« February 2020 »

IVolatility Trading Digest™

Volume 20 Issue 5
Hedging Uncertainty [Charts]

Hedging Uncertainty [Charts]- IVolatility Trading Digest™

With 4Q earnings reporting underway, coronavirus news captured most all market's attention last week. For the S&P 500 Index, our Market Review below includes a chart showing the uptrend that began on October 3, ended last Monday. Next, a new SPDR S&P 500 ETF (SPY) put spread hedge idea follows, since coronavirus uncertainty remains the primary focus. Then, another Volatility Kings™ update for companies scheduled to report earnings this week.

Review NotesS&P 500 Index (SPX) 3225.52 sank 69.95 points or -2.12% last week with largest decline on Friday due to increasing coronavirus anxiety. Last Monday it closed below the upward sloping trendline (USTL) from the October 3 low and the previous support around 3250. The 50-day Moving Average at 3211.30 represents the next support followed by the late November high at 3150 (green horizontal line).


The Slow 14, 3 Stochastic momentum indicator, measuring closing prices relative to their 14-day high-low ranges, suggests more downside.

Review NotesCBOE Volatility Index® (VIX) 18.84 advanced 4.28 points or +29.40% 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, gained 3.82 points or +30.71% ending at 16.26%.


Considering the IV Index Mean spiked up above 20% last August 5, (in middle of the chart) when China devalued CNY above 7, in response to a U.S tariff threat, it seems likely uncertainty about global growth due to the coronavirus has not yet been fully reflected in the markets.

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 12 trading days until February expiration, the day-weighted premium between February and March allocated 60% to February and 40% to March, for a premium, of -3.93% , into the bearish red zone vs.10.45%, at the bottom edge of the bullish green zone for week the ending January 24. The curve flattened as the front end advanced faster than the back end.

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 the next 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  

The total put volume of all options including SPX, Indices, ETFs, Equities, and VIX Monday through Thursday averaged 2.33 million contracts vs. 4.03 million on Friday.

Put Spread Hedge

Last week Digest Issue 4 "3 Volatility Kings [Charts]" suggested 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.

Without a reason to change this view until the coronavirus news improves, a specific suggestion follows.

SPDR S&P 500 ETF (SPY) 321.73


Using Friday's ask price for the buy and mid for the sell, this long put spread debit was 1.57 about 31% of the distance between the strike prices with 78% of the long put price risk hedged by the short put. Set the SU (stop/unwind) at a close above the pivot high made last Wednesday at 328.63.

Since option implied volatility will likely continue rising, spreads provide several advantages over outright purchase or sales of options. One of the important benefits is the ability of offset volatility and time decay risk. With a long option, if the implied volatility declines the option value will decline even when the underlying price is unchanged. The same is true of time decay. If the underlying price remains unchanged, its time value will decline each day reducing the value of the option. Using spreads partially offsets these two big concerns.

This week's Volatility Kings™

For those interested in following this week's Volatility Kings™, an update to our original Volatility Kings™ list in Digest Issue 2 "Volatility Kings Fourth Quarter 2019" shows 5 companies reporting this week.


For column heading details and comments about Calendar Spread risk see Digest Issue 2 "Volatility Kings Fourth Quarter 2019." Remember to check the Implied Volatility Index Mean/Historical Volatility ratio just before the release as a guide to potentially large moves of the stock after the report.


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.

Coronavirus uncertainty falls into the Rumsfeld category of known unknowns. "...we know we don't know."


Last week, the markets, equities, fixed income, currencies, commodities and shipping rates all reacted to uncertainty about potential damage the coronavirus could do to global growth. Both momentum and volatility indicators suggest the S&P 500 Index will likely continue lower until the coronavirus is contained. Until then, hedge long exposure with SPDR S&P 500 ETF (SPY) put spreads or put spreads on individual stocks or ETFs.

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 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

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

To add comments or to ask questions please click here (or use the blog "COMMENTS" link at the very bottom of the blog page).




Comments are closed for this entry.

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".