Blogging Options: CBOE Morning Update 7.29.14

Slow news-night.  Overseas markets up fractionally as 2-day FED meeting begins, and few newsworthy comments expected.  VIX futures calm overnight.  Beautiful weather in midwest again this week, trains empty coming into downtown Chicago.  little Volatility as an asset classUPS (UPS) is down $3.00 to $99.66 in the premarket after cutting FY14 adjusted EPS view to $4.90-$5.00, consensus $5.09. Overall option implied volatility of 21 is above its 26-week average of 15.

Herbalife (HLF) is sharply lower, off $8.18 to $59.58 after the company’s Q2 results missed analysts’ estimates.   Option implied volatility of 58 is above its 26-week average of 52.

Wynn Resorts (WYNN) is down $1.54 to $209.43 (had been down over $6 earlier this morning) in the premarket after reporting Q2 adjusted EPS $2.11, consensus $1.95, however gambling revenue growth cooled in Macau. August weekly call option implied volatility is at 37, August is at 28, September is at 24, December is at 25; compared to its 26-week average of 29.


CBOE S&P 500 BuyWrite Index (BXM) at 1096.40, compared to its 10-day moving average of 1092.99

CBOE DJIA BuyWrite Index (BXD) at 270.69, compared to its 50-day moving average of 267.87

iPath S&P 500 VIX Short-Term Futures (VXX) is recently down 23c to 28.42.

CBOE Volatility Index (VIX) at 12.56, compared to its 10-day moving average of 12.32 and its 50-day moving average of 11.77.

CBOE S&P 500 Short-Term Volatility Index (VXST) at 12.02, compared to its 50-day moving average of 10.97

SPDR S&P 500 ETF Trust (SPY) is up $0.33 to $198.1`y3 into this week’s Federal Reserve meeting, July jobs reports and corporate results.

Calls with increasing volume at CBOE:

FB 8/16/2014 75 32K
IWM 8/16/2014 120 27K
EEM 12/20/2014 50 25K
AAPL 8/1/2014 99 10K
SPY 8/1/2014 198 10K
F 9/20/2014 17 8K


The Guacamole Dilemma: Dip Buyers Must Be Aware of Too Much Dip

So, when the markets drop 2-3%, which we have seen can happen within a week’s time – then is it right to buy that dip?  If you look at the chart below dating back a year the answer is a resounding YES.  But we are talking about drops/corrections in price and not time.  What makes many uncomfortable are the sharp drops in a few days that used to take a few weeks to occur.  We could blame that increase of speed on any ol’ reason – algorithmic traders, high frequency trading, hedgers, ETF’s, or just a more informed and reactionary investor/trader.  Gone are the days of buy and hold, which often turns into hope and pray mode!

spx 072614

Whatever the reason, we should look for patterns and trends that play out regularly, find confidence and go with the flow.  That gets us back to the dip question and how should we interpret what is a sufficient drop and whether it is appropriate to step in.  I have found over the past year plus these dips tend to be accompanied by very sharp changes in sentiment.  We’ll see a VIX spike as we had on July 17 and reversal – one of many that has occurred since 2012.  The McClellan Oscillator will show an extreme reading, with the NASDAQ and NYSE oscillators ticking down under -100 (very oversold).  Put/calls often zoom past 1 in these instances and the the polls show fewer bulls, traders getting more fearful (such as the AAII and II have lately).  When these all line up congruently I have found the best odds are buying that dip.

But each dip could be the last one, faking everyone out – right?  Sure, but is that likely with so much liquidity in this market, low interest rates and strong corporate profits – not to mention a very dovish Fed that will continue to provide accommodation?  I side with recent history.

Money moves very FAST in this market and if you’re not positioned right you can be trampled.  Discipline trumps conviction in most cases and we must be willing to take profits and losses and move on.  As option traders, we do not have the luxury of time if we are buyers.  With low volatility in this market it means options are priced cheap, a great condition if the trend continues.  But market trends are not necessarily stock trends.  For instance, the markets were hammered on Friday yet some stocks performed well.  While we know Amazon was clobbered down 10%, Baidu was up nearly 13%.   Freeport McMoran was up 1%, Apple was up .6% but Netflix was down 1%.  My point is this:  We continue to live in a non-correlated market, a stockpicker’s delight.

The best friend of a stockpicker is usually the chart and technical’s, which gets us back to the dip dilemma.  Do we trust each dip to buy, or is the next dip the ‘sucker move’, the one that takes stocks down for that massive 10-20% correction that EVERYONE expects?   You can sit around and wait for that, and much like a broken clock you’ll be right some day – but how much time have you wasted in waiting for it?  Let the market tell you what to do.  Currently, the market is consolidating recent gains (heck, from Feb 1-June 30 the SPX was up 12.7% – entitled to a break?).  In July the SPX is up a scant amount, the Dow Industrials and NASDAQ are up solid while the Russell 2K is down an ugly 5%.  What’s to come for August and September?  I won’t guess the move, but certainly buying dips has been the right play – it will continue to be, until it’s not.  At some point the pattern changes, and if that happens we may not have something left for our chips to dip.

