« April 2018 »

IVolatility Trading Digest™

Volume 18 Issue 16
The 10-2 Spread [Charts]

The 10-2 Spread [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
Please read IVolatility Trading Digest™ Disclaimer at the very bottom of this page

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

Last week earnings reports and trade issues were the primary focus until Wednesday when interest rates returned to the main stage after the yield on the 10-Year Treasury Note advanced 5 bps, followed by an equal advance Thursday and another 4 bps Friday, ending the recent S&P 500 Index upswing. More follows including a chart for the topical spread between the 10-Year and the 2-Year Treasury Notes including a just in case ProShares UltraShort 20+ Year Treasury (TBT) hedge idea.

Review NotesS&P 500 Index (SPX) 2670.14 added 13.84 points or +.52% last week after reversing a two week upswing in response to increasing long-term interest rates and closing back below the 50-day Moving Average that it had just closed above three days prior, greatly disappointing the bulls.

VIXCBOE Volatility Index® (VIX) 16.88 declined slightly by .53 points or -3.04% 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 .95 points or -6.60% to 13.45.



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 May expiration, the day-weighted premium between May and June allocated 85% to May and 15% to June for 1.05 % 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. At the extremes, declines below 10 and advances above 30 are both unstable. Currently reaching the bullish green zone between 10 and 20 seems like a struggle.

Rising Interest Rates

The 10-2 Spread currently generating considerable commentary, measures the difference between the 10-Year and the 2-Year Treasury Notes. While the spread is also calculated between other maturities, such as the ten year and the one year, the 10-2 seems to attract the most attention , although the much noted March 5 Federal Reserve Board of San Francisco Economic Letter uses the spread between the ten and one year.

Consider this 10-Year Note year yield chart for the last year showing the declining 10-2 spread at the bottom, now .50 with the 10-Year yield at 2.96 up 13 bps last week.


Last week's rapid 13 basis points advance approaching 3% set off alarms even though the spread improved since the two year advanced only 7 basis points.

As for the significance of the spread here are selected quotes from the RBSF Economic Letter, Economic Forecasts with the Yield Curve.

"Every U.S recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve."

" The central feature of the business cycle is that expansions are at some point followed by recessions. Long-term rates reflect expectations of future economic conditions and, while they move up with short-term rates during the early part of an expansion, they tend to stop doing so once investors’ economic outlook becomes increasingly pessimistic. A flatter yield curve also makes it less profitable for banks to borrow short term and lend long term, which may dampen loan supply and tighten credit conditions. Despite these plausible explanations, the complex relationship between interest rates and the macroeconomy makes it difficult to pinpoint the exact mechanism underlying the link between yield-curve inversions and economic slowdowns."

" An extensive analysis of various models leads us to conclude that the term spread is by far the most reliable predictor of recessions, and its predictive power is largely unaffected by including additional variables."

Back to the ten year rising toward 3%, in Digest Issue 5 "All About Interest Rates [Charts]." included a long term semi-log scale chart concluding it will take a close above 3.5% to turn the long-term trend higher while 3% was near term resistance, the current situation. However, since the market seems obsessed with 3% any further advance will likely create a strong headwind for equities. Consequently, here is an interest rate hedge idea just in case it continues above 3%.

Review NotesProShares UltraShort 20+ Year Treasury (TBT) 38.24 added 1.51 or +4.11% for the week.

The current Historical Volatility is 17.94 and 12.94 using the Parkinson's range method, with an Implied Volatility Index Mean of 19.11 at .19 of its 52-week range.

The implied volatility/historical volatility ratio using the range method is 1.47 so option prices are relatively high compared to the recent movement of the ETF. Friday’s option volume was 21,270 contracts traded compared to the 5-day average volume of 18,320 contracts with good bid/ask spreads.

Consider this long call spread with plenty of time to expiration.


Using the ask price for the buy and mid for the sell the call spread debit would be .52 about 17% of the distance between the strike prices with a positive delta of .2201 and 38% of the long side risk hedged by the short call along with a slight implied volatility edge. Use a close back below the last pivot at 36 as the SU (stop/unwind).

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

Big Data? In options we are Big Data!

Europe Options Data Now Available

More information or just fill in this data form to request a quote.


PreviousIssuesWhile keeping an eye on the US Dollar Index (DX) & DXY, $USD, now 90.32 up .82 or +.92% for the week, consider hedging higher interest rates in the event the 10-Year Treasury Note yield exceeds resistance and continues above 3%. Long out- of- the- money SPDR S&P 500 ETF (SPY) put spreads will also offer "just in case" downside protection.


At the start of last week the focus was on trade negotiations and tariffs as well as earnings reports and specific issues in the tech sector. By the end of the week it was all about the rapid rise in the yield of the 10 -Year Treasury Note toward the 3% resistance level. Assuming resistance holds the focus should return to earnings reports and trade issues this week.

Twitter Follow us on twitter for more ideas from our scanners and other developments.

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 plan includes more market review details with special attention to interest rates.

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 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




Comments are closed for this entry.

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.

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".