With 4Q earnings reporting underway, coronavirus news captured most of the market's attention last week. For the S&P 500 Index, our Market Review below includes a chart showing the uptrend that began on October 3, ended last Monday. Next, a new SPDR S&P 500 ETF (SPY) put spread hedge idea follows, since coronavirus uncertainty remains the primary focus. Then, another Volatility Kings™ update for companies scheduled to report earnings this week.

S&P 500 Index (SPX) 3225.52 sank 69.95 points or -2.12% last week with the largest decline on Friday due to increasing coronavirus anxiety. Last Monday it closed below the upward sloping trendline (USTL) from October 3 low and the previous support around 3250. The 50-day Moving Average at 3211.30 represents the next support followed by the late November high at 3150 (green horizontal line).

The Slow 14, 3 Stochastic momentum indicator, measuring closing prices relative to their 14-day high-low ranges, suggests more downside.

CBOE Volatility Index® (VIX) 18.84 advanced 4.28 points or +29.40% 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 3.82 points or +30.71% ending at 16.26%.

Considering the IV Index Mean spiked up above 20% last August 5, (in middle of the chart) when China devalued CNY above 7, in response to a U.S tariff threat, it seems likely uncertainty about global growth due to the coronavirus has not yet been fully reflected in the markets.

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 February expiration, the day-weighted premium between February and March allocated 60% to February and 40% to March, for a premium, of -3.93% , into the bearish red zone vs.10.45%, at the bottom edge of the bullish green zone for the week the ending January 24. The curve flattened as the front end advanced faster than the back end.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until the front-month futures contract converges with the VIX at the next futures expiration on Wednesday, February 19.

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.

The total put volume of all options including SPX, Indices, ETFs, Equities, and VIX Monday through Thursday averaged 2.33 million contracts vs. 4.03 million on Friday.

Put Spread Hedge

Last week Digest Issue 4 "3 Volatility Kings [Charts]" suggested hedging long positions using SPDR S&P 500 ETF (SPY) put spreads or put spreads using other ETFs with high options volume and open interest.

Without a reason to change this view until the coronavirus news improves, a specific suggestion follows.

SPDR S&P 500 ETF (SPY) 321.73

Using Friday's ask price for the buy and mid for the sell, this long put spread debit was 1.57 about 31% of the distance between the strike prices with 78% of the long put price risk hedged by the short put. Set the SU (stop/unwind) at a close above the pivot high made last Wednesday at 328.63.

Since option implied volatility will likely continue rising, spreads provide several advantages over outright purchase or sales of options. One of the important benefits is the ability to offset volatility and time decay risk. With a long option, if the implied volatility declines the option value will decline even when the underlying price is unchanged. The same is true of time decay. If the underlying price remains unchanged, its time value will decline each day reducing the value of the option. Using spreads partially offsets these two big concerns.

This week's Volatility Kings™

For those interested in following this week's Volatility Kings™, an update to our original Volatility Kings™ list in Digest Issue 2 "Volatility Kings Fourth Quarter 2019" shows 5 companies reporting this week.

For column heading details and comments about Calendar Spread risk see Digest Issue 2 "Volatility Kings Fourth Quarter 2019." Remember to check the Implied Volatility Index Mean/Historical Volatility ratio just before the release as a guide to potentially large moves of the stock after the report.

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 ordinary pullbacks 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.

Coronavirus uncertainty falls into the Rumsfeld category of known unknowns. "...we know we don't know."

Summary

Last week, the markets, equities, fixed income, currencies, commodities, and shipping rates all reacted to uncertainty about the potential damage the coronavirus could do to global growth. Both momentum and volatility indicators suggest the S&P 500 Index will likely continue lower until the coronavirus is contained. Until then, hedge long exposure with SPDR S&P 500 ETF (SPY) put spreads or put spreads on individual stocks or ETFs.