« September 2017 »

IVolatility Trading Digest™

Volume 17 Issue 36
High Yield Caution [Charts]

High Yield Caution [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Friday iShares iBoxx $ High Yield Corporate Bond ETF (HYG) made a noticeable decline and after testing the August 2 high on September 1 it then turned lower. As one of our Foremost Indicators the failure to continue higher at the previous high deserves some attention. There is more below including a put spread idea, but first a brief market review.

Review NotesS&P 500 Index (SPX) 2461.43 slipped 15.12 points or -.61% for the week but remained above the 50-day moving average at 2454.90 after declining 18.70 points last Tuesday on geopolitical news from North Korea and then recovering Wednesday to make a small inside range day that began forming a possible symmetrical triangle continuation pattern.

VIXCBOE Volatility Index® (VIX) 12.12 turned higher again gaining 1.99 points or -19.64% for the week while the comparable IVolatility Implied Volatility Index mean, IVXM increased 1.10 points or 15.58%.

Chart Courtesy of StockCharts.com

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.

As the VIX advanced again the premium declined from the top of the range at 30.58% to 15.81% as September futures expiration approaches in 7 days when the futures will equal the VIX.

Friday's Chart:


With 7 trading days until the September expiration, the day-weighted premium between September and October allocated 28 % to September and 72% to October for a positive 15.81% premium.

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.

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Review NotesiShares iBoxx $ High Yield Corporate Bond ETF (HYG) 87.79 declined .53 points or -.60% for the week after testing the previous August 2 intraday high of 88.35 on September 1 where it apparently also found resistance from the operative upward sloping trendline, USTL and turned lower.

Chart Courtesy of StockCharts.com

While it could find support at both the 50-day moving average and the and the previous highs shown as the green support line, failure would suggest formation of a possible double top pattern with a downside measuring objective near 85. With both credit and interest rate risk, a trend change should it occur, would be quite negative.

As a hedge against a further decline that may exceed support consider this put spread.

First the options data.

The current Historical Volatility is 4.30 and 2.95 using the Parkinson's range method, with an Implied Volatility Index Mean of 6.20 up from 5.34 the week before . The implied volatility/historical volatility ratio using the range method is 2.10 so option prices are expensive relative to the recent movement of the ETF. Friday’s option volume was 54,810 contracts with the 5-day average of 111,453 contracts and with reasonable bid/ask spreads.

Chart Courtesy of StockCharts.com

IVXM 6.20, HV 4.30, PHV 2.95


Using the ask price for the buy and middle for the sell the debit would be .49 with an attractive implied volatility edge (6.86 for the long option and 8.95 for the short) and about 25% of the distance between the strike prices. Use a close back above 88 as the SU (stop/unwind).

The suggestion above is based on the ask price for the buy and middle for the sell presuming some price improvement is possible. Monday option prices will be somewhat different due to the time decay over the weekend and any price change.

StrategyGeopolitical news derailed the S&P 500 Index last week as it attempted to retest the previous high while options implied volatilty remained high and appers trending higher. Since September is historically a seasonally weak month along with HYG turning lower it may be time to consider hedging long positions.


So far the S&P 500 Index has been unable to recover from concerning geopolitical news early last week and showing signs of indecision while the VIX trends higher. Then when credit sensitive HYG turned lower the yellow caution light began flashing just enough to begin considering hedging or at least reducing long exposure since "Buy the Dip" appears stalled for now.

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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.


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Next week, we plan to expand our market review and update crude oil from the Commitment of Traders perspective.

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 usual, 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.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".