« August 2019 »

IVolatility Trading Digest™

Volume 19 Issue 32
Option Spreads [Charts]

Option Spreads [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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China lets go of the yuan and the S&P 500 Index made another leg down early last week, followed by a reversal that brought it back up to the upward sloping trendline USTL, shown in the chart below. While some indicators are giving bearish signs others are holding up as explained in the Market Review below, followed by a long overdue review of spread trading, a look at the Best Calendar Spread, and then a long call spread suggestion for VanEck Vectors Gold Miners ETF (GDX).

Review NotesS&P 500 Index (SPX2918.65 declined 13.40 or -.46% after a quick decline and partial recovery to end just below the 50-day Moving Average and right on the upward sloping trendline, now resistance. Depending upon this week's China news it could go either way.


Trendline literature uses a term called "throwback" to describe how prices often react after crossing important trenlines. In this example, after closing below the upward sloping trendline USTL , it bounced back up the trendline, encountered resistance at the 50-day Moving Average (blue line) and stalled. The case against a further advance includes lagging transports, industrials, consumer discretionaries, and market breadth.

However, since iBoxx $ High Yield Corporate Bond ETF (HYG) 86.25, our "Double Barrel" indicator held up well last week, the burly bulls could still push SPX back up to test the July 26 high at 3027.98.

VIXCBOE Volatility Index® (VIX) 17.97 added .36 points or +2.04% 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, gained just .19 points or +1.25%, ending at 15.43. The one-year charts below show the IVXM advance and quick decline as SPX turned back up.


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 7 trading days until August expiration, the day-weighted premium between August and September allocated 28% to August and 72% to September for a premium of 3.12%, in the yellow caution zone, compared to -.38% for the week ending August 2.

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  

Option Spreads

Since both option and futures prices decline in value as they near expiration, spreads are often used to offset a portion of time value decay when used for direction trades.

First some common terminology. When completed with a debit, the practice is to refer to a spread as a long position. Alternatively, when completed for a credit it's called a short position.

Generally, for pricing spreads with actively traded options, when buying, use the ask of the higher priced leg, less the mid price for the second (or more legs). When selling, use the bid for the lower priced leg plus the mid price for the upper leg. Underlings with low option volume and wide indicated bid/ask prices, may require using the ask for the buy leg and bid for the sell leg when buying a spread, and bid for the buy leg and ask for the sell leg when selling a spread.

Referring to options characteristics, commonly called the "Greeks," some have positive values, others such as time value or "theta" have negative values. By combining a long option with a short option the positive and negative values are partially offset depending upon the "moneyness" or the amount the strike prices are in, at, or out- of-the money. Of course, spreads can be done with more than two legs in various ratios such as 1:2, or 2:3 or other combinations that significantly alter the "Greeks" and the risk profiles.

Using 1:1 spreads for direction trades or hedging existing long positions, allows for the initial debit or credit to be limited and defined while the maximum potential value can be calculated based on the distance between the strike prices of the legs. For bullish call spreads or bearish put spreads, a debit of about one-third of the distance between the strike prices makes a reasonable guideline.

Best Calendar Spread

IVolatility regularly offers a complimentary "Best Calendar Spread" idea in the Rankers and Scanners section of our home page, about one-half the way down on the right side. Based primarily on the difference in implied volatility of the two legs, it displays the ask price for the longer term buy leg and bid price for the near term sell leg. This was Friday's "Best Calendar Spread" idea for Ulta Beauty Inc. (ULTA) 346.70.


While it displays Dec19 for the long 345 Call, it is actually the Dec 20 Call, and for the August 19 it's the August 30 Call. In addition, since the scan includes strike prices with no volume it uses the indicated ask price for the buy an indicated bid price for the sale. With last week's option volume average at just 4500 contracts, the bid/ask spreads are wide.

With an implied volatility index mean IVXM of 40.64 at .74 of its 52-week range and rising, UTLA is scheduled to report 2Q earnings on August 29.

As an alternative to a long calendar spread on the earnings date, a short calendar spread into the earnings date reduces the chances of a loss should the stock make a large move on the release. A short calendar spread strategy would be to purchase the August 30 345 call now and sell the December 20 345 call and then close the position on August 29 before the release scheduled for after the market close. Last quarter the IVXM reached 47.32 before the release date and this quarter it could go even higher considering generally weaker results from the retail sector using SPDR S&P Retail ETF (XRT) 40.20 as an indicator, now approaching the May 31 low at 39.87.

Gold Hedge

Last week Digest Issue 31"Hedge Report [Charts]" included a two ideas to consider for Wheaton Precious Metals Corp. (WPM) 27.74.

With competitive devaluations underway, gold continues to attract attention as it broke out above 1,480 last week closing Wednesday and Thursday at 1500. In addition to central banks lowering interest rates to reduce exchange rates, uncertainty about a trade agreement with China anytime soon, further increases concerns about slowing global growth. With both equities and bonds near highs that some analysts are calling bubble territory, money flows into gold and silver are increasing.

In an unmistakable uptrend since the start of June, here is another gold idea to consider.

VanEck Vectors Gold Miners ETF (GDX) 29.36.

With a current Historical Volatility of 35.63 and 26.65 using the Parkinson's range method, the Implied Volatility Index Mean is 33.37 at .87 of its 52-week range. 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 120,002 contracts with the 5-day average of 239,760 contracts with reasonable bid/ask spreads.


With plenty of time to expiration, using the ask for the buy and mid for the sell, the debit was .59 Friday at 15% of the distance between the strike prices. At an attractive price, with limited and defined risk it will increase in value if gold prices continue higher.

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


Review NotesCaution and hedging return to the playbook until there is more evidence that the "Die Hard Bulls" can push the S&P 500 Index back up toward the July 26 high at 3027.98 once again, since important divergences continue reflecting rotation out of cyclical stocks.


Last week the S&P Index gapped lower on Monday after China let the yuan trade above 7 and then it quickly turned back up to retest both the upward sloping trendline and the 50-day Moving average. Since rotation out of cyclicals continue, important divergences remain a drag and suggest it could go either way depending on China tariff and sensitive exchange rate news this week. In the meanwhile, gold continues higher.

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 an update for skew 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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