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Today


IVolatility Trading Digest™


Volume 19 Issue 41
China Trade & the Fed Adds Liquidity [Charts]

China Trade & the Fed Adds Liquidity [Charts] - IVolatility Trading Digest™

The China trade news announced last week seemed like an effort to support stock prices since an actual agreement was not signed. The gap up open on Friday by the S&P 500 Index looked like short covering and then the pull back near the close looked like disappointment. However, news that the Federal Reserve will start buying Treasury bills October 15 and will continue adding cash into overnight lending markets will keep hope alive for the bulls. Our Market Review explains.

Review NotesS&P 500 Index (SPX)2970.27 added 18.26 points or +.62% last week closing well above the 50-day Moving Average, although still a long way below the operative upward sloping trendline, USTL from the December 26 low.

While the China trade news added some support, until it closes back above the September 19 high at 3021.99 it remains range bound, rising and falling on every China trade and tariff announcement and destined to continue fluctuating until November 16 when Trump and Xi Jinping are expected to sign a limited first phase trade agreement at the Asia Pacific Economic summit in Santiago, Chile.

Although the latest announcement from the Federal Reserve emphasized a new program to buy $60 billion per month of Treasury bills should not be considered a policy change, it will likely enhance their ability to manage the yield curve after finally acknowledging its importance to the markets. On Friday the 10-2 Treasury Note spread closed at 13 bps up from 4 bps on September 26.

Review NotesCBOE Volatility Index® (VIX) 15.58 declined 1.46 points or -.57% last week after reaching 20.28 last Tuesday. 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 1.39 points or -9.21%, to end the week at 13.71% , shown in the chart below.

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Reflecting the SPX, the IVXM fluctuates between 13% and 20%, up or down on each China trade comment.

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 two trading days until October expiration, the day-weighted premium between October and November allocated 10% to October and 90% to November for a premium of 14.18%, in the green zone between 10% -20%, compared to 7.59% for the week ending October 4.

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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 Wednesday October 16. On Fridays before expiration there seems to be excess day-weighted premium that quickly fades away on Monday and Tuesday the last trading days. Friday's volume weighted premium was 9.88%.

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  


Hedging Strategy

The caution and hedge images began appearing in the Strategy section of Digest Issue 32 "Option Spreads [Charts]"on August 12, 2019 and have remained in this space for the last ten weeks.

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These two images show the current situation. "On-again, off- again", up and down on China trade news, along with the stubbornly strong US Dollar Index (DX) 98.00, driven by bond inflows and relative growth expectations.

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In case you can't read the labels on the passenger's hats, they are Crude Oil, Gold, Treasuries, and Equities. Hidden in the back are other commodities as well.

If adding reserves by buying short-term Treasury bills is like putting oil on a squeaky wheel, then the Fed heard the squeaking and grabbed the oilcan. While it could be enough to keep equities from declining into year-end, it may not be enough to propel the SPX to a new high before year-end.

As third quarter earnings reporting gets underway this week, maintaining some level of long position hedges using November 15 or December 20 out-of-the-money SPDR S&P 500 ETF (SPY) put spreads or collars still seems prudent.

Summary

Last week the two defining events were a China trade agreement, yet to be documented, and the Federal Reserve's announcement to start buying Treasury bills and injecting cash into the overnight bank lending market. While the S&P 500 Index initially responded positively at the open Friday, it pulled back later as details were released. For now some level of long position hedging still remains prudent.

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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 another Market Review along with trade ideas.

Finding Previous Issues and Our Reader Response Request

PreviousIssues

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

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).

 

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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".