Floor Trading History 101: Hand Signals

With the millions of investors and traders across the country involved in the stock, options, and commodities markets, very few have actually seen these products traded in person. Someone who has never taken a tour of any one of these trading floors is missing out on an art that takes years to perfect yet only seconds to appreciate.

Back before  technological influences made their way into the various markets, the only truly effective manner of communicating all potential buys or sells was through speaking loudly (the term “yelling” or “shouting” could be substituted) or by communicating with ones hands.  Interestingly enough, Chicago was one of the first cities with exchanges that quickly adopted the hand signals as one of the most basic and effective forms of mass communication.

The CME, CBOT, and CBOE have all been using hand signals for years (CBOE since the 1970’s, the others from the turn of the previous century).  Even though the CME is one of the only institutions left in the country that still use this method on a regular basis, the CBOE SPX (options on the S&P 500) pit uses a mix of computer hand-held tablets as well as open outcry/hand signals to make the trades day by day. For those who are lucky enough to witness this developed combination in action recognize the immense concentration and practice it takes to trade effectively.

The SPX pit is where the old school open out-cry with hand signals are used frequently and necessary for traders to execute trades. This being the case, the aspect of visual communication is ideal for everybody in the pit. Basically, the pit is less of a pit and more of a small amphitheater with large raised levels to support all the traders. Now fill it with hundreds of traders with tables strapped to their chest manning a stylus in one hand while shouting and throwing out bids and offers for calls and puts with the other hand.

You can’t help but gawk at all the color splashed trading jackets (representing different trading firms), the 20 foot monitors displaying the underlies prices hanging from the ceiling, and of course the rapid flailing movements paired with the erratic yelling and screaming of the traders trying to obtain the best price possible. It truly is a spectacle just to be able to observe this constant process.

Deciphering some of the signals is easy at first, which helps better grasp the understanding of what is actually going on when all some people see is screaming and swinging of limbs. Whenever a trader has his palms directed towards the face they are indicating a buy or a bid on an underlying position to initiate a position or to close it out.  The opposite of that is when the palms facing away, representing the sale of an option or the asking price where that trader would be a seller of options. The hand formation of the “C” shape leads you to believe the signal for Calls is being displayed while the connection of the index finger to the thumb, similar to an upside down “P” or the “A-Ok” sign, shows Puts are being discussed.  Other hand signals might denote which option expiration is being discussed, which brokerage firm a floor broker is representing, which option strike price, etc.

Thinking in this way may be pretty straight forward by the time you read all of that, but in that time, 30,000 contracts could have been exchanged and the price could have moved half of a percent. Obviously, this environment is not for those with slow reaction times.

The contract quantities are just another factor that traders need to think about when considering a transaction. The values one through five are displayed vertically on the hand and six through nine horizontally. The larger values are a little more detailed and the excerpt from an online student manual for traders and clerks below shows the large sums of proposed contracts traders must read accurately.

The market opens 8:30 am CT, and closes at 3:00 pm CT five days a week for individual stock options and until 3:15 for indexes like SPX.  Each day, that’s six and a half hours of hand movements, yelling orders through for priority from traders, surrounded by hundreds of other people, all inside what they call the SPX “pit”. The floor traders who understand and speak this fascinating hand signal language are beyond valuable to the customers, brokers, and even the exchanges. Just reading about the organized chaos that it is online is one thing and seeing it in person is experience all its own.

hand fiveBennett Wakenight

(editors note:  Bennett is a hard-working intern here at CBOE, back to Loyola U Chicago in the Fall for his senior year)

Blogging Options: CBOE Mid-day Update 7.28.14

Volatility as an asset class

Trulia (TRLA) is recently up $6.75 to $63.12 on Zillow (Z) acquiring for $70.53 per share. August call option implied volatility is at 57, September is at 55, December is at 43; compared to its 26-week average of 56.

Zillow August call option implied volatility is at 55, September is at 53, November is at 51; compared to its 26-week average of 56.

Tyson (TSN) is recently up $1.67 to $41.20 after the a food production company specializing in chicken and other proteins reported better than expected Q3 revenues and the sale of Mexican and Brazilian assets. August call option implied is at 28, September is at 25, January is at 23; compared to its 26-week average of 27.

Cal-Maine (CALM) is recently down $4.49 to $74.80 after the egg provider said it was “cautiously optimistic” about having a good start to full-year 2015. August call option implied volatility is at 28, November is at 27; compared to its 26-week average of 32.


