Weekly Market Outlook – Is The Market Rolling Over?

Following through on the budding bearish effort from two weeks ago, the bears fended off a bullish bounce-back effort over the course of the first half of last week. It wasn’t meant to be, however. Between Thursday’s and Friday’s high-volume selling, the S&P 500 (SPX) (SPY) booked a 1.2% loss last week, and broke below some key support levels in the process. If history is any indication, this stumble may well be the beginning of a more serious pullback.

We’ll dissect the rollover effort below, after running down last week’s and this week’s economic news that will either reverse the selling effort, or exacerbate it.

Economic Data

Last week was pretty busy in terms of economic news. The biggest item, of course, was the Federal Reserve’s decision to stand pat on interest rates. Janet Yellen did downplay some economic concerns, though her cheerleading didn’t do much to boost stocks.

It was also a particularly important week for real estate and sentiment. We rounded out the week-ago look at the housing market with new-home sales and the Case-Shiller 20-city Index for February, and we got a double-dose of consumer sentiment reports.

As for real estate, the Case-Shiller Index indicated a 5.4% improvement in annualized home values, jibing with FHA data of the same. This has been one of the steadier aspects of the real estate recovery.


Source: Thomson Reuters

As for home sales, new-home sales was lackluster again last month, at an annualized pace of 511,000 units… more or less where it’s been for the past five months. At the same time, it’s become clear that new-home inventory is ramping up. It all suggests a tapering in demand. And yet, demand for existing homes popped last month, and the supply of existing homes remains near multi-year lows.

Home Sales, Inventory Chart


Source: Thomson Reuters

The only other data worth plotting is an updated look at our two key consumer sentiment measures… the Conference Board’s consumer confidence reading, and the final April update of the Michigan Sentiment Index. The former fell from 96.2 to 94.2, and the latter fell from 91.0 to 89.0. One monthly pullback doesn’t make a trend, but we’ve seen a string of pullbacks more than a year now. Something has to give sooner or later. More

2016 SPX 500 Chart Has Similar Pattern as 2008

We often look at charts to find recognizable and repeatable patterns, hoping to take notice of a previous move that may have a high probability of happening again.  In the universe of technical analysis, there are a plethora of technical patterns with setups for both bullish and bearish plays.  You can find a nice sampling of those below.  But the important takeaway from the analysis is to have an open mind without bias, identify a pattern and which way is most ‘likely’ and play it accordingly.  We’re not always going to be right, but this is not a game of perfect.  Below are some of the most identifiable candlechart patterns that I use.  This from traderslaboratory.com, via Steve Burns.

candlechart patterns

When someone asks me about the current condition and whether we are in bull or bear market territory, I refer them to the longer term monthly chart.  Bull and bear markets are long term conditions, hence we need to see how patterns are constructed on these charts before making an assessment.  A monthly chart has less noise and when in bullish is often a sign of more confidence among investors, especially large institutional money, who are mostly long term investors.

I’ve been saying for months we are still a bear market since Spring 2015 when the very important MACD indicator crossed to the bearish side.  Now, a monthly chart is very slow, and it took many months to get this indicator to turn (see chart).  However, we have seen some of the largest and most spectacular rallies within bear markets.

Identifying repeatable patterns put the odds in your favor, but since timeframes are always different and characteristics change, we have to analyze the entire picture.  The SPX 500 just finished it’s fourth month of 2016, and here we have identified and identical pattern to early 2008.  Now, we all know what happened later in 2008, and the chart shows the ominous outcome.  This of course started with the Bear Stearns collapse in the Spring of that year and led to a near collapse of the financial system.

spx monthly 043016

While we cannot argue with the identical candle patterns, they are indeed exact – other factors must be considered before we believe the markets will completely roll over.  Interest rates today are at all time lows, back in early 2008 that was not the case.  Central bankers are easing with reckless abandon today, and given their aggressive nature it makes for big shocks to hit the traders and investors.  You remember some of those big gaps up and down over the last few years after some words by ECB Chair Draghi or BOJ Premiere Kuroda?

