This week is by far the busiest of earnings season with over 100 companies with Weeklys available for trading reporting results. As always the data below is based on the last three years of earnings results unless the ticker is in italics. The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings. Finally, double check the earnings dates as not all were confirmed.
In honor of National Pasta Day, I went searching for a trade that is bullish on a restaurant that serves its share of Italian food. One Friday, I guess in anticipation of a surge in the consumption of food at Olive Garden, someone put on a bull call spread using options on Darden Restaurants (DRI). When the stock was trading at 62.62 someone came in a purchased the DRI Nov 18th 62.50 Calls for 1.53 and sold the DRI Nov 18th 65.00 Calls for 0.55 and a net cost of 0.98. A payoff at November expiration shows up below.
Note that the break even for this trade is at 63.48, a little higher than where DRI was trading when this trade was executed. If the stock is at 65.00 or higher on the close on November 18th then the net profit comes to 1.52.
The bulls tried and tried, but it was a lost cause last week. Stocks never recovered from last Tuesday’s stumble, and the bulls squandered their best chance to get back on a bullish track on Friday. All the major indices closed below key technical levels on Friday when the bullish effort that day petered out.
Near-term the market still isn’t completely past the point of no return, but it’s close, and it’s pointed in that direction. However, while the tide may be pointed in a bearish direction, as we’ve learned several times this year, we can assume nothing. There’s still a chance stocks could come out of this funk mostly unscathed.
We’ll explore the standoff below. First, let’s run down last week’s and this week’s major economic news. There’s quite a bit for both weeks that has and will move the market.
There’s little doubt as to last week’s economic highlight – the release of the minutes from the most recent FOMC meeting. Unfortunately, it didn’t tell us much more than we already knew about the health of the economy. That is, we’re not quite in need of a rate hike yet, but we may need one soon… the same song and dance we’ve heard for a while now.
The other biggie last week was September’s retail sales. They were strong, reversal Augusts’ dip. Retail spending grew 0.6% overall, and were up 0.5% when removing automobiles from the equation. Both were in line with expectations. More important, last month’s year-over-year comparisons have been and continue to be positive, rolling in between 2% and 3% growth (depending on which segment of retail sales you’re looking at).
Retail Sales Year-Over-Year Growth Chart
Source: Thomson Reuters
Finally, though it won’t be until this week when we get the bulk of the most recent round of inflation data, we got a glimpse of it last week with the producer price inflation report. It was up, with or without food and energy…. up 0.3% overall, and up 0.2% on a core basis. Moreover, on an annualized basis, the benefit of cheap oil has finally run its course. Year-over-year inflation (a more meaningful figure) for producers even factoring in food and energy costs swing to a positive pace of 0.7% last month… the strongest pace since late 2014.
Inflation (Annualized) Chart
Source: Thomson Reuters
September’s consumer inflation data will be out this week. It too has been moving higher for a while now. Indeed, it’s starting to reach levels that will force the Fed’s hand.
Everything else is on following the grid:
In August, Admiral SPO delivered a great BIDU trade. Most HA Options Members were very grateful for such a brilliant gift from our fearless leader. As usual, Maury was exception to the norm, whose greed was only fueled by the talent at his disposal. He immediately began nagging for another over the top winner. Since Maury is not to be ignored, Admiral SPO obliged with another trade.
On September 8, Admiral SPO sent out a QCOM Straddle: Buy the OCT 21 Expiry 62.50 Calls and 62.50 Puts. QCOM was trading at 62.59 when the order went out, with a target of 60 on the low end and 65 on the high side. We bought into the trade for $3.12.
By September 29, the stock was trading at 66.95. Maury was beside himself with joy when we sold out his position that day for $6 at a 92% profit. And, we still owned the 62.50 Put for FREE!
On October 13, QCOM traded as low as $64.30. Suffice it to say, Maury is holding his breath for another slam lower in the market. If in fact markets do drift lower, you can be sure Fari’s greedy friend will be stalking the Admiral SPO for another Maury trade.
The Weekly News Roundup is your weekly recap of CBOE features, options industry news and VIX Index and volatility-related articles from print, broadcast, online and social media outlets.
VIX FIX: Volatility’s October Surprise
Earnings season is once again upon us, and has caused a bit of turbulence throughout markets. The Dow Jones Index underwent a series of triple-digit moves this week, briefly dipping below 18,000 on Thursday before rebounding on Friday. Another catalyst for recent market unrest is mounting speculation that a December Fed rate hike is in the works, providing fuel for a rising CBOE VIX Index and sending the VIX north of the 17 mark before leveling out in the mid-16 range. These macro conditions, along with an approaching U.S. Presidential election, could mean that greater market volatility may be imminent.