Stocks with increasing volume @ CBOE:  CVLT TRP DLTR RFMD SWFT AVP INFN ACRX GALT KN


Busy Week On Tap – Weekly Market Outlook 7.28

Although the market’s uptrend may still technically be intact, there’s no denying it’s in question now.  The very day after the S&P 500 (SPX) (SPY) pushed its way past a key resistance line, it also fell back under it … in spades.  That pullback didn’t crush the uptrend, but we’re close to falling off the edge of the proverbial cliff.  We’ll look at the make-or-break lines in a moment.  The first thing we want to get out of the way is a look at last week’s and this week’s economics-based clues.

Economic Data

It wasn’t too busy last week in terms of economic numbers, but much of what we got was relatively important stuff.

First and foremost, inflation appears to be under control.  Two weeks ago we saw producer price inflation fall for a second straight month, to an annualized rate of 1.9%.  So, we had a decent reason to expected consumer inflation to fall in June too.  And sure enough, it did.  Annualized consumer inflation rate fell from May’s reading of 2.13% to 2.07%.  These are very tolerable levels, and there’s little on the horizon that suggests inflation is bound to grow in the foreseeable future.

It was also a big week for real estate number, most of which were encouraging.

The good news was, the Federal Housing Finance Agency reported home prices increased by 0.4% between April and May, and existing homes sales reached an annual pace of 5.04 million.  Home prices reached new multi-year highs – again – and are now at early 2008 levels.  The rate of existing home sales is now at the strongest pace since October.

The bad news is, new home sales tumbled from a pace of 442,000 units to 406,000 units in June.  That’s the weakest reading since September of last year, though it should be noted there’s usually a summertime lull in new home sales activity.

There’s a little more real estate data on the schedule for this week, although most of it is in now. All the rest of last week’s data is on the table below.

Economic Calendar


Clearly this week is going to be considerably busier in terms of economic numbers.


Blogging Options: CBOE Morning Update 7.28.14

Markets opening soft this morning.  CAT, MMM & Visa off ~$1 and moving the DJIA lower, whine AMZN off $6 and ISRG lower by $5 dragging the NASDAQ lower.  CBOE did 4.3mm of ~15.9mm contracts Friday – SPX with ~900k volume. VIX Futures with 44k traded in this morning’s session.  Volatility as an asset class:

Family Dollar Stores (FDO) opened  up $13.40 to $74.06 on Dollar Tree (DLTR) acquiring it for $74.50 per share. Overall option implied volatility of 25 is near its 26-week average of 27.

Dollar Tree overall option implied volatility of 21 is near its 26-week average of 22. (SOHU) is down $1.00 to $56.40  after the internet portal reporting disappointing Q2 sales and guided weak Q3 sales. August call option implied volatility is at 54, December is at 40; compared to its 26-week average of 42.

Options expected to be active @ CBOE:  SOHU CYOU FDO DLTR X TEVA WYNN GPRO TWTR FSLR

CBOE S&P 500 BuyWrite Index (BXM) at 1095.06, compared to its 10-day moving average of 1092.07


This Week in VIX – 7/25/2014

VIX rose over 5% last week despite the S&P 500 being basically flat on the week. There could be some of that anticipation we see in VIX (as opposed to reacting to the market) in front of big economic events and this coming week is full of those events. The FOMC rate announcement comes out Wednesday and Friday before the equity market opens we will get the first read on the economy in July when the Labor Department releases the monthly jobs report.



This Week in Volatility Indexes and ETPs – 7/25/2014

I’m still getting back up to speed after a brief break from the markets last week. One of the first things I want to do Monday morning is get a handle on VXST versus the other S&P 500 oriented volatility indexes. The curve shift below has me stretching for a reason VXST would drop while the other indexes rose. Especially in front of a jam packed news week like we have coming up.



This Week in Emerging Market Volatility – 7/25/2014

The state of emerging markets is strong. EEM rose 1.4% last week and is up just a tad under 8% for 2014. After the underlying market put up a strong week VXEEM made a surprising move and rose over 5% – I’ll attribute this move up to the index already being pretty low and a couple of economic events coming out next week in the US that could result in extra volatility for all equity markets.



This Week in VXST – 7/25/2014

I like being surprised and perplexed when I look at the week over week changes in volatility indexes. What has me really scratching my head is the difference between VXST and VIX. VXST was down slightly last week while VIX rose over 5%. That’s where I start to wonder what is up. I could understand VIX up slightly and VXST down a little (or vice versa) based on the S&P 500 being hardly changed last week. However, we got some news on the horizon with an FOMC announcement Wednesday and the July employment number out before the market opens on Friday. If I knew VIX and VXST were going to diverge last week I would have guessed VXST would have been higher and VIX would have been down from Friday to Friday.