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Today


IVolatility Trading Digest™


Volume 18, issue 26
Yellow Flag [Charts]

Yellow Flag [Charts] - IVolatility Trading Digest™

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).

Gapping up at the open Friday following China and Europe higher, it looked as if the S&P 500 Index along with other important indices and sectors were about to confirm pivots and continue higher until about eleven in the morning when it began drifting lower to close just off the low for the day. More details follow in the regular market review including a turnaround idea for PayPal Holdings Inc. (SPX) and a just in case hedge idea using SPDR S&P 500 ETF (PYPL)

Review NotesS&P 500 Index (SPX) 2718.37 declined another 36.51 points or -1.33% for the week after attempting to extend a reversal from Thursday's low at support around 2700. Unless overwhelmed by more negative trade and tariff news, the 50-day Moving Average at 2718.37 should continue providing some downside support.

VIXCBOE Volatility Index® (VIX) 16.09 advanced 2.32 points or +16.85% 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, closed the week at 12.26 up 2.23 points or 22.23%

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VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts. With 12 trading days until July expiration, the day-weighted premium between July and August allocated 60% to June and 40% to August for a .94% premium, well under the bullish green zone between 10% and 20% disappointing the bulls for the second week.

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The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration. At the extremes, declines below 10 and advances above 30 are both unstable.Currently the inability to remain above 10% reflects higher VIX levels suggesting a more cautionary condition.

Turn Around Candidate

Here is one stock that didn't sell off going into the close Friday.

From Friday's Top 5 stocks with the greatest IV change from yesterday, a regular complimentary feature found in the Rankers and Scanners section on our Home page, here is the number 2 implied volatility gainer up 3.82% for a 12.14% IV gain.

PayPal Holdings Inc. (PYPL) 83.27 down 1.85 points or -2.17% for the week turned higher Friday and unlike many other stocks and sectors did not fade into the close.

Perhaps advancing implied volatility is related to the upcoming July 25 Q2 earnings report. If so, it will likely continue increasing from the current 35.27 level now at .66 of its 52 week range. This one year volatility chart includes spikes before previous report dates.

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With a Historical Volatility computed using the range method of 22.09, options are somewhat expensive at 1.60 and may become even more expensive going into the earnings report.

Presuming the stock continues higher into the earnings report accompanied by increasing implied volatility consider this long call idea.

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Next here is a long call spread alternative that hedges price risk, but also reduces the expected gain from increasing implied volatility.

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Since these options expire before the earnings date while the implied volatility may still be advancing, consider an August long call spread such as:

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The plan for this one is to close it on the July 25 report date before the close.


Big Data? In options we are Big Data!

RT Options Scanner and RT Spread Scanner Live

Information on these two money makers: RT Options Scanner - RT Spread Scanner.


Strategy

PreviousIssuesWhile seeming to recognize increased warnings of more tariffs on Chinese imports is part of the negotiation process, equity markets are now starting to reflect concern, especially since European autos were added to the commentary mix. The S&P 500 Index was unable to continue above 2800,while the VIX futures premium stalled under 10%, market breadth turned lower and SKEW remains above 140, all suggesting increased hedging activity and less enthusiasm for equities.

 

Hedging Rationale:

Many times in the past hedges were suggested just as the markets were about to recover from an oversold pull back and this could be another one of those times, but that's what hedges are for: unexpected continuing declines. Like buying flood insurance after heavy rain begins. Unlike traditional insurance policies that charge premiums even when the sun shines, using option strategies you can create downside insurance only when it seems necessary. However, since implied volatility typically rises as the underlying declines options are exposed to sudden declines in implied volatility so consider using spreads to partially offset this risk.

SPDR S&P 500 ETF (SPY) 271.28. While appearing oversold having completed a short term cycle, but closing near the low Friday suggests at least another retest of the 270 level.

In the event support around 270 looks weak consider this put spread.

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Using the ask price for the long put and middle for the short put assuming some price improvement the debit would be 1.18 or about 24% of the distance between the strike prices. Use a close back above last Friday's range, about 274 as the SU (stop/unwind).

The suggestions above are based on the ask price for the buy and mid for the sale presuming some price improvement between the bid/ask prices. Monday’s option prices will be somewhat different due to the time decay over the weekend and any price change.

Summary

The inability of the VIX futures premium indicator to stay above the important 10% level as well as Friday's sell off following substantial gains in China along with deteriorating market breadth suggests the current pull back may have more downside. Ongoing trade and tariff news has apparently shaken confidence enough to consider hedging against an S&P 500 Index failure to hold support around 2700.

Twitter Follow us on twitter for more ideas from our scanners and other developments.

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 feature another expanded market review along with a review of this week's hedge suggestion.

Finding Previous Issues and Our Reader Response Request

PreviousIssuesAll 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 the home page of our website.

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

 

Comments:

Hi, have seen lately you advise/encourage options strategy on Usa stocks or index, based on your Ivo informations. I'd be interested in eurex index . Are you tinking to offer such a service for eurex ??
thanks
GR

Posted by GABRI on July 02, 2018 at 11:11 AM EDT

Thank you for the hedge idea and pypl play on how to use volatility in trading. Helps us learn.

Posted by Sri on July 02, 2018 at 01:42 PM EDT

Gabri,

Thanks for your question about Euro Index. Sorry for the delay responding.

Since we are concerned about options liquidity we have a tendency to focus on those with high volume, but we will take a look and see which ones for Europe have good volume and include them in a future issue. It's a good idea.

Jack

Posted by Jack (52.6.122.109) on July 06, 2018 at 04:17 PM EDT

Sri,

Thanks for taking the time to comment.

Let us know if you have questions or an interest in a specific stock, ETF or index.

Jack

Posted by Jack (52.6.122.109) on July 06, 2018 at 04:22 PM EDT


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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".