.  $VIX futures are the underlying instrument for all of the Volatility ETN’s and ETF’s that exist today (VXX, for example).

The Seasonality of Volatility (Preview)

By Lawrence G. McMillan

There is a seasonality to volatility that has persisted over the years. Not every year is the same, of course, but the general pattern is similar. This can sometimes be useful in helping one determine whether to expect increasing or decreasing volatility during the life of positions that are being established.

The Under-Appreciated Weekly $VIX Futures and Options (Preview)

By Lawrence G. McMillan

Many volatility traders – we are among them – complained about the lack of response by volatility derivatives during last fall’s market decline.  That was especially true in the downward thrust in December.  $VIX itself managed to put together a decent move, as it rose from 16 in early December to 36 on Christmas Eve.  But one cannot trade $VIX; only the $VIX derivatives are available for trading.  

The Specter of 2001 Still Haunts This Market (Preview)

By Lawrence G. McMillan

We have written repeatedly about the similarities between the markets of late 2000 and early 2001, ascompared to late 2018 and early 2019. Those comparisons are still valid.

Some Statistics on Extraordinary Breadth (Preview)

By Lawrence G. McMillan

Last Friday (January 18th) the “stocks only” breadth oscillator stood at +854.04 – the fourth highest reading of all-time. This is extremely overbought, but is not a sell signal (“overbought does not mean sell”). In fact, in the past, extremely overbought readings have often led to much stronger markets in the short term.

Some Thoughts on Volatility Derivatives (Preview)

By Lawrence G. McMillan

Last year (2018) was a very interesting year in a number of respects. One of those was the behavior of volatility and especially the behavior of volatility derivatives. Since one cannot trade $VIX but must instead trade one of the listed products – $VIX futures, Volatility ETN’s or ETF’s, or options on those instruments – there are some nuances involved. Since all of those instruments are based on $VIX futures1 , that is where we’ll concentrate this discussion.

Determining The Trend of Volatility (Preview)

By Lawrence G. McMillan

We often talk about how the stock market usually trends in the opposite direction from volatility ($VIX). But how do we really measure the trend of $VIX? Often, we use the 20-day moving average, but that is a very short-term moving average that changes trend easily. In a longer-term bull or bear market, we would not want to swing in and out of a “core” position when we are trying to stick with the trend.

Seasonal Trading Bonanza (Preview)

By Lawrence G. McMillan

If you enjoy seasonal trading patterns, they abound from the end of October (the “October Seasonal,” which was strong this year), through the beginning of the new year (the “Santa Claus” rally). Over the years, we have combined three different late-year seasonal patterns into one trade.

The three patterns are as follows:

November Lows Entering Bear Markets (Preview)

By Lawrence G. McMillan

Several times, we have mentioned the fact that in a bear market, there is usually selling in October, followed by a strong October Seasonal rally, and then a failure of that rally in early November. If it is truly a bear market, new lows are made in November or early December.

Do Big Bullish Moves Portend Further Strength? (Preview)

By Lawrence G. McMillan

On Wednesday, $SPX made a huge move to the upside, rising 58.44 points in a massive display of buy programs that lasted right into the closing bell. Is this the way the market behaves when it’s ready to launch higher, or it is a sign of merely oversold buying which leads to lower prices shortly thereafter? That was the 9 th largest point move in history. Of the other nine in the “top ten” of such moves, every single one retraced that gain – gave it all back – in a fairly short period of time. I was a bit amazed to see that, but if you think about it, the only time the market can rise like that is in response to a very oversold condition – which means the market was already in a downtrend to begin with. So, these large moves have proven to be only temporarily bullish.

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