On December 9th the annual William F. Sharpe Indexing Achievement Awards were presented at the 18th Annual IMN Global Indexing and ETF’s Conference in Scottsdale, Arizona.
Here are the first two awards that were presented –
(1) Indexing Innovation of the Year — S&P 500 Dynamic VEQTOR Index, which dynamically allocates long-only exposure between the S&P 500, the S&P VIX® Short-Term Futures Index (which takes long positions in near-term futures on the CBOE Volatility Index® (VIX®)), and cash.
(2) ETF Innovation of the Year — PowerShares S&P 500 Downside Hedged Portfolio (PHDG), which is designed to provide investors with broad equity market exposure with an implied volatility hedge by dynamically allocating long-only exposure between the S&P 500, the S&P VIX® Short-Term Futures Index, and cash. The ETF seeks returns that correspond with the S&P 500 Dynamic VEQTOR Index.
PANEL AND CHART
At the Global Indexing Conference this week, I participated on a panel in which questions were raised as to whether VIX-based exchange-traded products (ETPs) have the potential to be strong buy-and-hold positions. I noted that different ETPs that use VIX futures or options can have very different performance. Various ETPs are designed to track all four of the indexes in the chart below.
The S&P 500 VIX Mid-term Futures Index measures the return of a daily rolling long position in the fourth, fifth, sixth and seventh month VIX futures contracts, and one could highlight the fact that the index rose 83% in 2008, but declined in recent years because the VIX has declined and it also experienced some challenges with contango (VIX futures priced higher than the spot price of VIX).
In the period from March 31, 2006 through Nov. 30, 2013, the S&P 500 Dynamic VEQTOR Index rose 174%, the S&P 500® Index rose 64%, and the S&P GSCI Index fell 28%.
Here is an example of a short term setup in the stock 3 D Systems ($DDD, $78.09, off $2.38). The recent pattern on the 30-minute chart is one of higher highs and lows and if price can hold above the $74.40 swing low, then I like the buy side of this one against either of the two price cluster zones illustrated on the chart below. I have potential support at the $76.86 – $77.58 area and the $75.29 – $76.17 area. If you see a buy trigger against one of these zones, it’s worth placing a bet on the buy side with your maximum risk below the $74.40 swing low. You can also define your risk below the actual price cluster zone.
If the most recent low remains intact ($77.54 earlier today), target one comes in at the $84.04 area. For this shorter term setup, you may want to use a 3 – 5 minute chart as your trigger chart. For more informations on triggers, please refer to:
Volatility as an asset class
Pandora (P) is recently down $1.73 to $27.51 after Spotify announced Spotify Free for tablets. December weekly call option implied volatility is at 72, December is at 53, January and March is at 59 compared to its 26-week average of 62.
H&R Block (HRB) is recently down $1.30 to $27.53 after reporting Q2 revenue $134M, compared to consensus $137M. December call option implied volatility is at 30, January is at 24, April is at 28; compared to its 26-week average of 29.
Scripps Networks (SNI) is recently up $5.48 to $80.75 on Discovery (DISCA) considering a bid, Variety says. Overall option implied volatility of 22 is near its 26-week average of 23. Discovery overall option implied volatility of 23 is at its 26-week average.
Options with increasing volume @ CBOE: JOY DIS TWTR MRK TSLA NRF AVP SHLD P MU HD
Yesterday afternoon I had the honor of presenting a 30 minute webcast on Russell 2000 Volatility Index (RVX) futures and option trading which has recently been launched at CBOE and the CBOE Futures exchange. We discussed the index, how the futures pricing seems to replicate the behavior of the more established VIX curve, and even covered an RVX Option trade that came into the VIX pit.
The Russell 2000 (RUT) index represents small cap and mostly companies that focus their business activity inside the United States. The S&P 500 (SPX) on the other hand is a more global index as the majority of the components are large multinational companies. Since different economic trends impact the RUT and SPX, RVX and VIX behave a little differently from time to time.
If you missed the webcast, don’t fret, a recording will be available on Friday and now that college football is behind us (for about a month) you can watch at your leisure on Saturday. Finally, this presentation was the first of three (free) volatility market webcasts that are being offered by CBOE this week. Today (Wednesday) we will be discussing the CBOE Short-Term Volatility Index (VXST) from 3:30 to 4:00 Chicago time and tomorrow (Thursday) we will finish the three part series with a discussion of extended trading hours for VIX futures. You can still sign up for the remaining two webcasts at –
Budget deal in Congress seems to have been baked into the market, as stock futures little changed. Oil lower, metals mixed. 10-year auction later this morning.
