« December 2019 »

IVolatility Trading Digest™

Volume 19 Issue 50
China Trade Uncertainty Continues [Charts]

SPY China Trade Uncertainty Continues [Charts]- IVolatility Trading Digest™

Following last Thursday's breakout to new closing and intraday highs by the S&P 500 Index, the release of verbal details outlining a China trade agreement on Friday failed to propel the S&P 500 Index much higher, although it barely made another closing and intraday high.

Risk that last week's breakout will become a "fake out" seems likely to increase as commentary along with criticism gets digested in all four corners of the world raising some doubt and uncertainty. The Market Review includes more details along with another mark-to-market update for the active SPDR S&P 500 ETF (SPY) put spread hedge and a trade report for last week's Oracle (ORCL) calendar spread idea.

Review NotesS&P 500 Index (SPX) 3168.80 jumped up 22.89 points or +.73% last week, breaking out Thursday and then continuing slightly higher Friday. Although not yet documented nor signed the verbal agreement with China apparently satisfied U.S. negotiators and President Trump enough to cancel additional tariffs scheduled to begin Sunday.

Based on limited details released on Friday many terms, conditions and commitments remain uncertain and since an earlier effort in May collapsed after translation and review by higher Chinese headquarters, some skepticism seems justified. This Wall Street Journal  article summarizes the issues and concludes, "Investors no longer face a tariff cliff this Sunday, but lingering trade uncertainty will remain a drag on markets and the broader economy well into 2020."

Review NotesCBOE Volatility Index® (VIX) 12.63 declined .99 points or -7.27% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, declined 1.69 points or -15.36% ending the week at 9.31% vs.11.00% for the week ending December 6. The chart below shows it returned near the 52-week low made on Tuesday November 25 at 9.12% as SPX broke out to the upside.


VIX Futures Premium

This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts.

With two trading days until December expiration, the day-weighted premium between December and January allocated 10% to December and 90% to January, for an 18.48% premium, in bullish green zone, vs.14.92% for the week ending December 6.


Day weighted premiums on Friday's before expiration on the next Wednesday usually remain high and then quickly decline on Monday and Tuesday.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the VIX at expiration on Wednesday December 18.

This volume weighted version with a premium of 9.47% shows the difference to the day-weighted version that will dissolve on Monday and Tuesday.


For daily updates, follow our end-of- day volume weighted premium version located about halfway down the home page in the Options Data Analysis section on our website.

This chart shows Fridays' VIX options put/call ratio at 1.98 compared to the weekly average of 1.13, reflecting high put selling volume in the front month December options expiring on Wednesday.


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Hedging Strategy Update

The long SPDR S&P 500 ETF (SPY) put spread from Digest Issue 46 "VIX Correlation Indicator Confusion [Charts]" (Long one Jan 17 305 put and short one Jan 17 295 put) booked for 1.70 – marked-to-market. After SPY gained 2.71 points last Thursday and another .19 on Friday to close at 317.32, the spread ended at .77 for a decline in value of .93.

Considered a hedge against a decline in the event last weeks' breakout becomes a "fake out." Hold it for another week. Then should SPY pull back, as seems likely, use the decline as an opportunity to reduce the insurance cost by closing the January 17 put spread and then look to open a new February put spread early in January. However, should it continue higher Monday, close it quickly since momentum remains with the bulls and the last two weeks of December are seasonally strong.

Earnings Calendar Spread Update

Last week Digest Issue 49 "SPY Put Spread Hedge [Charts]" suggested taking a look at a long Oracle (ORCL) calendar spread going into last Thursday's earnings report.

Here were the prices and implied volatility near the close Thursday before reporting.


Using the Ask for the buy and Mid for the sell the debit was .68. Notice the difference in implied volatility, IV in the last column. Based upon the Implied Volatility Index Mean, using options with 30-days to expiration, the IV/HV ratio at 2.82 approached the upper end of the caution zone suggesting increased potential for a large move of the stock.

From the previous Friday to Thursday before reporting the stock advanced 1.64 points or 2.99% suggesting any good news had been anticipated or leaked, and the stock price would most likely decline somewhat after reporting. Positive market responses need reported earnings to beat expectations along with increased forward guidance for both revenues and earnings without diminishing the upbeat outlook during the analyst call.

According to Earnings Whispers , "Oracle (ORCL) reported 2nd Quarter November 2019 earnings of $0.90 per share on revenue of $9.6 billion. The consensus earnings estimate was $0.88 per share on revenue of $9.6 billion. The Earnings Whisper number was $0.88 per share. Revenue grew 0.5% on a year-over-year basis."

While earnings were 2.3% above the consensus estimate, revenue was .2% below the estimate.

On Friday, the stock closed at 54.51 down 1.96 points or -3.47%.

And the long calendar spread to close:


At the bid price of .72, the spread gained .04 perhaps enough to cover commission costs. The entire short went into the gain column, but the implied volatility of the long call declined from 26.94 to 14.65.

The IV Index Mean (orange line) in the volatility chart shows from Thursday at 28.55 it declined 13.44 or 47.07% to 15.11 at the green arrow.


Of course, holding the long Jan 17 55 call with a basis of .68 is an alternative to closing the spread, but that means time decay over the holidays when activity typically slows although a seasonally bullish time of the year.


Hold the long Jan 17 put spread to test the possibility of last week's breakout will become a "fake out," until the markets have an opportunity to consider and respond to Friday's uncertain China trade agreement news.


Although the S&P 500 Index broke out to new highs last Thursday anticipating news of a China trade agreement that would delay or cancel more tariffs on imports from China scheduled for December 15, verbal summaries from both sides of verbal agreements still leaves specific details unanswered. Uncertainty about the details justifies retaining the long Jan 17 out-of-the money SPY put spread awhile longer.

Actionable Options™

We now offer daily trading ideas from our RT Options Scanner before the close in the IVolatility News section of our home page based upon active calls and puts with increasing implied volatility and volume.

“The best volatility charts in the business.”

Next week will include another Market Review as activity begins to slow for the holidays.

Finding Previous Issues and Our Reader Response Request


All previous issues of the Digest can be found by using the small calendar at the top right of the first page of any Digest Issue. Click on any underlined date to see the selected issue. Another source is the Table of Contents link found in the lower right side of the IVolatility Trading Digest section on our website homepage.

CommentAs always, we encourage you to let us know what you think about how we are doing and what you would like to see in future issues. Send us your questions or comments, or if you would like us to look at a specific stock, ETF or futures contract, let us know at Support@IVolatility.com or use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com website. To receive the Digest by e-mail let us know at Support@IVolatility.com

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