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Today


IVolatility Trading Digest™


Volume 19 Issue 49
SPY Put Spread Hedge [Charts]

SPY Put Spread Hedge [Charts] - IVolatility Trading Digest™

Those bulls still roaming global equity markets on Friday were delighted by a better than expected U.S. employment report that sent the bears and hedgers scrambling to cover and unwind short positions after the S&P 500 Index gapped up at the opening. While it appears, the pullback that had been underway ended on Friday, only a close above the November 27 high will confirm the bullish view. A mark-to-market update for the active SPDR S&P 500 ETF (SPY) put spread hedge follows the Market Review along with an earnings report calendar spread idea for Oracle (ORCL).

Review NotesS&P 500 Index (SPX) 3145.91 gained 4.93 points or +.16% for the week after gapping higher at the open on Friday and then closing up 28.48 points. However, the reported combined volume of 1.7 bn shares failed to exceed the weekly average. December seasonal optimism may emerge after the advance on Friday ended a brief pullback and could last until yearend unless derailed by a failure to reach a phase one China trade agreement before December 15, when new tariffs begin.

Confirmation the pullback ended and the uptrend resumes, requires a close above the November 27 high of 3,154.26, only 8.35 points away. While a small double top like those in July and September are possible, seasonal optimism will likely prevail. In the event of unfavorable China trade news, the 50-day Moving average at 3042.13 marks the first support area.

Review NotesCBOE Volatility Index® (VIX) 13.62 gained 1.00 point or + 7.92% 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, added .83 points or +8.16% to end the week at 11.00% vs.10.17% for the week ending November 29. The chart below shows the 52-week low made on Tuesday November 25 at 9.12%, along with the recent attempt to move back toward the mean as SPX pulled back.

table

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 December expiration, the day-weighted premium between December and January allocated 35% to December and 65% to January, for a 14.92% premium, still in bullish green zone, vs. 19.13% for the week ending November 29.

table

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 expiration on Wednesday December 18. 

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  


Hedging Strategy

Mark-to-market for the long SPDR S&P 500 ETF (SPY) put spread from Digest Issue 46 "VIX Correlation Indicator Confusion [Charts]" booked for 1.70. (Long one Jan 17 305 put and short on Jan 17 295 put). After SPX gained 2.85 points on Friday to close at 314.87, the spread ended at 1.34, for a decline in value of .36.

Viewed as a hedging cost like insurance against a large decline, alternatives include:

    1. Close it now, since SPY likely continues higher and will soon be making new closing highs again.
    2. Hold it until after the December 15 China trade tariff deadline.

Since the additional cost will likely be modest compared to the potential in the event of no trade agreement, alternative two seems consistent with the objective to hedge risk.

Earnings Calendar Spread

Here are the top five ranked by IV/HV ratios from Friday, a regular complimentary feature found in the Rankers and Scanners section of our home page about one-half way down on the right at table

table

A court battle over the proposed merger with T-mobile eliminates Sprint (S) from consideration, with the highest ratio at 2.99.

No earnings reports eliminates XLP, number 2 at 2.83.

At number 4, ArQule (ARQL), a biotech with binary risk, also eliminated.

At number 5, Lululemon Athletica (LULU) scheduled to report on Wednesday December 1, looked interesting, but at new highs, with high near term implied volatility well above the IV Index Mean of 41.61%, the potential for a large move on the report date disqualified it from further consideration since large price moves hurt long calendar spreads.

That leaves number 3, Oracle (ORCL) scheduled to report on Thursday with an IV Index Mean of 26.12%, a 30D HV of 9.53%, and IV/HV ratio of 2.74 as the best calendar spread choice.

Oracle Corporation (ORCL) 54.83, down 1.31 points or -2.33%, now near the middle of its range between July and September. Consider this implied volatility calendar spread idea.

table

With good implied volatility edge, the debit was .43 on Friday. Check the prices and implied volatility again on Wednesday afternoon then be prepared to close it Friday afternoon after the implied volatility of the December 13 call declines.

Macro Economic Thoughts and Question

"It's not the economy, it's the liquidity, stupid!" – Anonymous

Consider: If the Federal Reserve purchases 100% of the T-bills at auction does that translate into monetization as in Modern Monetary Theory?

Send your thoughts in the Comments section below the web version. All answers will be posted.

Summary

Friday's S&P 500 Index advance after a better than expected employment report most likely ended the pullback although new highs are required to confirm resumption of the uptrend. While the VIX futures and option indictors remain bullish, they retreated somewhat last week. Uncertainty about a China trade agreement before the December 15, when additional new tariffs are scheduled to begin, justifies retaining the long Jan 17 out-of-the money SPY put spread as portfolio insurance.

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 market responses to news about new China trade tariffs scheduled for December 15 along with a report on the Oracle Calendar Spread.

Finding Previous Issues and Our Reader Response Request

PreviousIssues

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).

 

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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.

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