« August 2019 »

IVolatility Trading Digest™

Volume 19 Issue 31
Hedge Report [Charts]

Hedge Report [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Whacked best describes equity prices last week. First came Jay Powell's disappointing "maybe" more rate cuts commentary, followed by "maybe" more tariffs on Chinese imports starting September 1. From new highs to correction in just three days. The Market Review includes speculation about what to expect this week, supported by an undated S&P 500 Index chart, including a report on previous hedge suggestions, followed by another hedge idea using Wheaton Precious Metals (WPM).

Review NotesS&P 500 Index (SPX) 2932.05 dropped 93.81 points or -3.10% after making new closing and intraday highs the week before. The financial media dutifully reported the decline as the worst week this year. First support at 2950 provided little help Thursday and then Friday it continued down to test the 50-day Moving Average before recovering slightly.


The 50-day Moving Average at 2927.56 could continue providing support but since Monday's are typically weak; it could decline to the operative upward sloping trendline, USTL from the December 26 low that crosses at 2900. Anything much lower and it will become something more serious that an ordinary overbought pullback.

VIXCBOE Volatility Index® (VIX) 17.61 jumped up 5.45 points or +44.82% 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 5.44 points or +55.51% ending at 15.24. The six-month IVXM and SPX charts show the advance compared to the May correction.


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 12 trading days until August expiration, the day-weighted premium between August and September allocated 48% to August and 52% to September going from hero to zero in less than one week, declining 22.92% ending at -.38% vs. 22.54 week ending July 26, 2019.

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 August 21, 2019.


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  

Hedge Report

While strict adherence to the suggested put spread hedge trade plans in Digest Issue 29 "Hedging Strategies [Charts]" would have closed the spreads when SPDR S&P 500 ETF (SPY) 292.62 advanced above the SU( stop/unwind) level at 301.13 on July 24, here are the mark-to-market results for those who were asleep at the switch or busy doing something else, or may have decided an overbought correction was overdue and kept them on.

1. At-the-money – Long 297August 16 put and Short 292 August 16 put with an initial debit of 1.44, marked-to-market = 2.17 credit for a .73 gain or +51%.

2. Out-of-the money – Long 292 August 16 put and Short 287 August 16 put with an initial debit of .84, marked-to-market = 1.31 credit for a.47 gain or +56%.

3. Out-of-the-money with more time – Long 292 September 20 put and Short 287 September 20 put with an initial debit of 1.17, marked-to-market = 1.54 for a .37 gain or +.32%.

With a lower net delta the September put spread lagged the August spreads, but allowed more time for the expected decline to materialize.

For those still long the spreads, consider rolling the August to September and watch the upward sloping trendline, USTL in the SPX chart above, since it may provide enough support to end the pullback.

Gold and Silver Hedge

In addition to rotating into secular growth stocks from cyclical growth stocks both gold and silver have been attracting attention since the beginning of June even against a headwind from an advancing US dollar Index.

Although both have been advancing for the last two month, the lack of income carry opportunities remains an objection to the gold and silver trade.

Wheaton Precious Metals Corp. (WPM) 26.12, down .94 or -3.47% for the week may help overcome the income issue. As a precious metals streaming company it purchases a percentage of precious metal output produced by top tier mines for upfront payments and additional payments as metals are delivered that they sell at market prices. Since Wheaton does not own or operate mines, they have no exposure to rising capital and operating costs.

Paying a minimum quarterly dividend of .09 per share, it's .68 correlated to gold and .99 correlated to silver with tradable options.

Due to report 2Q earnings on Thursday August 8, after the close, the consensus earnings estimate is .10 on revenue of $198 million.

With a current Historical Volatility of 34.65 and 27.67 using the Parkinson's range method, the Implied Volatility Index Mean is 34.70 at .69 of its 52-week range and rising. The implied volatility/historical volatility ratio using the range method is 1.25, so option prices are reasonable relative the recent movement of the stock.

Friday’s option volume was 3704 contracts with the 5-day average of 4300 contracts with reasonable bid/ask spreads near the money.

For a long-term position, on the assumption precious metals continue advancing consider this covered call, buying 100 shares and selling an out-of- the-money call since implied volatility has been rising going into the earnings report. The long stock will earn the dividend with a chance to enhance the income from the short call. For example, here were Friday's prices.


Since the IV/PHV ratio at 1.25 suggests the stock will not likely make a dramatic move when they report earnings, a calendar spread has potential to gain value from declining implied volatility after the report. Here is an idea.


With a .15 debit, using the ask for the buy and mid for the sell, and with good implied volatility edge, the risk is a large stock move on the report. Check the implied volatility readings near the close on Thursday.

Monday’s option prices will be somewhat different due to the time decay over the weekend and any underlying price change.


Indeed, there was a "sell the news" event last week amplified by new tariff news the next day.

With the anticipated pullback underway, attention should now focus on its reversal. Friday the S&P 500 Index declined below the 50-day Moving Average intraday, before recovering somewhat, suggesting some support. However, a pullback of this magnitude will probably require more time to run its course. A breach of the upward sloping trendline, USTL at 2900 in the chart above should give the best indication.

Since iShares iBoxx $ High Yield Corporate Bond ETF (HYG) 86.39 declined only .47% last week, suggests liquidity remains adequate. See Digest Issue 28 "Double Barrel Indicator [Charts]" for details explaining the use of HYG as a market-timing indicator. Presuming liquidity remains ample, the current pullback will likely be limited, although divergences with the transports and market breadth remain a concern.


First Jay Powell disappointed the markets by not committing to more interest rate cuts, and then news of possible new tariffs on Chinese imports ignited an overdue correction of overbought equities. Although pullbacks usually take some time, there are two well-identified areas where the S&P 500 Index could find support this week, since liquidity remains adequate – presuming no new surprises.

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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.

“The best volatility charts in the business.”

Next week will include a spread scanner update along with our regular Market Review.

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.

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.

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".