« September 2019 »

IVolatility Trading Digest™

Volume 19 Issue 35
Gold/Silver Ratio [Charts]

Gold/Silver Ratio [Charts] - IVolatility Trading Digest™

Trade selection using volatility as the primary criteria. Different trades for different volatility opportunities.
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Gold began trending higher at the start of June then silver soon followed in early July advancing even faster. Based on the historical price relationship between them, since silver had been lagging, its acceleration confirmed renewed interest in the precious metals sector. A Gold/Silver ratio chart, along some observations and suggestions for iShares Silver Trust (SLV), follows the Market Review.

Review NotesS&P 500 Index (SPX) 2926.46 gained 79.35 points or +2.79% last ending just below the 50-day Moving Average at 2646.81. Until this week's advance, a continuation pattern seemed possible, but now it looks more like a range, bounded by 2940 at the top and 2820 on the bottom. The upward sloping trendline, USTL in the chart below, continues higher, confirming the end of uptrend from the December 26 low, and will become the second resistance if SPX closes above the 50-day Moving Average.


Shown at the bottom, the important and recently sensitive yield spread between the US 10-Year Treasury Note and the 2-Year Treasury Note closed flat at zero Friday after dropping as low as -.04 last Tuesday. Digest Issue 33" Inverted Yield Curve [Charts]" explains the inversion sensitivity.

VIXCBOE Volatility Index® (VIX) 18.98 slid .89 points or -4.48% 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 2.15 points or -11.72%, ending at 16.19. The one-year charts below show the IVXM confined to a range between 15% and 20%.


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 September expiration, the day-weighted premium between September and October allocated 60% to September and 40% to October for a premium of .02%, just inside the in the yellow caution zone between zero and 10% ,compared to .08% for the week ending August 23, with the four-week moving average at 2.00%.


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 September 18.

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
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Gold/Silver Ratio

According to a Mocatta Metals Corporation article, as of April 1980, when the price ratio of one ounce of gold to one ounce of sliver approaches 40:1 gold should be sold and sliver bought. Conversely, if the ratio narrows to 20:1 then silver has advanced too fast and should be sold. Further, "'When Columbus discovered America ten ounces of silver were equal to one of gold...'"

Although the ratio changes over time, the Hard Asset Investor reported in 2014 that the 15-year average ratio was close to 60 and exceeded 80 on two occasions since 2000.

On July 5, 2019, the ratio reached as high as 95.11 before quickly tumbling to 85.62 by July 24. See the chart below.


Now at 83.38 and heading lower, it crossed below the upward sloping trendline, USTL in early July then rebounded to back up to test the trendline , then fell off the shelf last Tuesday August 27 when gold stalled while silver continued higher.

Applying the 15-year average of 60 to Friday's continuous contract prices above for gold at 1529.40 equals 25.49 for silver. With silver at 18.34, there could be more upside, but since both can rise or fall independently, the ratio low made last December just below 82 will be important to watch.

As China devalues the Yuan to compensate for more tariffs, other central banks are lowering interest rates to reduce their exchange rates in a competitive race to the bottom. On Wednesday, JPMorgan's Emerging Market FX Index hit a new record low. Even though the US Dollar Index remains above 98, precious metals are attracting speculative money flows.

One idea to consider:

iShares Silver Trust (SLV) 17.15 closed up .80 or +4.89% for the week.

With a current Historical Volatility of 19.88 and 15.72 using the Parkinson's range method, the Implied Volatility Index Mean is 24.77 at.76 of its 52-week range making the implied volatility/historical volatility ratio using the range method at 1.58 so option prices are slightly expensive relative the recent movement of the ETF. Higher implied volatility for out-of-the-money call options makes long call spreads attractive. Friday’s option volume was 209,240 contracts with the 5-day average of 433,440 contracts with narrow bid/ask spreads. Two long call spread ideas follow.


With good implied volatility edge (the short option is relatively more expensive based upon implied volatility than the long option), using the ask price for the buy and mid for the sell the call spread debit would be .49 about 25% of the distance between the strike prices with 31% of the long call risk hedged by the short call.


Using the ask price for the buy and mid for the sell the call spread debit would be .58 about 19% of the distance between the strike prices with 18% of the long call risk hedged by the short call with good implied volatility edge.

The 17/20 call spread has greater upside potential, but more risk than the 17/19.

Use a close back below the last breakout at 16.25 as the SU (stop/unwind).

The spread suggestions above are 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 underlying price change.


VIXNow well below the operative upward sloping trendline labeled USTL in the chart above, the S&P 500 Index remains stuck in a trading range and could go either way depending mostly on China tariff and trade news. Hedging long risk remains the principal portfolio strategy along with rotating into defensive sectors.

As for silver, "Don't tell me what to buy-tell me when to buy it" – John Magee, co-author with Robert D. Edwards of Technical Analysis of Stock Trends.


Currently range bound between 2940 and 2820, the S&P 500 Index moves up and down depending on the latest China tariff news and the spread between the 10-Year and 2-Year Treasury Notes. In the meanwhile, precious metals are in the spotlight again with silver outperforming gold. For now, continue hedging long risk.

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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.”

The plan for next week includes our regular Market Report focused on the current S&P 500 Index range along with gold and silver.

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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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".