Momentum indicators are in a ‘better’ place today than in 2008, and the relative strength is better. Yet, these indicators take a back seat to the price action, and that is where we must take notice of the identical patterns we see in 2008 and 2016.  While there was a catalyst to the fall in 2008, clearly this pattern foretold the events that would follow, so we are now aware.  We’ll not jump in front of the pattern yet as we don’t have a trend yet.  As always, confirmation is needed, so a very dark candle this next month (as we had in 2008) would be the first sign that more downside could be on the horizon.

Weekend Review – Volatility Indexes and ETPs – 4/25 – 4/29

The weakness in the S&P 500 last week, although not really dramatic, did result in pretty big moves out of the four S&P 500 related volatility indexes. They were coming off pretty low levels which attributes to the large moves, at least on a percentage basis. The curve remains steep, which indicates the market remains concerned about whether stocks can move to the upside this year.



The Weekly Options News Roundup – 4/29/2016

  • The Weekly News Roundup is your weekly recap of CBOE features, options industry news and VIX and volatility-related articles from print, broadcast, online and social media outlets.

CBOE Livevol Aims to Be a “Data Amazon”

CBOE announced Thursday it has launched a new website, CBOE Livevol Data Shop, offering clients a full suite of uniquely customizable market data.  With the new Data Shop website, clients no longer have to purchase data or subscribe to data sets on a one-size-fits-all basis.

The new site is available at https://datashop.cboe.com

“How CBOE Is Keeping Up with the Fintech Revolution” – Spencer Israel, Benzinga


“CBOE Launches New Livevol Data Portal” – Max Bowie, WatersTechnology


CBOE Hosts “Smart Money, Smart Women, Smart Options” Event

CBOE sponsored and hosted a women investors’ event on Tuesday in conjunction with Money Smart Week, a weeklong financial literacy initiative by the Federal Reserve Bank of Chicago that concludes tomorrow, April 30. CBOE CEO Edward Tilly opened the session with introductory remarks, followed by an educational panel featuring the financial empowerment stories of leading women in the financial industry.

The event featured remarks from Carolyn Leonard, CEO and Co-Founder, DyMynd; Dorri McWhorter, CEO, YWCA Metropolitan Chicago; Dr. Monika Black, Chief Strategy Officer, DyMynd; Kathleen McQuiggan, Senior Vice President, Global Women’s Strategies, PAX World Management; Ilyce Glink, Founder and President, Think Glink, Inc.; Venita Fields, Partner, Pelham S2K Managers, LLC; and Nina Milovac, Director of Online Education, optionsXpress.


VIX: Taking a Long View

Goldman Sachs’ equity options experts this week published a research paper explaining how to gauge when to take a long position in the VIX, providing insights that fueled some discussion within the trading community.

“Goldman, Noting Anticipatory Aspect of VIX Futures, Outlines Performance Drivers” – Mark Melin, Value Walk



Live Vol

The Chicago Board Options Exchange® (CBOE®) today announced that it has launched a new website, CBOE Livevol Data Shop, which offers clients a full suite of uniquely customizable market data sets.

The new CBOE Livevol Data Shop, available at datashop.cboe.com, provides users with direct and immediate access to a comprehensive set of market intelligence for options, equities, indexes and exchange-traded funds (ETFs). The user-friendly website provides access to detailed calculations, including implied volatilities and Greeks (delta, vega, gamma and theta of options), as well as tick and trade data for nearly every underlying U.S. equity and option from 2004 to the present.

“The main differentiator with the new Data Shop website is that it offers clients unique customization of data sets,” said Catherine Clay, Vice President, Business Development, CBOE Livevol. “Clients no longer have to purchase data or subscribe to data sets on a one-size-fits-all basis.”

Instead, clients can choose the exact data set needed, Clay said. The data is downloadable from the self-service site, which is designed to serve both institutional and retail customers, as well as researchers and academics. Subscriptions are available on a daily, monthly or annual basis.

“We’re making sure the end customers are getting what they want, when and how they want it,” Clay said.

CBOE Livevol provides traders with cutting-edge tools, data and custom analytics services. CBOE Livevol offers a wide spectrum of technology and data solutions, including a consolidated feed, real-time programmable analysis and scanning, historical files and back testing, real-time decision support, flat files, XML web services and other web components.

