« January 2020 »

IVolatility Trading Digest™

Volume 20 Issue 1
SPY Put Spread Again [Charts]

7 SPY Put Spread Again [Charts] - IVolatility Trading Digest™

Last week Digest Issue 52 "7 Bull Chart Story" included charts showing the bull story along with a note to watch for signs of a pullback. Since those signs quickly began appearing and became more pronounced by the end of the week, the time has come to open a new SPDR S&P 500 ETF (SPY) put spread hedge once again. The Market Review below explains.  

Review NotesS&P 500 Index (SPX) 3234.85 slid 5.17 points or -.16% last week after making new closing and intraday highs on Thursday. For 2019, the advance was an impressive 29%. However, now looking overbought, the chart below includes RSI and Stochastic momentum indicators suggesting an increasing likelihood of a pullback.  


In addition, the gap open advance on January 2, followed by Friday's decline raises the prosepct that the gap could become an Exhaustion Gap  (red arrow), one that develops at the end of a price move, although the combined volume of 1.7 bn shares falls short of making a convincing case.  If Friday had opened with a gap lower it would have created a potential bearish island top. A new shorter term upward sloping trendline labeled USTL2 starting at the October 3 low at 2885.94 and touching the Decmber 30 low at 3070.33, defines the latest momentum surge after the Federal Reserve began buying more Treasury securities on October 15. It's all about liquidity.   

Presuming the pullback continues developing, as seems likley, expect the first support at the new USTL2 now 3175, followed by a prior high around 3150 marked by the green horizontal support line, then the blue 50-day Moving Average 3130.01.  All of these shpport areas are still above the operative upward sloping trendline, USTL (not shown) from the December 26, 2018 low that crosses around 3050.   

Review NotesCBOE Volatility Index® (VIX) 14.02 gained .59 points or +4.39% 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 1.03 points or +9.93% ending at 11.40%. After making a 52-week low at 8.98% on Monday December 16, regression to the long-term mean could be underway.


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.

With 12 trading days until January expiration, the day-weighted premium between January and February allocated 48% to January and 52% to February, for a premium, of 13.60%, in the lower part of the bullish green zone, vs. 16.94% for the week ending December 27. If the VIX continues higher, as expected, the premium will decline more.


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 next VIX futures expiration on Wednesday January 22.

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  


While the Foremost Indictors in Digest Issue 52 "7 Bull Chart Story" remain positive unmistakable signs of a developing pullback suggest the time has come again for another long SPY put spread.

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 ordinary pullbacks like to one that now appears underway, 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, the long 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.

Since the probability of a pullback has increased, consider a new SPY put spread, for example.

SPDR S&P 500 ETF (SPY) 322.41.


Using Friday's ask price for the buy and mid for the sell this long put spread debit was 2.08 about 20% of the distance between the strike prices with 56 % of the long put price risk hedged by the short put. Set the SU (stop/unwind) at 50% of the debit or about 1.04 just in case it continues higher without pulling back.


Last week after making new closing and intraday highs, the S&P 500 Index now looking overbought, began making some suspicious pullback signs and although most medium term indicators remain positive the time has come again to consider another SPY put spread to hedge long 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 will feature our quarterly Volatility Kings™ list for fourth quarter earnings reporting about to get underway.

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.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".