« January 2020 »

IVolatility Trading Digest™

Volume 20 Issue 4
3 Volatility Kings [Charts]

SPX Makes Multiple New Highs [Charts]- IVolatility Trading Digest™

In addition to our regular Market Review, this week's Digest includes additional details for 3 Volatility Kings™ scheduled to report earnings this week along with a post reporting update for Netflix (NFLX). However, until coronavirus news from China improves, considering new positions other than hedges like SPDR S&P 500 ETF (SPY) put spreads seems like an exercise in rearranging deck chairs on the Titanic.

Review NotesS&P 500 Index (SPX) 3295.47 dropped 34.15 points or -1.03% last week with most of the decline occurring Friday triggered by more negative coronavirus news from China. The upward sloping trendline from the October low now crossing at about 3290 will not likely provide any support unless news from China improves. The next support is around 3250, followed by the 50-day Moving Average at 3195.76.

Review NotesCBOE Volatility Index® (VIX) 14.56 added 2.46 points or +20.33% 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, advanced 2.86 points or +29.85% to end at 12.44%.


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 17 trading days until February expiration, the day-weighted premium between February and March allocated 85% to February and 15% to March, for a premium, of 10.45%, at the bottom edge of the bullish green zone vs. 21.59%, for week the ending January 17. Although the entire futures curve advanced, the VIX advanced faster narrowing the spread.


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 next VIX futures expiration on Wednesday February 19.

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.

Big Data? In options, we are Big Data!
For a comprehensive review and reminder, check this out
Options: Observations of a Proprietary Trader  

Those fortunate enough to have been following along on Friday as SPX declined from what some have been describing as extremely overbought and overdue for a correction, promptly reacted as reflected by increased put volume. The Put/Call chart for the last 6 months shows Friday's close at 2.25, not abnormally high, but above the recent range.


The total put volume of all options including SPX, Indices, ETFs, Equities, and VIX increased from an average of 2.25 million on Tuesday through Thursday to 3.67 million on Friday.

3 Volatility Kings

An update to our original Volatility Kings™ list in Digest Issue 2 "Volatility Kings Fourth Quarter 2019" shows 3 companies reporting this week. The new table below includes a supplement with additional qualifying information.


In the Additional Info. section, shows the implied volatility index mean, IV Now and the minimum after reporting third quarter, IV Min. The next column, Dif shows the potential decline along with the percentage %, assuming it follows the same pattern. The PHV column has the historical volatility using the range method, followed by the implied volatility/historical ratio, IV/PHV. While there are several ways to estimate the potential move of a stock when it reports, when the ratios are less than 2.00 the moves are usually not large enough to create losses for long calendar spreads. Check the implied volatility again in the afternoon on the report date before opening new calendar spreads.

One Volatility King Review

Update from last week in Digest Issue 3 "SPX Makes Multiple New Highs [Charts]"

Netflix (NFLX) 353.16 up 13.49 points or +3.97% for the week, reported after the bell Tuesday. At the close Tuesday before the release, the stock declined 1.56 to 338.11, the IVXM advanced slightly to 46.32 at .65 of its 52- week range for an IV/HV ratio of 1.65, and IV/PHV at 2.03.

From Tuesday's close of 338.11 to Wednesday's close at 326.00, it declined 12.11 points or -3.58%. Long calendar spread trade plans set to close on the next day worked out OK, but holding them one more day would likely have created a losses due to short gamma as it advanced 23.60 points or 7.24% on Thursday. While there are no strict rules, just the fact they have the potential for big moves, closing the next day to remove gamma risk makes sense since holding on exceeds the parameters of the strategy by adding a directional opinion.

The volatility chart shows the rapid decline to 30 and it will mostly likely continue somewhat lower presuming it follows the same pattern as previous quarters.


Foremost Indicators

The usual overbought indicators that had been with the bulls the week before, started wobbling early last week, and really started flashing caution on Friday. For example,

Review NotesMarket Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, started declining modestly on Monday then gained downward momentum to end the week lower by 49.03 points or -4.90%. While the early declines were not sufficient to trigger sell signals they warned and confirmed Friday's weakness.

Hedge Call

Although the upcoming calendar spread opportunities for the 3 Volatility Kings™ appear reasonably attractive, until the coronavirus is declared contained, the strategies that make the most sense are hedging long positions using SPDR S&P 500 ETF (SPY) put spreads or put spreads using other ETFs with high options volume and open interest.

For those concerned about valuation in a market described by some as overbought, uncertainty about both duration and magnitude caused by the coronavirus episode initially creates a profit taking opportunity.


In bull markets, the strategy is to stay long equities and/or ETFs and then tactically hedge declines as soon as they begin developing, since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.


Last week's equity market action can be summed up as, from hero to zero in one day. All the good news from the previous week was overshadowed by coronavirus news from China setting off a long overdue correction of markets that were overbought as measured by traditional standards. Unless the coronavirus is contained before the markets open on Monday, expect more downside

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 expect another Market Review along with another Volatility Kings™ update.

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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IVolatility Trading DigestTM Disclaimer
IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter constitutes a recommendation to buy or sell any security. Before entering a position check to see how prices compare to those used in the digest, as the prices are likely to change on the next trading day. Our personnel or independent contractors may own positions and/or trade in the securities mentioned. We are not compensated in any way for publishing information about companies in the digest. Make sure to due your fundamental and technical analysis homework along with a realistic evaluation of position size before considering a commitment.

Our purpose is to offer some ideas that will help you make money using IVolatility. We will also use some other tools that are easily available with an Internet connection. Not a lot of complicated math formulas but good trade management. In addition to Volatility we use fundamental and technical analysis tools to increase the probability of success and reduce risk. We prepare a written trade plan defining why the trade is being made, what we call the "DR" (determining rationale) and the Stop/unwind, called the "SU".