“Investors Struggle Over ‘Hard Brexit’ Positioning” – Daniel O’Leary, EQ Derivatives
“MAI Shortens Duration As VIX Curve Flattens” – Daniel O’Leary, EQ Derivatives
“One Measure of Investor Worry Just Hit Its Highest Level Ever” – Joseph Ciolli, Bloomberg
“LSE’s Curve Trading Steadily On the Rise” – Julie Aelbrecht, FOW
“Wall Street Volatility Gauge Soars 18%” – Financial Times
“Why the Markets Took a Tumble Today” – Bloomberg
“Financial Markets Continue To Price In Clinton Win After Debate” – Caroline Valetkevitch and Rodrigo Campos
The tug of war was on and it appears the VIX futures won last week as VIX rose about 20% and the October contract gained only 8%. When we are in steep contango eventually VIX either rises or the futures give in, this time VIX blinked. Remember next week October drops off the board and November becomes the front month. If you are playing the election volatility game we do have Weeklys that expire closer to the vote, but the standard November contract will be the one that gets most of the attention.
On a percentage basis VIX was the big winner among the four S&P 500 related volatility indexes. VIX gained just over 19% while VXST was up about 13%. The longer end of the curve is often less responsive to drops in the stock market. VXV and VXMT behaved as they normally do and rose about 6% and 4% respectively.
The finish line for 2016 performance is starting to appear in the distance. It was starting to look like small cap stocks would rule the year, but in the past couple of weeks, large cap stocks have started to play a little catch up. Last week the Russell 2000 (RUT) dropped just over 2% while the Russell 1000 (RUI) was down just over 1%. The spread is narrowing with RUT maintaining about a 2.4% lead going into the final stretch that is 2016.
With a couple of exceptions (AAL, PYPL) the data below represents twelve quarters of earnings history. As always the data below is based on the last three years of earnings results unless the ticker is in italics. The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings. Finally, double check the earnings dates as not all were confirmed.
Earnings season kicks off this week with AA reporting tomorrow Tuesday before the market opens. As always the data below is based on the last three years of earnings results unless the ticker is in italics. The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings.
CBOE RMC Europe Recap
CBOE wrapped up its 5th annual Risk Management Conference (RMC) last week in County Wicklow, Ireland. During the conference, CBOE’s Senior Vice President, Business Development, Andy Lowenthal, and Vice President of Research, Bill Speth sat down to discuss product development, extended-trading hours, and options education with EQ Derivatives. For more information on RMC, including blogs recapping presentations, visit http://www.cboermc.com/.
“Q&A: CBOE’s Andy Lowenthal and Bill Speth Discuss Product Development & ETH” – Georgia Reynolds and Robert McGlinchey, EQ Derivatives
Other RMC Articles:
“Equity Allocations, Options Key for Challenged Pensions, Endowments” — Georgia Reynolds and Robert McGlinchey, EQ Derivatives
“Hybrids Turn Off Some Institutional Investors” — Georgia Reynolds and Robert McGlinchey, EQ Derivatives
Two weeks ago, CurveGlobal, a new venue for trading European interest rate futures, backed by the London Stock Exchange Group, CBOE and several major dealer banks, opened its doors to investors and immediately began making headway in the market. Trading over 500 lots on its opening day, Monday, September 26th, the exchanges’ volume continued to rise throughout this week, topping 1,500 lots traded and 2,000 lots of open interest on Monday, October 3. CurveGlobal is pushing full speed ahead.
“LSE’s Curve Passes OI, Trading Milestones” – Luke Jeffs, FOW
Pension Funds Put Pileup
Pension Funds are increasingly beginning to use the award winning CBOE S&P 500 PutWrite Index (PUT) as an instrument for volatility protection and income enhancement. Most recently, the Hawaii Employees Retirement System, South Carolina Retirement System Investment Commission and the Illinois State Universities Retirement System each began using the strategy in their allocations.
The PutWrite strategy is designed to sell a sequence of one-month, at-the money, S&P 500 Index (SPX) puts and invest cash at one- and three-month Treasury Bill rates.
For more information on the PutWrite Index, visit http://www.cboe.com/micro/put/.