Today at 3:30pm Chicago time Russell Rhoads of our Options Institute will have a 30-minute free webcast, the topic is the CBOE Short-Term Volatility Index (VXST) which was introduced in early October. Details can be found on the cboe.com home page.
Volatility as an asset class
Home Depot (HD) is down $0.05 to $78.56 in the premarket after reaffirming its outlook for 2013, seeing FY14 sales growth 5% and EPS growth 17%. Overall option implied volatility of 20 is near its 26-week average of 21.
Costco (COST) is down $2.04 to $118 on Q1 profit rising 2.2%, but the wholesale club’s revenue grew less than anticipated. December call option implied volatility is at 17, January is at 16, April is at 15; compared to its 26-week average of 18.
MasterCard (MA) is up $31.38 to $794.98 after announcing a 10-for-1 stock split, an 83% increase in its dividend, and a new $3.5B share repurchase program. Overall option implied volatility of 22 is at its 26-week average.
Joy Global (JOY) is down $2.49 to $53.75 after the underground mining equipment manufacturer reported Q4 earnings decreased 87%. December weekly call option implied volatility is at 62, December is at 36, January is at 32, April is at 30; compared to its 26-week average of 34.
CBOE Crude Oil Volatility Index (OVX) closed @ 17.95, below its 50-day moving average of 20.55. WTI Crude Oil is trading above $98 www.CBOE.com/OVX
TradeKing Midday Market Call Recap – SPX, LOW for Tuesday, December 10th.
Analysis of S&P 500 from QuickTakesPro’s Michael Kahn:
S&P 500 (SPX) – At the time of this broadcast, SPX was around 1,803.31 down 5.06 from Monday’s close. There’s no real defining trend going on here. The overall long term trend is still up, but momentum has been going down. There may be a small head and shoulders pattern recently formed, but until it moves one way or the other, there is nothing definitive.
It is above its 50 day moving average of 1756.45 and the 200 day moving average of 1660.37.
The Chart of the Day is Lowe’s (LOW) – At the time of this broadcast, LOW was at 47.51 down 0.25 from yesterday. Its rising trendline was broken on a gap down and the gap area seems to now be acting as resistance to more upside around the 48.70 area. In last week’s discussion we reviewed a bearish trade on Home Depot, and this is a sector that continues to look weak to Michael. If the stock does continue lower the next level of support looks to be around 44.
Volatility as an asset class
Lumber Liquidators (LL) is recently down $9.01 to $94.79 after the hardwood flooring retailer provided lower than expected fourth quarter profit guidance. December, February and May call option implied volatility is at 45; compared to its 26-week average of 43.
Twitter (TWTR) is recently up $2.38 to $51.54 as shares trade a new record high. December weekly call option implied volatility is at 71, December is at 54, January is at 49, February is at 60; compared to its 16-day average of 52.
General Motors (GM) is recently down 29c to $40.61 after the U.S. Treasury announced the sale of its remaining stake in the carmaker. December, January and March call option implied volatility of 29 is near its 26-week average of 30.
AutoZone (AZO) is recently $17.61 to $474.95 after the company beat earnings expectations by a penny. December call option implied volatility at 19, January is at 17, March is at 18; compared to its 26-week average of 22.
Options with increasing volume @ CBOE: ABX NBG BRCM FNF RMBS PVH BBRY TE
I think this first piece of advice I received on the floor is truer today than ever.
I received this question during a covered call strategy webinar presented to our customers this week. Many of our customers employ short option trades, either covered calls or cash secured puts. They are confident on the risk and rewards of the strategies and the initial trade set up, but where I believe many of them make mistakes is in the closing of the position. Way too many retail investors simply hold their short positions all the way until expiration especially when the option they have sold is out of the money.
Once you have a trade established, ignoring adding to existing positions, your choice is to either hold that position or close that position. When I think about whether to close or hold any position (but especially short option trades) I use the one of the most important bits of wisdom I learned my first month on the floor 30 years ago.
A very successful trader preached to me, “If you don’t close an open position today, it is the same as if you opened it today.”