Additional information on CBOE Livevol and its products can be found at www.livevol.com.


Morningstar Is Adding New “Option Writing” Category on April 29

In my opinion, the launch of a new Option Writing category by Morningstar this week has tremendous potential to boost long-term interest in and acceptance of options-based strategies by portfolio managers, financial advisers, and consultants.

On April 29, 2016, Morningstar is adding a new Option Writing category to its U.S Retail Category system, and the Category Index is the CBOE S&P 500 BuyWrite Index (BXM).


Over the past decade I have spoken to numerous representatives of different mutual funds that used options, and the top group of complaints I heard from these reps involved the Morningstar categories – these reps told me that the Morningstar categories were very important and influential, but the categories applied to their options-based fund (such as “Long-Short” or “Large Blend”) could be updated to be more accurately descriptive. Some of these representatives said that (1) they individually met with Morningstar to discuss the category applied to their fund, (2) they were interested in a the possibility of new Options category, and (3) they asked if CBOE could discuss the category topic with Morningstar. In 2014 I had a two-hour meeting with key Morningstar reps in which (1) I gave them an overview of performance of options-based benchmark indexes (such as the BXM Index) and some options-based mutual funds, (2) Morningstar reps told me that potential new Morningstar categories have several requirements, including the fact that there should be enough constituents to form the basis for reasonable peer group comparisons (e.g., a dozen funds generally would not be enough to generate a new category), and (3) I told Morningstar reps that in the future I would provide more information on many dozens of options-based funds. In early 2015 I was pleased to send to Morningstar a new study by Keith Black and Ed Szado that provided a list of 119 ’40 Act funds that used options (see more info on the study below).


Morningstar states that their categories “help investors identify the top-performing funds, assess potential risk, and build well-diversified portfolios.” In the U.S., Morningstar supports 122 categories, which map into nine category groups (U.S. equity, sector equity, allocation, international equity, alternative, commodities, taxable bond, municipal bond, and money market). The category group indexes and category indexes listed with each category are used in Morningstar’s tools and reports to show performance relative to a benchmark.

Two of the key Alternative categories that could be of interest to people who invest in options or volatility products are:

Option Writing (introduced on April 29, 2016)

Option writing funds aim to generate a significant portion of their returns from the collection of premiums on options contracts sold. This category includes covered call strategies, put writing strategies, as well as options strategies that target returns primarily from contract premiums. In addition, option writing funds may seek to generate a portion of their returns, either indirectly or directly, from the volatility risk premium associated with options trading strategies.

  • Category Group Index: S&P 500 TR USD
  • Category Index: CBOE S&P 500 BuyWrite BXM
  • Morningstar Index: Morningstar US Market TR USD

Volatility (introduced on April 30, 2011)    

Volatility strategies trade volatility as an asset class. Directional volatility strategies aim to profit from the trend in the implied volatility embedded in derivatives referencing other asset classes. Volatility arbitrage seeks to profit from the implied volatility discrepancies between related securities.

  • Category Group Index: S&P 500 VIX Short Term Futures TR USD
  • Category Index: S&P 500 VIX Short Term Futures TR USD
  • Morningstar Index: Morningstar Cash TR USD


Morningstar’s Category Index for the new Option Writing category is the CBOE S&P 500 BuyWrite Index (BXM). While there are some people who still wonder if use of options usually adds to volatility, see the chart below and note that since mid-1986 the BXM Index had less volatility than the Citigroup Treasury Bond, S&P 500, Russell 2000, MSCI EAFE, and S&P GSCI (commodity) indexes.



In 2015 Keith Black and Edward Szado published a paper “Performance Analysis of Options-Based Equity Mutual Funds, CEFs, and ETFs.” You can visit www.cboe.com/funds to click on different versions of the paper — Slide Presentation (30-page PDF), Highlights (4-page PDF), and Paper (28-page PDF).

The 2015 paper found that the number of ’40 Act funds (including mutual funds, ETFs and closed-end funds (CEFs)) that used options grew from 10 in the year 2000 to 119 funds in 2014, and the paper provides a list of the names and ticker symbols for all 119 funds.


