A Heads-up SPX Warning from RSI Divergence

Uncategorized Aug 06, 2019

By Steve Lentz

Today is August 5th, 2019, and could very well be the initial day of a significant market correction.  For the last year and a half, each successive market high has occurred with less and less momentum as the one before it.  This fading momentum often foreshadows serious market corrections.

The RSI indicator was developed by Wells Wilder decades ago and is available in most all charting programs.  Divergences of the RSI from price is considered a leading indicator and not a lagging one like moving averages.  This is a big advantage for index traders looking for a “heads-up”.

Example from Crash of 1987

As shown above in the monthly SPX chart, the market collapse of 1987 was preceded by index highs that corresponded to lower high values of the RSI (14).  This relationship is called divergence and it lasted several months in this case.  It reflected the fact that the final push upward had less momentum than the one before it in...

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Wait for a Down Day?

Uncategorized Apr 10, 2019

By Steve Lentz

Some options trading educators have said to always “wait for a down day” before placing an index condor or butterfly position.  The theory goes that, by doing so, implied volatility will rise and then give the trader more of a credit and therefore more adjustment leeway and also more profits.  Let’s use Volatility Edge Analysis to test this idea.


Figure 1   SPX with marked Down Days and the VIX underneath

 If you look carefully at Figure 1, you will see that on most marked Down Days (close is lower then previous day’s close), the VIX did indeed rise.  This should come as no surprise to even an intermediate index options trader.  A down close brings more anxiety over the possibility of another down close and perhaps a bearish period which could get volatile very quickly.  The options market reflects this concern (fear) in the form of rising time premium across the board.

Figure 2   ...

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The SPX Vertical Skew

Uncategorized Apr 03, 2019

By Steve Lentz

For years now, options traders and market observers have used the VIX as a measure of expected volatility.  The rules of thumb may vary, but usually a line-in-the-sand exists around 15 or so.  When the VIX is above 15, watch out for the bears.  When it’s below 15, all systems are a “go” for the bulls.  You get the picture.

But, when evaluating expected volatility, SPX Butterfly and Condor traders need more than just a single VIX figure.  Why?  Because the SPX options have a very interesting characteristic.

The put options imply a different expected volatility than the call options.

Take a look at the matrix of options below

The MIV for each contract represents the implied volatility of the mid-point between the bid and ask prices.

Notice how the calls have lower and lower MIVs as they get further out of the money.  Now see how the put MIVs get higher and higher as they drift further out of the money.  These...

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