Although the increasing VIX premium over the VIX cash suggests the professional hedging community is growing more cautious we think this is the time to increase long positions and accordingly have another long call spread idea for the occasion.
iShares Russell 2000 Index (IWM)
Since the smaller capitalization companies have a tendency to outperform the large companies in the early part of the year, here is another trend continuation idea to consider. While we suggested the same approach in Digest Issue 1, using February options this one going out to April allows enough time for the breakout retest.
The current Historical Volatility is 13.59 and 10.04 using the Parkinson’s range method, with an Implied Volatility Index Mean of 13.24 down from 15.23 last week. The IV/HV ratio is .97 and 1.32, using the range method to calculate the HV. The put-call ratio was in bearish territory at 2.00, but it is a hedging favorite so high put-call ratios are the norm. Friday’s volume was 702,821 contracts traded compared to the 5-day average volume of 422,350.
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The put volatility edge offsets the lack of edge in call spread. Use a close back below the 84 support as the SU (stop/unwind) and below the USTL up from the November 11 low.
Summary
While the professional hedging community is becoming more cautious with the breakout our indictors are positive, especially the economically sensitive DJ Transportation Index. The breakout is likely to continue awhile longer before retesting the breakout.