In the 15-year line chart graph in the 2015 Black/Szado study, the black line (representing the returns of the U.S.-equity-focused options-based funds as a group) and the green line (representing the CBOE BXM Index) both tracked each other pretty closely. At the end of the end of the 15-year period, both the options-based funds and the S&P 500 rose 86%, the BXM Index was up 82%, and the MSCI EAFE Index (in US$) rose 46%. All these returns are pre-tax, and past performance is not predictive of future returns.

Line chart

In the bar chart by Black & Szado showing annualized standard deviations, the Options-Based Funds (represented by the black bar) had lower volatility than the S&P GSCI, MSCI EAFE. S&P 500, BXM, and Citigroup 30-Year Treasury Bond indexes.



I am looking forward to learning more about which funds will be included in the new Option Writing category, and I will be interested to see if the most funds in the new Option Writing category have less volatility than most funds in Morningstar’s domestic and global stock categories.

To learn more about options benchmarks. options white papers and options-based funds, please visit www.cboe.com/benchmarks and www.cboe.com/funds.

CBOE Hosting New Conference on Derivatives and Volatility

Over the past ten years or so VIX futures and options have been two of the fastest growing listed derivative markets in the world.  This has resulted in traders and investors paying more attention to market volatility than ever before.  It has also resulted in the dramatic expansion of academic research focused on volatility.  The combination of these two factors has led to a collaboration between the Financial Management Association and CBOE in the form of a new conference.  In November we will be hosting the first Conference on Derivatives and Volatility to be held at CBOE.

For those unfamiliar with FMA, the organization has over 3,000 members with a focus on developing and disseminating knowledge about financial decision making.  They host multiple academic conferences each year throughout the world.  FMA also published the academic journals, Financial Management and Journal of Applied Finance.

The goal of this conference is to bring together practitioners and academics focusing on derivatives and volatility in the markets at the same event.  I have found that academics whose research interests include the financial markets are surprised when I relay how much of their work ends up in the hands of traders and analysts.  This conference will give them a chance to discover how their work is implemented in new speculative, investment, or risk management strategies.

The first step for a conference like this is the call for papers which went out last week.  Over the next few months the submissions will be reviewed by the program committee with the final list of presentations being announced in late June or early July.  If you have any questions about this event please feel free to email me at rhoads@cboe.com or you can check out the links below.

Call for Papers – http://fma.org/CBOE2016/CBOE_CallforPapers.pdf

Conference Website – http://www.fma.org/CBOE2016/

Shaking down the $SHAK

A trading friend of mine, who wishes to be called “Chip” in the telling of this story, is clamoring for me to tell this story on his behalf.  The brief but detailed saga is basically a chronicle of Chip’s studious, calculated transactions that allowed him to benefit from a particular company’s stock price trajectory over the one week span of time covered by this case study. It’s a tale of Shake Shack, puts and calls, and of cash raked over the barrelhead into Chip’s sweaty, eager hands.

On April 15th, noticing that Shake Shack had been trading four cents shy of $39 during the morning and was somewhat above $38 in the afternoon, Chip scouted out attractive puts to sell. With cash set aside to secure them, he submitted a limit order for $1.10 for the 38.50 strike puts expiring one week away, on April 22nd. His reasoning was that he believed SHAK’s price would top $38.50 by the 22nd, despite possible interim moves lower. He was willing to be assigned stock if incorrect in this prediction.  His order was filled at $1.13.

He now held ten short put contracts for SHAK at the 38.50 strike, April 22 expiration, for $1.13 premium each.

Interestingly, two trading days later, on Tuesday the 19th, SHAK touched an intraday low of $35.59.  Chip’s puts would have been expensive to buy back.  He did no such thing, however; to the contrary, while SHAK hovered just under $36 that morning, Chip bought five calls at the 36 strike for $0.85 each.

The next day, April 20th, the premium for those calls decreased, despite a slight rise in share price for SHAK.  Chip bought five more of the same for $0.80 each.

He now held ten short puts expiring in just two days for the 38.50 strike and ten long calls also expiring in two days for the 36 strike.  SHAK’s trading range for April 20th was 36.10 – 37.54.

