For the S&P 500 Index, last week's story was a combination of resistance at the 200-day Moving Average making it unusually sensitive to any negative fundamental news and that arrived Thursday on a report of declining German exports, resulting in a revised lower Eurozone growth forecast. The combination created a gap lower opening that ended the short-term uptrend from the December 26 low, thereby increasing the chances for a meaningful retest of the low. Accordingly, a detailed collar suggestion for SPY using Advanced Options data follows a short market review.

S&P 500 Index (SPX ) 2707.88 added 1.35 points or +.05% last week, including Friday's reversal day closing 1.83 points or +.07% higher. Last week could have been labeled "Target 200" as resistance at the 200-day Moving Average became an ideal place for profit taking. Now look for support from the operative downward sloping trendline from the October 3 high around 2650.

CBOE Volatility Index® (VIX) 15.72 6 declined .42 points or -2.60% 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 .25 points or -1.89% ending at 12.99, below the bottom of the recent range shown in the one-year volatility chart and the SPX line chart.

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. Previously, declines below 10 % and advances above 30% were unsustainable, but for the last year premiums above 10% have been scarce. If there was only one indicator available, this one would be a top contender.

With 2 trading days until February expiration, the day-weighted premium between February and March allocated 10% to February and 90% to March for an 8.26% premium vs. 7.54% the previous week ending February 1. Well below the bottom of the green zone between 10% to 20%, it continues suggesting cautionary positioning unconvinced the SPX advance will continue without an attempt to retest the December lows that may have just begun.

Strategy

As long as the S&P 500 Index remains above the downward sloping trending from the October 3 high and breadth continue to improve, odds favor the bulls. However, last Thursday's gap open lower suggests it may be prudent to hedge longs. Advanced Options provides the data needed to determine just how much of a hedge can be provided by using a collar.

SPDR S&P 500 ETF (SPY) 270.47 gained .41 points or +.15% for the week including +.33 points Friday. Interestingly, unlike the SPX it briefly advanced above its 200-day Moving Average last Tuesday, but gapped back below Thursday.

Assuming a 100 share long position at Friday's closing prices, how much protection can be expected by using a collar?

As a reminder, a collar consists of a long stock or ETF position and short call with a long put.

Advanced Options

The top section of the data table shows "Feb 09 2019 market close" data has been selected. "The New Version (Beta)" will be looked at another time. The green "20-minutes delayed data" displays updates during the day. Additional details are also provided in the "Companion Guide."

The price data includes the 52 wk high and low while stock volume shows there is plenty of liquidity here along with the end of day options volume (EOD Opt Volume) and week average options volume (1WK Ave Opt Volume), with similar data for high open interest.

The next section displays volatility data, first implied volatility then historical volatility. Since most analysis uses 30 days for the term they are market with blue arrows.

Relative to the 30-day historical volatility at 15.89% (calculated using the annual rate of change method ) that has declined from 25.15% the prior week, both the mean call implied volatility index (IV Index %) at 12.90% and the put implied volatility index at 12.86% suggest options are reasonably priced compared to a month ago.

The next section with the graphs require considerable explanation so they will be saved for another time, but some information is provided in the "Companion Guide."

Since the next monthly expiration will be Friday, February 15, going out to March 15 for this trade plan allows more time. SPY has weekly options many so other expirations could be used. The available selections are in this next section with explanations at the? marks.

Next, the heading for the selected March 15 data page.

Once again details are provided at the blue? marks.

This example focuses on the Greeks: Delta, Gamma, Theta and Vega.

Starting at-the-money 270 with two strikes below and two above with option prices circled in red and the Greeks in purple.

Collar combination:

Results are .10 debit, -.8607 negative delta, with the other Greeks mostly offsetting, where ? = delta, G= Gamma (rate of delta change), T = Theta (time decay), V = Vega (implied volatility change).

For a small debit about 86% of the long ETF risk can be hedged. By selecting other strike prices the debit amount and Greeks will change.

The trade plan should also consider adjustments when the price of SPY changes beyond the selected strikes. Since the objective of this plan was to hedge some portion of a long position should SPY quickly decline to the lower strike near 268 a vertical put spread would add additional downside protection. For example, long a 268 put and short a 260 put. Typically collars are used to protect gains already made by the stock or ETF, an alternative is to just sell the 272 call for a 3.78 credit an create a covered call. All the data needed for vertical spreads or any other combination are available in Advanced Options.

Summary

The short-term uptrend from the December 26 low ended last Thursday after news of slowing growth in Europe combined with solid resistance at the 200-day Moving Average the day before turned the S&P 500 Index lower increasing the probability of at least a partial retest of the December 26 low. Collars and other combinations can hedge some portion of the expected pullback.