Chart of The Day
MSCI EAFE Index (EFA US Equity) vs. EuroSTOXX Volatility Index (V2X Index - data equals 30day vols 100% moneyness)  
Click to Enlarge

SOMETHING FOR OPTIONS TRADERS 

 

This is the weekly chart (but it works just as well on the daily chart). We will look at how we can compare a stock index to the volatility index (using specific options data). This can be done by dividing one index by another. You could just as easily take the spread (subtracting) just as you would looking at something like the spread between rates, say the 2 and 10 year.   

 

Chart Notes:

  • Looking at this chart, we get a glimpse of the relationship between the EFA and the EuroSTOXX Volatility Index (using the V137 - 30day vols 100% moneyness). As an options trader/analyst Bloomberg offers amazing tools to slice and dice the market. We also have tools that show when a high probability turn is possible, on any time frame. Knowing this data can give you an additional edge.    
  • VBSR does two things, it defines immediate support/resistance (N Bands) and projected support/resistance (SR levels). The projected levels are created when a confirmed peak or trough in the N Band is selected by a few of our algorithms (increases or decreases in volatility change the relevance of these levels). At any rate, all of these forms of support/resistance represent extremes. I have turned on the Support/Resistance Signals and Directional signals as well: N, SR, and A, VS, and E. These show high probability turns in real time, printed on the day of the potential peak. This is what we know; right now, only using the data that we have right now.
  • These levels are significant because market participants act in concert (hedging and speculating) near these extreme levels: call and puts are bought and sold, futures contracts are put on, and hedges are taken. These transactions have two things in common: a set expiration date and a volatility element.
  • These levels have already been shown to be statistically valid, however, when they are overlapping or in tight proximity (within 1 average true range), they are even more so. When this occurs, it is called the compression effect. 

Support and resistance with known tendencies that have been quantitatively demonstrated across several markets and time frames, makes it is easier to find unique opportunities and take advantage of them. You can view the statistical evidence for MetaSwing's components here: http://metaswing.com/site/files/MetaSwing_Components_Catalog.pdf

In Bloomberg, simply type APPS CS:MS <GO> and you can test drive the NT MetaSwing Full Suite for 30 days free. 

  

If you have any questions about this chart or our suite, please don't hesitate to reach out to us.  

 

For more about MetaSwing for Bloomberg find it here.