On this same day, April 20th, after having loaded up on long calls for 36 strike SHAK at a cost to him of $825 total (including those purchased the day before), which had the potential to become a total loss to him in two days, Chip assessed the health of this position.  With his second purchase having been made during the first hour of the trading day, the last hour approached and call prices had risen significantly.  In mid-afternoon, when SHAK prices hovered around 37.50, more or less, Chip liquidated all ten of his long 36 strike calls for $1.30 each.  This brought him a profit of $429.50, after broker commissions, for just one day of monkeying around and shaking up the shack a little bit.  See summary below:

On Thursday, April 21st, only one day remained in the life of Chip’s short puts.  See chart above for refresher:  He had sold ten puts short for the April 22nd expiration, 38.50 strike, for $1.13 premium received.   SHAK’s trading range on this day was $36.76 – $37.70.   Chip knew that if SHAK ended below $38.50 by the end of the next trading day, he was likely to be assigned 1,000 shares of SHAK, and in fact, he could be assigned those shares at any point prior.  He was willing to own those shares, because he believed SHAK share prices would rise in the long run, and he was comfortable owning the shares.  But his intention was to avoid taking on shares if possible, and instead to profit from the movement in option prices over short periods of time.

Around midday on Thursday the 21st, one day before expiration, Chip rolled his short puts by doing the following:  (see chart below for detail)  He bought to close all ten of the above-described 38.50 puts for $1.30 premium each,  which was a price higher than what he had opened the short puts for, so he took a loss on this transaction.  The loss was $201 after accounting for commissions.  Then he opened up new short puts as such:

With a date one week farther out but everything else being identical, he replaced the set of short puts by selling ten SHAK puts expiring April 29th at the 38.50 strike for $1.73 premium received per contract.  On the next day, April 22nd, Chip noticed SHAK stock prices rising (see chart again) so that traders weren’t hot on the trail of SHAK puts, and premiums softened accordingly.  When  his week-away puts sported $1.40 price tags – cheap relative to the price he had received – Chip took the opportunity and bought the contracts back to close for a profit.  His profit on these rolled contracts paid him back for the loss he had taken on the puts closed the day before, with some extra bonus profit.  While his loss had been $201 on the previous set of puts, he made a gain of $299 plus some cents (all figures after commission) on the new transaction, and netted together, that made for about $99 in profit from his put-selling and buying-back venture.

This chart zooms in on the last two days shown in the previous chart

Total figures on the short put project are summarized as such:

All told, he made over $500 and never owned any SHAK stock at any point during the put-and-call shuffle. Chip’s trades demonstrate that both long and short options can generate profits when traded with attention to daily price fluctuations and an eye on the underlying’s price.

First Trades in New CBOE FLEX Index Options with Asian-Style Settlement

Last week the first couple of trades were executed in the new CBOE FLEX® index options with Asian-style settlement. Open interest for the new CBOE Asian-style FLEX options has grown to more than 680 contracts, representing notional value of more than $6 million..

A recent article at EQDerivatives.com noted that

An insurance firm has traded the first listed Asia-style flexible exchange option, which were listed on the Chicago Board Options Exchange last month. Agency only broker X-Change Financial Access facilitated the trade, which involved an Asia-style call spread on a broad-based U.S. index.. …”

An Asian-style option, also known as an “averaging option,” is an option whose settlement value is based on an average of the underlying index closing prices throughout the contract’s life, as opposed to the single price at expiration. CBOE Asian FLEX index options have a term of approximately one year with 12 monthly observation dates.

Insurance companies that write indexed annuity contracts often have exotic option liabilities embedded within those annuity contracts. One of the most common types of exotic options is an option with Asian-style settlement. Insurance companies seeking to hedge embedded exotic option risk have historically traded exclusively in the over-the-counter (OTC) market. The introduction of Asian FLEX index options is expected to provide insurers with an alternative hedging tool to OTC market products, while also providing traditional exchange-traded benefits like enhanced price discovery, transparency and centralized clearing. For the past 43 years, CBOE has been and continues to be a leader in terms of providing innovative options-based risk-management solutions for investors.