“Funds Go Exotic with Put-Write Options to Stem Volatility” – Rick Baert, Pensions & Investments
VIX FIX: Volatility’s R&R
Volatility has once again subsided, giving investors a bit of rest and relaxation, or so it seems. With lack of any catalyst, major market indicators are virtually unchanged, while the CBOE Volatility Index (VIX Index) is slightly lower on the week, landing just north of the 13 level at Friday’s close. But with the U.S. Presidential Election less than a month away, and the case for a December rate hike appearing more likely, volatility may rapidly rise.
“A Guide to Hedging the Election” – Steve Sosnick, Barron’s
“The Latest Hot Trade: Volatility” – Ben Eisen, Wall Street Journal
“VIX Fear Index Challenges Prevailing Calm on Wall Street” – Economic Calendar
“The Chart of the VIX Could Signal the Calm Before the Storm” – Timothy Collins, The Street
“Volatility Update: 3rd Quarter Winners and Losers” – Frederic Ruffy, The Ticker Tape
The VXST – VIX – VXV – VXMT changed a little last week with the wings (VXST & VXMT) losing a little value and the middle section (VIX & VXV) rising slightly. I find the drop on Friday in VXST a little perplexing as I was hearing concern with respect to a potential market reaction to the Sunday night debate. People may have been thinking it, but VXST was not reflecting short term concerns.
The only thing that rose last week on the VIX curve below was spot VIX. The steep contango managed to influence the futures pricing versus spot and even with a small gain in VIX, all standard futures lost value last week. Despite the divergence in performance between VIX and the futures, we are still in pretty steep contango as the market seems to be braced for some sort of fourth quarter surprise.
Large cap stocks held up relative to small caps with the Russell 2000 (RUT) losing 1.30 last week while the Russell 1000 (RUI) was down only 0.77%. RUT still holds the 2016 lead by a fairly wide margin up 8.86Z% versus up 5.43% for RUI.
On the night of September 26 a debate-record 84 million people tuned in to watch the first of three U.S. Presidential debates. During the debate there were movements in the prices of futures on the CBOE Volatility Index® (VIX®), S&P 500® futures, and the Mexican peso (see below for a chart and more information).
If you would like to follow the movements of VIX futures during the upcoming Presidential debate from 8:00 to 9:30 p.m. CT this Sunday, October 9, here are three resources for you –
AROUND-THE-CLOCK TRADING OF VIX FUTURES
The trading hours for VIX futures begin at 5:00 p.m. Chicago time on Sundays, and VIX futures are offered more than 23.5 hours a day during the trading week Last month the average daily volume for VIX futures during extended trading hours (from 3:30 p.m. to 8:30 a.m.) was 31,901 contracts. www.cboe.com/ETH.
EXPIRATION DATES FOR VIX FUTURES
At around noon Chicago time on Friday, October 7, the VIX Index spot price was 13.88, and the VIX futures prices are shown in the table below.
MARKET MOVEMENTS DURING THE FIRST DEBATE ON THE NIGHT OF SEPTEMBER 26
During the first presidential debate on September 26 (from 8:00 to 9:30 p.m. CT) –
- VIX futures prices fell,
- S&P 500 futures prices rose.
- Mexican peso rose in value (vs. U.S. dollar).
As shown in the chart below, during the 90 minutes of the first debate, the VIX October futures fell by about 0.50 points. (Please note that the new trading day for VIX futures usually starts at 3:30 p.m. the previous calendar day, and so on the calendar night of September 26, the September 27 trading day already had begun).
A 1290-word analysis by Professor Justin Wolfers of the University of Michigan noted that —
“… During the debate, the overnight [stock index] futures markets rallied, raising the value of broad stock market gauges like the Standard & Poor’s 500-stock index by two-thirds to three-quarters of a percentage point. This was a consequential move, … the rally occurred between 9 and 11 p.m. on a Monday, typically a fairly tranquil time and, in this case, a stretch in which there was no other important economic or financial news. … the rise in stock prices was unusually large for that particular time period — larger than during the same window on all but one of the 200 previous Mondays. It appears to be a statistically significant move … “
Regarding the Mexican peso, a September 27 news story at http://money.cnn.com noted that —
“As Trump and Hillary Clinton sparred on live TV, one key financial barometer of the Republican nominee’s prospects started moving sharply: the Mexican peso soared more than 2% against the dollar. In recent weeks, the Mexican currency has been moving in the opposite direction to Trump’s poll numbers. As they have improved, the peso has dropped, hitting an all-time low against the dollar ahead of Monday night’s debate. Its sudden leap during the debate was a clear reaction to Trump’s performance, according to Ihab Salib, head of international fixed income at Federated Investors. …”
To learn more about the ways in which VIX futures and options can be useful tools in portfolio management, please visit www.cboe.com/VIX.