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Today


IVolatility Trading Digest™


Volume 20 Issue 10
Volatility Predictability [Charts]

Volatility Predictability [Charts] - IVolatility Trading Digest™

Uncertainty (fear) about potential long-term damage to the global economy from COVID-19 remains undefined and the S&P 500 Index fluctuates in wide trade ranges, consistent with uncertainty, safe-haven selling, along with some short covering activity on Friday. This week's Market Review includes a chart of a developing consolidation pattern along with some additional attention given to explore the forecasting value of various volatility measures. Then another SPDR S&P 500 ETF (SPY) put spread suggestion to consider.

Review NotesS&P 500 Index (SPX) 2972.37 ended up 18.15 points or +.61% after a wild ride last week on greatly increased combined volume in excess of 3 bn. shares every day. The 200-day Moving Average, now 3051.82 seems like both a resistance and support zone for now.

After last week's charts in Digest Issue 9 "Big Picture Trend [Charts]" showing the initial pullback and short-term trend change, the smaller chart below proposes a potential consolidation pattern describing last week's activity.

table

Starting from the gap open lower on February 24, the February28 low at 2855.84, marked 1 represents the first reversal. Then reversal points 2 and 3 begin forming what could become a symmetrical continuation pattern, outlined with the blue dotted lines. Reversal point 4, yet to be determined, would add to the picture, especially if it stays within the hypothetical pattern. These patterns typically have at least 4 reversals and then usually continue in the direction of the prior trend when they breakout. A majority of symmetrical triangles will be continuations and typically do so about three-fourths of the way before reaching the apex of the pattern.

The measuring objective can be determined by taking the height of the triangle between points 1 and 2 and subtracting it from the point where the price crosses the blue lower trendline or 280 points (3136-2856). In addition, both volume and volatility should decrease as the trading ranges narrow as it moves toward the apex. Finally, a close below 2855.84, at the red dotted horizontal line, will confirm this symmetrical continuation pattern.

However, it's still early and since it all depends upon fundamental developments, the final pattern could be quite different. For now, it's a framework for analysis, useful for following the wide daily trading ranges reflecting uncertainty while providing a level for placing the next put spread.

Review NotesCBOE Volatility Index® (VIX) 41.94 advanced 1.83 points or +4.56% 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 .77 or -2.03% ending at 37.11 compared to 37.88 last week, not 20.11% as incorrectly shown in last week's chart.

table

The second spike up conforms to most of the abrupt advances that have a tendency to retest or challenge the highs, see May, August and October above.

Put Volume

After reaching a high on February 28, the SPX put volume quickly declined on the counter trend moves during last week as the consolidation pattern began forming.

table

Last week the average put/call ratio declined to just 1.67 compared to 5.03 for the week ending February 28, and reversal point 1 in the chart above. The declining ratio reflects the consolidation pattern underway and would likely change dramatically should SPX drop below the bottom of the pattern and close below the low at 2,855.84. This marks the place for the next SPY put spread hedge, below, 285.

VIX Futures Premium

This next chart shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts as of last Friday.

With seven trading days until March expiration, the day-weighted premium between March and April allocated 35% to March and 65% to April for a premium of -22.31 remaining well into the red zone, beyond previous pullback episodes.

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 the next futures expiration on Wednesday March 18.

table

As an indication to the degree of uncertainty, the premiums were negative every day last week ranging from -24.72% on Tuesday to -17.52% Wednesday, basis volume weighted premium.

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  


Put Spread Hedges

SPDR S&P 500 ETF (SPY) 297.46 up 1.20 points or +.41% for the week.

This conditional SPY put spread ads to the series of suggested put spreads beginning with an intraday tweet on February 20. Consider implementing on a close below 285.54 (SPX 2,855.84) as detailed above.

For example, long one April 17 295 put at 14.24 and short one April 17 285 put at 10.95 for a debit of 3.29 based on Friday prices. Set the SU (stop/unwind) at a close above reversal point 2 of the connuation pattern at 314. Since this suggestion is conditional on a close below 285.54, adjust the option prices accoringly.

The entire scenario could quickly change on positive COVID-19 news, but that still remains unlikely.

Strategy

In bull markets, the strategy is to stay long equities and/or ETFs and then tactically hedge declines as soon as they begin developing since pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

Rather than waiting to see if a pullback will become a more serious downturn, consider hedging as soon as the first signs appear and consider it like the cost of insurance. If not needed, existing long portfolio positions will continue higher and the insurance protection can be cancelled. In addition, by watching and managing the put spread it will keep attention focused should the pullback develop into something more serious requiring even more put spreads.

Consider SPY put spreads or collars for long individual stocks or ETFs by selling an out-of-the-money call and buying and out-of-the money put with the sale proceeds.

Summary

Last week the S&P 500 Index began the process of forming a consolidation pattern, perhaps a symmetrical triangle trading in wide ranges on greatly increased combined volume. Although a great deal of uncertainty remains, following the outline of a potential symmetrical triangle provides an analytical framework should it move beyond the upper or lower boundaries. In the event it closes below 2,855.84 consider adding another SPY put spread. Should COVID-19 news improve unwind the put spreads, in the meanwhile also consider collars on individual positions.

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 Market Review will continue following the progress of the SPX potential symmetrical continuation pattern.

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".