This is an incredibly simple concept and yet totally missed by many retail traders. Most retail traders focus on the price they initially sold the option. Let me make one thing extremely clear. The market does not care what price you bought or sold to open any position, stock or option. If you sell a covered call at $1.50 and now that short call is offered at 10 cents, if you don’t CLOSE that open short call at 10 cents it is the EXACT same as if you are choosing to SELL that call TODAY at only 10 cents.
Therefore determining when to close a position is really basic. If you wouldn’t sell it today at the current market price, then CLOSE the position. That’s it. End of discussion. Whether this is a short call or short put the most additional income you are going to make from that short option is only 10 cents. Many traders wait until it expires worthless, basically tying up margin and buying power for very little return. A better use of your investing margin may be to close that “teeny” and roll into a new option that is more attractive to be short, with more decay and more potential reward. Steve Claussen
Temperature guage on car last night hit zero after Chicago Bears sent Cowboys packing. Cold weather headed East. SPDR S&P 500 ETF Trust (SPY) is recently is recently down 32c to $181.08 as Treasury prices rally. Trading may get a boost if Budget Committee makes progress today. One committee meeting cancelled due to weather.
Volatility as an asset class
Toll Brothers (TOL) is up $1.07 to $34.65 in the premarket after the luxury homebuilder reported Q4 EPS of 54c compared to consensus 43c and reported Q4 backlog of $2.63B. December call option implied volatility is at 37, January is at 33, March is at 34; compared to its 26-week average of 36.
Pep Boys (PBY) is down $1.56 to $11.85 after the auto-care company reported weak Q3 results. December call option implied volatility is at 47, January and April is at 31; compared to its 26-week average of 33.
Geron (GERN) is up $0.80 to $6.32 following a presentation of Imetelstat, novel telomerase inhibiting drug, at the ASH meeting. Overall option implied volatility of 116 is above its 26-week average of 110.
CBOE Crude Oil Volatility Index (OVX) closed @ 18.10, below its 50-day moving average of 20.65. WTI Crude Oil is trading above $98 www.CBOE.com/OVX
CBOE Gold ETF Volatility Index (GVZ) closed at 20.65, below its 50-day moving average of 21.66 GLD is recently up +1.4% to $121.58 in premarket www.cboe.com/GVZ
CBOE S&P 500 BuyWrite Index (BXM) closed at 1004.18, above its 50-day moving average of 984.29. www.cboe.com/BXM
As a technical analyst, my job is to find the most reliable and predictable patterns out there and make the assumption that they will repeat. But that is a pretty big leap of faith, isn’t it? Well, if you follow charts and technical’s you find they represent the very emotions that embody the crowd of players. Look at any chart and you can see the fear and greed, polarized emotions which exist on a spectrum of where we as individuals often slide from one side to the other. We all fear losing our wealth but have an insatiable appetite for building our accounts, and will do whatever it takes to make it happen.
Fear and greed are the parameters or limits we can deal with in our quest to interpret price action on a chart. For instance, we can explain big drops or surges in a stock price simply by observing price action. On Friday, ULTA was a great example of fear, players running for the hills to get out of the way of this falling boulder. Last week, TSLA had a big surge at the open on good volume and continued higher all day long, closing at the highs of the session. No fear on this one, right? But these are all seen after the fact, right? I want to see what the ‘right side of the chart’ will look like down the road, and of course that is the trickiest part of all. There is no ‘secret sauce’ to predicting the future but we can learn from past patterns and trends and put together a reasonable scenario.
One of many patterns I’ve seen this year is on the SPX and VIX (see charts below). The SPX lately has shown a predictable pattern of bouncing from its daily 20 MA, and on Friday it did just that. This is the fourth time this pattern showed up and worked, it also occurred several times earlier this year.
So, armed with that information and sitting right there last week, wouldn’t it have been worth a good bet to get long prior to the jobs report? Okay – hindsight is 20/20, I get that. But the setup was there and did not fail on previous occasions. What pattern do u see now after Friday’s action?
The VIX has often signaled a spike high but a very quick reversal following, nearly impossible to jump on board. BUT – if you saw the previous patterns develop coupled with oversold conditions (each time this was the case) the markets reversed hard in the face of great fear. Friday saw the VIX get slammed lower after a recent 28% move up in volatility.
So, is it taking too much of a risk chance to call for a reversal of a short term move to resume the current market trend? If the shoe fits, you wear it! Bob Lang