« June 2021 »

IVolatility Trading Digest™

Volume 21 Issue 26
Secular Growth Edge [Charts]

Secular Growth Edge [Charts]

Last Monday's advance by the S&P 500 Index quickly nixed the suggestion in Digest Issue 25 "Less Accommodative Not Hawkish [Charts]" to consider opening SPX or SPY put spreads or collars on overextended cyclical stocks. An explanation follows in the Market Review below along with and update for the previous earnings calendar spread idea for Micron Technology, Inc. (MU).

Review NotesS&P 500 Index (SPX) 4280.70 gained 114.25 points or +2.74% making new closing and new intraday highs on both Thursday and Friday. The hedge call happened on Friday June 18 as it closed  below both the operative upward sloping trendline that began at the October 30 low and the 50-day Moving average. Last Monday it rebounded early and closed up 58.34 points ending that threat. Now both the upward sloping trendline and the 50-day Moving Average meet at 4192.93 providing downside support.

Invesco QQQ Trust (QQQ) 349.46 added 7.23 points or +2.11% last week. Based on advances made by QQQ following the April CPI report on May 12 equities began rotating back into secular growth stocks from cyclicals assuming the Fed will raise interest rates sooner than previously expected thereby eventually slowing the economy. Making made new closing and intraday highs on Thursday, it pulled back slightly Friday as the yield on 10-Year Treasury Note added 5 basis points to end at 1.54%. Support from the 50-day Moving Average now crosses down at 335.15.

Review Notes
CBOE Volatility Index®
(VIX)slid 5.08 points or -24.54% last week to end at 15.62%. 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 5.17  points or -33.38% ending at 10.33%, another 52-week low.

Since implied volatility has a tendency to revert to the mean of its relevant range (estimated from June 5, 2020) it declined from 17.93% for the week ending June 18 to end at 17.78%. The six-month chart shows the bullish lows.   
In addition, both the historical volatility measures ended at 52- week lows at 9.65% and 7.60% for the historical volatility using the range method. The six-month chart shows the bullish lows.


VIX Futures Premium

$VIX futures premium on Friday ended at 18.53%, well into the green bull zone with July futures the front month vs. 4.45% for the week ending June 18 in the yellow caution zone. The contrarian bears watched and waited but were disappointed again.


Since most of the volume and open interest are in the two closest futures contracts measuring the volume-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds. The chart reflects the distance from the VIX to the futures curve computed from the two front month contracts.

Review NotesMarket Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, failed to follow the indices higher declining every day last week. Although the rate of decline slowed toward the end of the week, nevertheless, it declined every day ending 69.50 points or -9.04% lower at 699.63, slightly above the 50-day Moving Average at 696.49. Should the divergence continue this week it will begin casting some doubt on further market highs.


All on one page

Our Sentiment Analyzer included in all IVolLive packages features a quick reference one-page summary including moving averages, relative strength, Chaikin Money Flow, correlation, options implied and historical volatility and more.

Best Calendar Spread Update

Last week's "Best Calendar Spread, in "Digest Issue 25 "Less Accommodative Not Hawkish [Charts]" featured a Micron Technology, Inc. (MU) 82.03 long calendar spread with the implied volatility (IV) and time to expiration added to the legs originally displayed.

Buy Oct 15 82.50 calls 4.85  IV 39.60  (117 days).

Sell July 2 82.50 calls 1.02  IV 49.82  (12 days).

Net indicated debit of 3.83 on June 18.

For this strategy the idea is to sell the July 2 82.50 call during the day on June 30,  before the earnings report scheduled after the close of trading to generate the highest credit based upon implied volatility while buying the longer dated October 15 82.50 call.

For comparison, the long October 15 82.50 call closed Friday at 6.50, IV 37.56 and the July 2 82.50 call closed at 2.23, IV 52.64 for a net debit of 4.27 with the gain due to the increase in stock price from 76.95 to 82.03, helped by time decay of the short put offset by the increase in implied volatility and gamma (rate of change of delta).

With the 30-day Implied Volatility Index Mean, IVXM of 38.61 and with an IV/PHV ratio (using the range method to calculated historical volatility) at 1.36, the risk of a large harmful move in the stock when it reports appears modest by this measure. Check it again at the close on June 29, the day before it reports 3Q earnings on June 30 after the market close. The higher the ratio, the greater the risk. Since the stock advanced last week and may continue higher until Wednesday the odds are increasing it may decline after reporting as in "buy the rumor sell the news" so plan accordingly.


In bull markets, a good strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing, since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.


With the exception of market, breadth all the indicators turned bullish again last week cancelling the need to hedge long positions. The S&P 500 Index bounced back up above both the operative upward sloping trend line and the 50-day Moving Average. For now, secular growth stocks like those in the Invesco QQQ Trust (QQQ) are outperforming cyclicals but that could change with all the upcoming commentary after the June payroll report on Friday.

By Jack Walker

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 Digest will include the final update for the Micron Technology Inc. long earnings calendar spread.

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 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

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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.

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