« October 2019 »

IVolatility Trading Digest™

Volume 19 Issue 43
Semiconductor Sector Brightens Outlook [Charts]

Semiconductor Sector Brightens Outlook [Charts] - IVolatility Trading Digest™

For those who may have been on the freeway looking for an exit as the S&P 500 Index closed above the September 9 high on Friday, may want to reconsider after the semiconductor sector broke out to the upside last week. Scheduled to report earnings on Tuesday, two trade ideas for Advanced Micro Devices (AMD) follow the Market Review.

Review NotesS&P 500 Index (SPX) 3022.55 edged up another 36.35 points or +1.22% last week closing above the September 19 high at 3021.99. Next objective, the July 26 high at 3027.98 just 5.43 points or .18% away. On the next pullback, keep an eye on the open pattern gap created by the gap up open on October 11, since pattern gaps are usually filled. For now, look for a test of the July 26 high.

Review NotesCBOE Volatility Index® (VIX) 12.65 dropped 1.60 points or -11.23% 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 1.84 points or -14.94%, to end the week at 10.48%, vs. 12.32% for the ending October 18, shown in the chart below and now approaching what could be labeled oversold from a IVXM perspective compared to a one-year mean closer to 15. Of course, an oversold IVXM corresponds with an overbought S&P 500 Index.


In addition, to an improving outlook for semiconductors, there were reports of some progress on sections of a phase one trade agreement with China on Friday.

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 17 trading days until November expiration, the day-weighted premium between November and December allocated 68% to November and 32% December for a premium of 25.48% well above the top of the green zone versus last week ending October 18, at 17.76%. The entire futures curve declined, but VIX declined more, increasing the spread. It may continue higher as SPX closes in on the July 26 high.


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 November 20. Typically, a normal upward sloping futures premium curve above VIX by 10% - 20% correlates well with a rising SPX.

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  

Semiconductor Sector

Although the S&P 500 Index rotated to "Risk Off" sectors during this upswing, some important semiconductor companies are now reporting a cycle bottom, so the VanEck Vectors Semiconductor ETF (SMH) 127.03 broke out to the upside gaining 4.04% for the week, and 30% since the June 3 low shown by the upward sloping trendline, USTL.


If the sector broke out, what will AMD do?

Advanced Micro Devices (AMD) 32.71 up 1.74 points or +5.62% for the week, but still near the middle of its recent range between 28 and 35. As one of our Volatility Kings, AMD will report earnings after the close on Tuesday. Earnings Whisper shows the consensus earnings estimate at .18 per share on revenue of 1.80 billion.

With a current Historical Volatility of 29.09 and 29.55 using the Parkinson's range method, the Implied Volatility Index Mean is 52.51 at .20 of its 52-week range after declining 3.51 last week. The implied volatility/historical volatility ratio using the range method is 1.78 so option prices are moderate relative to the recent movement of the stock before announcing earnings. Friday’s option volume was 304,054 contracts with the 5-day average of 231,430 contracts with narrow bid/ask spreads.

This chart shows the implied volatility index mean, IVXM declining from above 60 two trading days before the report suggesting less uncertainty and/or more optimism about the current estimate.


Using Friday's prices consider this long calendar spread idea.


Using the ask price for the buy and mid for the sell the debit was .82 with a big implied volatility edge, meaning the call sold (83.27) was relatively more expensive in implied volatility terms than the long call (45.84).

Since long calendar spreads are short gamma a large move in the underlying will result in a loss. For this suggestion, the short gamma on Friday was -.0250 (-.0921 + .0671). However, the declining implied volatility index mean, IVXM just before reporting suggests less risk of a large stock price move, but check it again on Tuesday before the close.

Alternative Iron Condor

Near the middle of a trading range with high implied volatility makes good set up for an Iron Condor, short an out of the money call spread combined with a short out of the money put spread. For example, long Nov 1 36.5 call and short Nov 1 35 call for a .33 credit, and long Nov 1 28.5 put and short Nov 1 30 put for a .29 credit. Both legs had implied volatility in the 80s on Friday and will decline quickly after the report. For this trade, even if AMD makes a large move, only one side will be at risk.


iShares iBoxx $ High Yield Corporate Bond ETF (HYG) 87.39 up .30 or +.34% last week. Using last Monday's closing prices here are the prices for the hedged long position in Digest Issue 42 "Hedging High Yield Bond ETF [HYG]."

Opening price, long 100 shares at 87.12. Close Friday 87.39 = +.27

Open, long 1 November 15 87 put at .49. Close Friday .25 = -.24

Open, short 1 November 15 85 put at .09. Close Friday .06 = +.03

Open, debit .40. Close Friday credit .19 = -.21

Hedged position net change marked-to-market +.06


This will be a be a busy week including many important earnings reports, China trade agreement news and the Federal Reserve's announcement after the FOMC meeting on Wednesday. After the Fed's October 11 announcement to start buying $60 billion per month of Treasury bills on October 15, and adding cash into overnight bank lending market, on Friday it was reported the New York Federal Reserve accepted $77.34 billion in bids from primary dealers at a repurchase agreement (repo) operation, intended to keep the overnight repo rate inline.

The slowing global economy bearish case will be harder to uphold if the major semiconductor manufacturers continue reporting improving sales and earnings, especially if more cyclical sectors start turning up.


A breakout to the upside by the VanEck Vectors Semiconductor ETF (SMH) along with more encouraging China trade agreement news and an accommodative Federal Reserve all helped the S&P 500 Index to close above the September 19 high with the next objective at the July 26 high of 3027.98. Should more cyclical sectors join the semiconductors and report better than expected earnings and revenue in the next two weeks the S&P 500 Index could continue into new high territory much to the delight of the bulls.

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 another Market Review along with an update from the Commitment of Traders report for WTI crude oil.

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.

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