Because the much-anticipated news from the Trump meeting with Xi Jinping at the G20 Summit in Osaka, Japan on Saturday seemed pretty much as expected, the odds increased for a "buy the rumor, sell the news" equity event this week. With that thought in mind, this week's Digest offers two hedge ideas to consider. The first for FedEx Corp. (FDX) and then Invesco QQQ Trust (QQQ), both follow the Market Review.

S&P 500 Index (SPX) 2941.76 slid 8.70 points or -.29% last week after turning lower last Tuesday and then rebounding slightly after finding support just above 2900. With the 50-day moving average at 2880.71, the zone between 2900 and 2880 should provide solid support, as there were multiple previous highs near 2900 as far back as April. However, should 2880 fail to contain any selling pressure; speculators will begin anticipating a possible double top formation.

Increasing put open interest mentioned last week, turned out to be nothing more than regular hedging activity related to June quarterly expirations of futures and options. This chart shows put open interest declined back into a normal range around 10 million contracts.

CBOE Volatility Index® (VIX) 15.08 fell .32 points or -2.08% 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 .05 points or +.39% to 12.98%. Charts for IVXM and SPX are below.   

If the new normal is close to 10% then options implied volatility remains modestly elevated and consistent with increasing uncertainty and willingness pay somewhat more for options used for hedging.

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.                        

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month future converges with the VIX at expiration on Wednesday, July 17.

With 12 trading days until July expiration, the day-weighted premium between July and August allocated 60% to July and 40% to August for a 6.55% premium vs. 8.01% for the week ending June 21, still in the yellow caution zone between 0 and 10.

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.

Hedge Ideas

Hedging market or individual stock risk costs money, just like insuring against an auto accident or fire, you don't know when or if it's going to be necessary, in the meanwhile, premiums still need to be paid. How about if you could buy auto insurance for just a week when you are planning a trip since after returning your car will be in the garage for the next month?

For tradable securities with listed options, hedging strategies provides a way to limit and define the cost depending upon the degree of desired protection based upon the perceived risk in almost any time frame, one-day, week, months, or for some actively traded issues, even longer.

Before tuning out due to all the confusing option terminology and the strange strategy names, like straddles, strangles, or butterflies, simple two leg spread strategies will do the trick. Simply buy one strike price and sell another.

Here are two examples of hedging against the possibility of a "buy the rumor, sell the news" event this week after the Trump Xi Jinping meeting and announcements on Saturday.

Following the money, for long direction strategies, odds favor leading stocks and sectors. For short direction strategies, odds favor the weakest stocks and sectors.

Currently, the Transportation sector defined by the iShares Transportation Average ETF (IYT) 188.19 lags the SPDR Dow Jones Industrial Average ETF (DIA) 265.85, creating a well-known Dow Theory negative divergence. However, since IYT options volume and open interest is low, searching for a single stock alternative revealed a weak culprit.

Number 1 Hedge Idea

FedEx Corp. (FDX) 164.19 declined 1.16 points or -.70% for the week, making a wide range reversal last Wednesday after reporting earnings Tuesday. With a .91 correlation to IYT, it makes a better alternative for options strategies. After Wednesday's reversal followed by advances Thursday and Friday, any further advance will set up a potential double bottom activated on a close above 168.

Here are the option details.

With a current Historical Volatility of 31.05 and 23.61 using the Parkinson's range method, the Implied Volatility Index Mean is 25.90 at .38 of its 52-week range and declining after reporting earnings. The implied volatility/historical volatility ratio using the range method is 1.10 so option prices are reasonable relative to the recent movement of the stock.

Friday’s option volume was 27,449 contracts with the 5-day average of 63,210 contracts including last Tuesday and Wednesday after reporting earnings.

Consider this put spread with plenty of time to expiration.

Using the ask price for the buy and mid for the sell the debit would be 2.54 at 25% of the width of the spread with a slight implied volatility edge, meaning the put sold is relatively more expensive in implied volatility terms than the long put. Just in case the transports come roaring back, use a close back above the 50-day moving average, now about 170 as the SU (stop/unwind).

Number 2 Hedge Idea

Invesco QQQ Trust (QQQ) 186.74 declined 1.41 points or -.75% last week. This unit trust, holding all the stocks in the NASDAQ-100 Index has been lagging the S&P 500 Index as money rotates into stocks and sectors considered less vulnerable to a market decline.

With a current Historical Volatility of 18.12 and 11.78 using the Parkinson's range method, the Implied Volatility Index Mean is 18.47 at .24 of its 52-week range. The implied volatility/historical volatility ratio using the range method is 1.57 so option prices are moderate relative to the recent movement of the stock.

Friday’s option volume was 552,924 contracts with the 5-day average of 528,150 contracts.

Consider this put spread.

Using the ask price for the buy and mid for the sell the debit would be 1.31 at 26% of the width of the spread with 66% of the long put hedged by the short put. Use a close back above the previous May highs just above 190 as the SU (stop/unwind) in the event growth euphoria prevails.

The spread suggestions above are based on the ask price for the buy and middle price for the sell presuming some price improvement is possible. Monday’s option prices will be somewhat different due to the time decay over the weekend and any underlying price change.

Strategy

Until the major indices breakout to the upside and transports catch up consider hedging long positions. Several important indicators such as manufacturing PMIs are declining and the China trade issues remains unresolved

Summary

Since news from the Trump meeting with Xi Jinping at the G20 in Japan seems in line with expectations those speculating the announcement of a wide-ranging agreement could start closing long positions. Instead, it will be more rhetoric from both sides that could last all summer while economies of both countries show signs of slowing growth. Accordingly, adding some hedges for long market exposure seems prudent.