« February 2020 »

IVolatility Trading Digest™

Volume 20 Issue 6
Buying the Dip [Charts]

Buying the Dip [Charts] - IVolatility Trading Digest™

Review NotesOf the several stories told by the equity markets last week, "buying the dip" that began last Monday gets top billing. Then "Risk On"-" Risk Off" played cat and mouse all last week without paying much attention to the coronavirus. The Market Review below includes an updated S&P 500 Index chart showing the new operative uptrend. Next, an update for the latest SPDR S&P 500 ETF (SPY) put spread hedge idea followed by this week's Volatility Kings™ list of companies scheduled to report earnings this week.

Review NotesS&P 500 Index (SPX) 3327.71 quickly added 102.19 points or +3.17% last week making a new closing high Wednesday followed by another on Thursday activating a new operative upward sloping trendline (USTL) from the October 3 low. The chart below tells the story including the day the Federal Reserve announced the new Treasury bill buying program to start on October 15, highlighted in the callout.


On the next pullback look for support at the USTL and the 50-day moving average that supported the recent pullback.

Review NotesCBOE Volatility Index® (VIX) 15.47 dropped 3.37 points or -17.89% 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 3.46 points or -21.28% ending at 12.80%.


The IV Index Mean reached its 52-week low on December 16 at 8.98% as the SPX made a new closing high. Now with new closing highs implied volatility remains elevated suggesting increased hedging activity.

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 seven trading days until February expiration, the day-weighted premium between February and March allocated 35% to February and 65% to March, for a premium, of 4.72%, in the yellow caution zone between 0 and 10, vs. -3.93 week ending January 31, in the red zone. Cautiously better.

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  

Put Spread Hedge Update

Last week's SPDR S&P 500 ETF (SPY) put spreads suggestion in Digest Issue 5 "Hedging Uncertainty [Charts]" was quickly closed according to the trade plan when SPY closed back above the previous pivot high last Tuesday. From opening the day before the loss was .35.

Since the coronavirus news gained attention again last Friday, another hedge suggestion follows.

From "buy the dip" last week to "hedge the rip" this week.

SPDR S&P 500 ETF (SPY) 332.20


Using Friday's ask price for the buy and mid for the sell, this long put spread debit was 1.39 about 28% of the distance between the strike prices with 74% of the long put price risk hedged by the short put. Set the SU (stop/unwind) back above last Thursday's intraday high at 334.19. Should SPY open lower today adjust the strike prices lower as well.

More Volatility Kings™

This week's Volatility Kings™, update to our original Volatility Kings™ list in Digest Issue 2 "Volatility Kings Fourth Quarter 2019" shows five more companies reporting this week.


For column heading details and comments about Calendar Spread risk see Digest Issue 2 "Volatility Kings Fourth Quarter 2019." As for implied volatility in the IV Now column, most are almost back to their highs from the third quarter with CVS slightly higher and with the greatest potential percentage decline with the least gamma risk.

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 reporting. Ratios above 2.0 imply increased risk of large moves.


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.

As for the coronavirus tragedy, "Anyone who isn't confused clearly doesn't really understand the situation." – Edward R. Murrow, 1953, an esteemed radio and television broadcaster


As for equities, until last Friday it was all about "buying the dip" since new highs quickly followed every pullback starting in early October. However, by Friday uncertainty about potential coronavirus damage resurfaced so equities retreated slightly. While still near the previous high made last Thursday, new SPDR S&P 500 ETF (SPY) put spreads, put spreads on individual stocks or ETFs seem prudent until the coronavirus is declared contained.

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 again 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

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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".