To learn more about CBOE Asian-style FLEX index options, please visit www.cboe.com/Asian and click on the Fact Sheet.


Open Interest for VIX Call Options Recently Topped 7.5 Million Contracts

Last week the open interest for call options on the CBOE Volatility Index® (VIX®) surged to more than 7.5 million contacts (see chart below).

In a recent article at Bloomberg.com, reporters Joseph Ciolli and Inyoung Hwang wrote –

“Going long market turbulence has surged in popularity in the last nine weeks, with investors sending an unprecedented $3.2 billion into securities that reap gains from wider price swings. That pushed shares outstanding on exchange-traded notes tied to the Chicago Board Options Exchange Volatility Index to a record …  [Some derivatives strategists] attribute the positioning to investors who still doubt the staying power of a stock market runup that’s added more than $2.5 trillion to share values. [But others believe] the opposite is true: the increase is equity bullish, with investors simply protecting their expanding wagers on stocks. …  The VIX has traded below 20 for 37 straight days, the longest such streak in 13 months. … “ 



As shown in the two charts above –

  1. The open interest for VIX call options ranged between 2 million and 4 million contracts in the first quarter of 2015, but last week the open interest topped 7.5 million.
  2. It is interesting to note the relationship on various dates of the top chart (with open interest for VIX calls and puts) to the bottom chart (with price levels for the SKEW, VVIX and VIX indexes). Note, for example, that when the CBOE VIX of VIX Index (VVIX) spiked (e.g., in Jan. 2015 and Aug. 2015), the open interest for VIX puts often rose and the open interest for VIX calls was lower when compared to other nearby months. In times when the both the VIX Index and VVIX Index are at relatively low levels, the open interest for VIX calls could rise because some investors may believe that a long position in VIX calls could be a form of cheap portfolio protection in the event of a market crisis.

To learn more, please visit the links below –

A Buffett Put Trade Refresher

It’s been a while since I first wrote about Berkshire Hathaway selling put options on broad based indexes.  The following is a refresher or introduction to the trade if this is new to you.

Back in 2008, as the financial world was falling apart, the business media loved to quote Warren Buffett’s comment about derivatives from Berkshire Hathaway’s 2002 annual letter. However, that line has been taken completely out of context to fit the needs of market commentators or derivative critics. The specific line appears below –

“In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal”

The same letter contained the next quote, which may be a startling to many readers.

“Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies”


Weekly Market Outlook – Weekly Chart Weakening

Though the S&P 500 (SPX) (SPY) managed to eke out a gain last week, it also ended the week fighting for its life, dropping hints that the rally is running out of gas. Meanwhile, the NASDAQ Composite (COMP) logged a weekly loss — the second in the past three weeks — and also hinted that a rollover was already taking shape.

Moving into the thick of earnings season could drive a course correction with little to no warning. Indeed, the course isn’t even technically bearish yet. The bulls have a heck of a lot to prove now, however.

We’ll hash out the details after running down last week’s and this week’s key economic numbers.

Economic Data

Last week wasn’t a terribly busy week in terms of economic news, but it was a big week for real estate data… though not an especially encouraging week.

Perhaps first and foremost, we heard March’s existing home sales tally last week.- existing home sales ticked a little higher, from 5.07 million to 5.33 million. It will be interesting to see if that growth is offset this coming week by a lull in the pace of new home sales (as has been the case in the recent past). We still contend that a modest lack of inventory may be slowing home sales down. Even so, we continue to see slow and steady progress on this front.

Home Sales, Inventory Chart


Source: Thomson Reuters

Don’t sweat last week’s lull in starts and permits too much, as March — oddly enough — is often a tepid one for both. On the other hand, both dips were more than slight, and neither data set was exactly rip-roaring heading into March’s announcement. Another lackluster round of housing starts and building permits could be trouble.

Housing Starts and Building Permits Chart


Source: Thomson Reuters

While total home sales and construction activity has waffled of late, one thing that’s remained strong enough to serve as encouragement is pricing. Last week we heard the FHFA Housing Price Index, and this week we’ll get the Case-Shiller Index for February. The former was up (again) last month, and the latter is still in a comparable uptrend.

Home Price Chart More