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Today


IVolatility Trading Digest™


Volume 20 Issue 9
Big Picture Trend [Charts]

Big Picture Trend [Charts] - IVolatility Trading Digest™

From hero to zero in 7 trading days due to increasing uncertainty (fear) about potential long-term damage to the global economy from COVID-19 a.k.a. coronavirus. After sudden and substantial equity declines, this week's Market Review looks at the damage inflicted on the important upward sloping trendlines along with what to watch for this week. Then more about SPDR S&P 500 ETF (SPY) put spreads.

Review NotesS&P 500 Index (SPX) 2954.22 plummeted 383.53 points or -11.49% last week, making gap lower openings three days on substantially increased combined volume of 17.9 bn shares slightly more than 17.7 bn shares traded on the December 17, 2008 swoon. The operative upward sloping trendline (USTL) from the October 3 low, and the 50-day Moving Average, provided zero support last Monday, opening with a gap lower and then continuing lower and closing well below the red 200-day Moving Average on Friday.

table

Since this correction ended the upward sloping trendline from the October 3, low previously labeled the Fed T-bill buying uptrend in Digest Issue 6 "Buying the Dip [Charts]" then what's the next level where it may find support and where is the next lower trendline?

This chart shows the previous operative upward sloping trendline from December 26, 2018 including Elliott Waves 1-5, with 5 at the February 19 intraday high of 3393.52 marked with a red arrow in the upper right corner.

table

From this perspective, it could decline as low as 2600 and still be in an uptrend. However, a close below the upward sloping trendline and below the December 26, 2018 low at 2346.58 market wave 4 would challenge the presumption that the bull market will resume anytime soon.

If so, the next trendline begins at the March 2009 low, shown below.

table

Once again with estimated Elliott Waves 1-5 and with an upper trendline forming a channel, the labeled 5 wave looks less alarming in the center of the channel. From this perspective look for support just below 2800, but it would be a real problem for the bulls should it close below the 4-wave low at 2346.58.

Review NotesCBOE Volatility Index® (VIX)40.11 spiked 23.03 points or +134.84% 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, gained 6.09 points or +43.44% ending at 20.11% after reaching a 52-week high of 35.36 last Thursday.

table

While a spike up and retreat often means the high has been reached, occasionally it will spike once again, see May, August and October above.

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 12 trading days until March expiration, the day-weighted premium between March and April allocated 60% to March and 40% to April for a premium of -38.02%, well into the red zone beyond previous sell-off episodes with the entire curve inverted and well below the abnormally high VIX.

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

The SPX put/call ratio ended Friday at 2.19. While put voulme increased to 2 million contracts, call volume also increased. The ratio occasionally spikes above 2.5 then quickly retreats. Here is the chart for the last year. Nothing noteworthy here.

table

Total put contracts for all Cboe products were 5.63 million put contracts traded on Friday vs. the 10-day average of 3.98 million.

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 Hedge Report

SPDR S&P 500 ETF (SPY)296.26 down 37.22 or -11.16% for the week.

Thursday February 20 around mid-day when it suddenly dropped 1.38%, apparently on COVID-19 news, prompted this tweet: "$SPY down near 1% makes good reason for new put spreads now." Two more tweets followed on Friday February 21, suggesting more put spreads.

Then Digest Issue 8 "Uncertainty & Gold [Charts]" suggested SPY put spreads or collars for long individual stocks or ETFs.

Following that suggestion a new SPY put spread was booked at the close last Monday although at the time it seemed like the horse was already out of the barn since SPY gapped lower at the opening. The record: long one April 17 320 put and short one April 17 315 put for a debit of 1.59. The marked-to market value on Friday was 2.95 for a 4-day gain of 1.36.

Here is another SPY put spread suggestion to consider.

Since the trading ranges have expanded, widen the strikes somewhat. For example, long one April 17 295 put at 13.50 and short one April 17 285 put at 10.06 for a debit of 3.44 based on Friday prices. Set the SU (stop/unwind) at a close above the 200-day Moving Average now around 302.50. Should SPY open gap higher today delay the trade until it turns lower again.

Reasons to expect more downside.

  • Earnings downgrades likley
  • Still a lot of "buy the dip" chatter
  • Needs to retest the bottom
  • Total put volume still less than 2X the 10-day average needed for a Bollinger buy signal

Of course, all the above could quickly be negated on positive COVID-19 news, but for now that seems 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 with 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

Increasing uncertainty (fear) about potential long-term damage to the global economy from COVID-19 resulted in substantial and rapid equity declines with the S&P 500 Index losing 11.49% last week. From a trendline perspective, watch the first important support from the long-term trend at 2800, then 2600, and finally the most critical that could redefine the trend as bearish at 2346.58. Unless the COVID-19 news improves expect tests of all or some of these support levels. Continue considering SPY put spreads or 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 as it attempts to bottom.

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).

 

Comments:

hello,
i am interested in the $VIX/SPY hedged strategy suggested by Larry McMillan.
But where do i found the 20-day historical volatility of the futures contract underlying the $VIX options?
tanks for your kind answer and thanks for your weekly letter that i read with a lot of attention and interest
Christian Morio

Posted by christian Morio on March 07, 2020 at 12:28 PM EST

Christian,

Thanks for your interest and question.
Go to our Futures Options page. Enter VX for the symbol and CF for the exchange. Then at the GO! button on the right change the period to 21. Next hit the GO! button on the Product Code line.

Jack

Posted by 52.6.122.109 on March 17, 2020 at 12:29 PM EDT


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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".