« October 2020 »

IVolatility Trading Digest™

Volume 20 Issue 42
Hedging Review [Charts]

Hedging Review [Charts] - IVolatility Trading Digest™

While hardly reveling to say hedging activity increased in the last two weeks perhaps adding a bit of quantification based upon the many derivatives of the S&P 500 Index could be informative and maybe even useful. First, the Market Review along with a selected indicator.  

Review NotesS&P 500 Index (SPX) 3483.81 added 6.67 points or +.19% last week with all of the advance occurring last Monday followed by  pulling back the rest of the week. So far, the advance from the pivot made on September 25 at the end of the corrective a-b-c wave, has yet to challenge the September 2 high at 3588.11, but last week's pullback closed two gaps before turning slightly higher on Friday. The 50-day Moving average at 3399.36 will likely support any unexpected interruption of the advance toward the previous high.

Invesco QQQ Trust (QQQ), 288.51, called "the decider," gained 2.80 points or +.98% last week and like SPX failed to challenge the September 2 high at 303.50. Support near the 50-day Moving Average at 279.27 should contain any unexpected pullback. Brief attempts to rotate into selected cyclical stocks that began at the September 2 high, have attracted some follow-on support.

Review NotesCBOE Volatility Index® (VIX) 27.41 increased 2.41 points or +9.64% 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 2.24 points or +10.36% ending at 23.87.

In regression to the mean terms, implied volatility appears to have arrived in the low 20's most likely due to increased uncertainty caused by Covid-19 and the upcoming election compared to pre-Covid-19 March when it declined into the mid teens. The IVXM and SPX charts follow.


Comparing the implied volatility of options expiring in 30-days to those expiring in 9-days helps to quantify the increase for longer dated options. This chart shows the differences since the start of the year.


On Friday, the VIX closed at 27.41 and VXST (9-day VIX) closed at 21.64 for a spread of 5.77 points. In the last two weeks, it averaged 4.88 points compared to 1.97 points between April 9 and September 30 when it began increasing. The spread should begin narrowing by then end of next week when implied volatility of options expiring on November 6 increase relatively more.

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 just two trading days until October expiration, the day-weighted premium between October and November allocated 8% to October and 92% to November for a premium of 5.55% with the volume-weighted version at 3.66%. The elevated VIX reflects hedging activity with SPX and SPY options so the spread narrows unless the futures also advance.  


This chart compares the VIX futures term structure for the six nearest futures contracts as of Friday.


Since October 2 (blue line above) the VIX futures prices have declined while the VIX cash remains elevated thereby narrowing the spread.

The relationship of the futures curve to the VIX, as measured by the premium, usually makes a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds. Currently hedging with VIX futures seems less attractive than options on the index and ETF.

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.

Foremost Indicators

Review NotesMarket Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, gained 118.54 points or +44.36% ending at 385.77. From the September trough at -8.12 it added 393.89 points reflecting rotation from just "growth at any price" to the broader market. Encouraging, as it sets the stage for a retest of the previous high.

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Despite a modest pullback that began last Tuesday, odds are SPX and QQQ will continue higher this week unless sidetracked by unexpected Covid -19 news. Expect SPX to advance back up and retest the September 2 high at 3588.11 and then,

  1. Attempt to form a double top or
  2. Exceed the previous high, and start forming a potential H&S Top pattern or
  3. Resume the long-term uptrend. 

Use the previous high to begin considering hedging long stock, ETFs and index

Earnings reporting really gets going this week so check out our Volatility Kings™ list in Digest Issue 41 "Volatility Kings Third Quarter 2020" for volatility trading ideas.


The S&P 500 Index and the Invesco QQQ Trust both paused last week before reaching their September 2 highs. Market breadth continued improving suggesting some rotation into cyclical stocks. While the VIX remains slightly elevated the VIX futures term structure suggests less hedging activity.  

By Jack Walker

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 another Market Review along with an update on hedging activity before the November 3 election.

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 the home page of our website.


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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