« March 2020 »

IVolatility Trading Digest™

Volume 20 Issue 11
Volatility Highs [Charts]

Volatility Highs [Charts] - IVolatility Trading Digest™

Fear of undefined potential damage to the global economy from COVID-19, declining crude oil prices and government fiscal actions dominated the news last week pushing all asset prices around, some in unexpected directions. The S&P 500 Index continues fluctuating in wide trade ranges, reflecting uncertainty along with short covering activity again for the second Friday in a row. In an effort to display what now appears as extremes, this week's Market Review includes a few more volatility charts than usual along with more SPDR S&P 500 ETF (SPY) put spread commentary.

Review NotesS&P 500 Index (SPX) 2711.02 dropped 261.35 points or -8.79% last week including a 230.38 gain Friday on what was mostly likely short covering before the weekend since various fiscal measures and direct governmental actions will likely be announced.

While the media claims the bull market ended when the major indices declined 20%, a better measure compares the decline to the uptrend from the March 2009 low as illustrated by the third chart in Digest Issue 9 "Big Picture Trend [Charts]" showing the bull market will end on closes below the December 26, 2018 4-wave low at 2346.58. Until then claims the long uptrend ended last week are premature. This trendline could very well hold and be enough, along with some positive news, to turn SPX higher once again. However, more negative news will mean the media was right.

Review NotesCBOE Volatility Index® (VIX) 57.83 added another 15.89 points or +37.89% 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, advanced 15.35 points or +41.36% to end at 52.46% after spiking as high as 71.58% on Thursday when the S&P 500 Index declined as low as 2478.86 before closing at 2480.64 down 260.74 points on the day. Then, with some short covering Friday, IVXM declined 19.12% to end at 52.46% as shown in the chart below. In implied volatility terms, it sure looks like a spike top far exceeding any others since 2009.


However, it does have a tendency to retest or challenge the highs, see May, August and October above.

Put Volume and Put/Call Ratio

SPX put volume and put/call ratio are not reaching extremes associated with previous market bottoms. While it could mean less need for hedging activity last week, an alternative interpretation could be peak put volume will occur on the next leg down.


From 2.33 on last Monday then 1.58 Friday and 1.56 Thursday, it remains well within the recent range and like the put volume above, suggests no rush to add hedges.


Historical Volatility

The spread between the SPX Historical Volatility, also called Realized Volatility calculated on a year-over-year rate of change basis and the alternative range calculation method reached 58.22% and 31.62% the highest levels since March 2009 at 80% and 70%. Although at the highest levels since 2009, they could still go higher if the SPX makes another leg down.


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 as of last Friday.

With two trading days until March expiration, the day-weighted premium between March and April allocated 10% to March and 90% to April for a premium of -20.86% stuck in the bearish red zone vs. -22.31% for the week ending March 6. However, this was the Friday before options expiration when the near term future remains abnormally high then collapse on Monday and Tuesday. For comparison the volume-weighted version was -15.76%, still in the red zone, but not quite as low (VIX above the futures curve).


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.

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.

VIX Options

The put and call volume on VIX futures options has a pattern similar to options on SPX above, with Friday's volume of 2,055,150 contracts.


Put open interest closed Friday at an unusual high at 12.8 million contracts slightly less than 14.1 million reached on February 18, 2018, suggests trading strategies anticipate a VIX decline.


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 Hedges

SPDR S&P 500 ETF (SPY) 269.32 down 28.14 points or 9.46% for the week.

After adjusting the strike prices lower, last week's conditional put spread was booked after SPX gapped lower on Monday. Long one April 17 270 put at 15.43 and short one April 17 260 put at 11.77 for a debit of 3.66.

This new conditional SPY put spread adds to the series of suggested put spreads beginning with an intraday tweet on February 20. On an opening or trade below 248, long on May 15 265 put 20.39, IV 49.65 and short one May 15 255 put 16.54, IV 52.53 based on Friday's closing prices. Set the SU (stop/unwind) at a close above last Tuesday's pivot at 289. Adjust the strike prices lower should it open with another gap lower.


Consider SPY put spreads or collars for long individual stocks or ETFs by selling an out-of-the-money call and buying and out-of-the money put with the sale proceeds.

Iron Condors are another strategy to consider when implied volatility is abnormally high. Although it involves a lot of trading, for this strategy sell and out-of-the-money call spread, along with an out-of-the-money put spread. Using spreads will limit and define any potential loss. Look for stocks or ETFs with good options volume and liquidity that are near the center of their 52-week range, and then place the spreads near the extreme highs and low. April 17 options are about right although shorter dated ones will be more responsive to both price movement and time decay.

Although the COVID-19 news still seems bleak along with news from OPEC+ and crude oil prices, the Federal Reserve could announce another interest rate cut Wednesday after blowing the doors off with a bazooka last Thursday, adding $500 billion to the 3-month repo facility. Accompanied by more fiscal stimulus actions the tide (and sentiment) could begin turning.

While the SPX may not have reached the bottom, contrarians are likely dusting off their playbooks. Consider.

"Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive." – Howard Marks, The Most Important Thing Illuminated


Although the media claims the long bull market ended last week, an alternative technical analysis measure using the long-term trendline from the March 2009 low, suggests until it closes below 2346.58, bear market calls seem premature. High implied volatility levels not seen since 2009 could mean the low for S&P 500 Index occurred last Thursday or there is more to go depending upon the news flow this week. In the meanwhile, consider SPY put spreads, collars on individual positions and perhaps even some out-of-the-money Iron Condors.

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 the Market Review will continue following the progress of the SPX as it moves toward a bottom.

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



Looking at the Vol20 Issue11 issue's new strategy for SPDR S&P 500 ETF (SPY) you suggest a put spread with for example: "May 15 265 put 20.39, IV 49.6". What does the 20.39 mean? And the IV? For your information, today's closing price for the ETF was 239.85 and the May 265 Put sold for $40.57. Many thanks, Jim

Posted by Jim Zidek on March 16, 2020 at 06:03 PM EDT

Jim, Thanks for letting us know some clarification would be useful. While we typically show ideas in a table along with all the relevant data we have been using a short version lately to save space. For the long leg the May 15 265 strike put ask price closed at 20.39 on Friday, while the short May 15 255 strike put mid price closed at 16.54. The put spread was indicted at 3.85. Today Tuesday, after rebounding from yesterday decline it's 5.00 at 1:00 p.m. E.T, but down from 6.21 at yesterday's close as implied declined somewhat. Jack

Posted by on March 17, 2020 at 01:11 PM EDT

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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".