Sell in May and Go Away Alternatives (Part 1-BXM)

I love Wall Street sayings.  There is usually some truth behind them, but being a numbers guy I always like to trust these statements but also do some verification.  The Wall Street saying that comes around this time of year is, “Sell in May and go away”.  This basically means that investors would do well by only being in the stock market from November to April each year and then exit the market from May through October.  For the heck of it (and because I like to play with numbers) I took a look at how often the S&P 500 Total return was higher and how often it has been lower over the last 20 years during the period when those that sell in May would not be in the market.  It turns out the total return for holding an S&P 500 portfolio was higher 14 of the last 20 years from the last day of April through the last day of October.  That’s 70% of those years where the S&P 500 total return has been positive, so maybe sell in May and go away isn’t what it used to be.

Being an option guy I started thinking about different approaches as opposed to getting out of the stock market at the end of April each year and buying back on the first day of November.  I decided to take a look at the performance of some of the strategy indexes quoted by CBOE over this six month time period.  The results were pretty darn startling and so extensive that I’ve decided to break this up into a three part blog series.  Tonight is all about the CBOE S&P 500 Buy-Write Index (BXM).

As a refresher, BXM shows the performance of a hypothetical buy-write strategy on the S&P 500 Index.  On standard SPX option expiration dates the strategy buys (or owns) a portfolio that replicates the S&P 500 and sells a near-term S&P 500 (SPX) call option which expires on the following month’s standard expiration date.  The call option strike is the next strike higher than where the S&P 500 is trading at a certain time.  For a full explanation of this strategy index check out


CBOE Mid-Day Update 4.22.14

Fairly active options session with ~9.8mm options trading.  SPX with 585k and VIX showed ~375k trading.Volatility as an asset class

McDonalds (MCD) is down $0.31 to $99.39 after reporting disappointing Q1 earnings, but a rise in global same-store sales. May call option implied volatility is at 11, June is at 10, September is at 11; compared to its 26-week average of 14.

Xerox (XRX) is up $0.24 to $11.71 on Q1 earnings falling 5.1% and reducing its full-year adjusted earnings expectations. May call option implied volatility is at 24, June is at 21, October is at 22; compared to its 26-week average of 27.

United Technologies Corp (UTX) is up $1.61 to $119.91 after raising the lower end of its per-share earnings estimate. May, June, August and November call option implied volatility is at 13; compared to its 26-week average of 17.


Stocks with increasing volume: POT NLY NRG JNS MDSO SBAC SWK CTIC


Volatility is Starting to Sag

Two days in a row of small moves is enough to give the most die hard juice buyer indigestion.  The volatility of VXX options is now sub-50, 30 days out.  For VXX, peaking around $46 a few days ago, the vol ETP is sliding toward $40.  A level it has not been able to stay below since January, before the emerging markets crisis.  Do you remember that?

The simple fact is that it is hard for volatility to get too low.  But how low it can go is always delicious speculation for a juice buyer like me.  Will VIX hit 12 or 11, only the shadow knows?  What there is a lot of is healthy premium in the VIX futures in both May and Jun.

The May cycle is an extra week for VIX and with the future premium trading 2.1 over parity that is already priced in.  We need a couple more days like this for things to really implode.

LivevolX (r)

Most of the current crises are receding.  That just leaves earnings, and those are already turning into the not so good/not so bad earnings seasons of old.  With lack of catalyst on the horizon, we should see lower levels for VXX.

The Trade

Time put spreads just OTM or 1 x 2 Weekly put spreads just OTM for even or credits in VXX.  A little short direction is ok in Vol products right now but don’t get crazy.  Andrew @optionvol

Blogging Options: CBOE Morning Update 4.22.14

MCD missed on top and bottom line, stock rebounds from initial selloff and is now slightly higher.  HOG with stellar results, up over $4.  It’s earnings season.  .Asian shares mostly higher, but Chinese indices lower. Volatility as an asset class

Netflix (NFLX) is up $25.55 to $374.04 in the premarket after reporting stronger than expected Q1 results and better Q2 guidance. April weekly call option implied volatility is at 126, May is at 67, June is at 51; compared to its 26-week average of 44.

Allergan (AGN) is up $27.60 to $169.20 after Bill Ackman and Valeant Pharmaceuticals (VRX) teamed up to make a bid of $46B for Allergan. Overall option volatility of 30 is near its 26-week average of 29.

Comcast (CMCSA) is up $0.42 to $50.30 after reporting Q1 EPS ex-items 68c, consensus 64c. Overall option implied volatility of 23 is at its 26-week average.

Harley-Davidson (HOG) is up $4.46 to $72 in the premarket after reporting Q1 EPS $1.21, consensus $1.08.  May call option implied volatility is at 34, August is at 23; compared to its 26-week average of 24.



What (or Who) Are You Listening To?

With the increase in market volatility, we find ourselves reaching for and needing more certainty. Is our approach correct? Do we need to make adjustments? Is there better information out there?  This last question can lead us to listening to anyone with a viewpoint, and as the number of opinions and rhetoric rise, the more confused and indecisive we get.

But is this really what we want? Do we want to be dragged along by someone who may have an entirely different agenda? My suggestion: Turn down the noise, and pay attention to what the market is saying.

The market will tell you what is happening by giving off many signals that are evident in various technical tools. There is no guessing, judging or feeling here. High volume tells us there is interest from institutions (accumulation signals buying and sponsorship, while distribution signals selling). Momentum indicators show the power of price action and strong movement. Relative strength compares the action to indices as price consistently beats (or retreats) from a benchmark. Moving averages show direction, flow and support/resistance levels for price, which often acts as a magnet. Bands around price tell us where the majority of price action lies, and it helps us to discover accepted price levels.

Armed with the knowledge of past price and volume action, we find that patterns tend to repeat over and over again. After all, a stock chart is only a picture of human emotions and behavior (characterized by fear and greed) playing out in real-time stock prices. Price levels attract interest, and volume tells us whether that interest is strong or weak. A trader/investor with conviction will show commitment by buying or selling heavily.

I really don’t need to listen to someone’s market opinion on the tube when I have the facts right there in front of me. But it takes time and skill to filter through the information and pinpoint where we are and make assumptions about the future price levels based on the past. Is this method 100% guaranteed? Of course not, but I’ll take my chances based on past experience anytime. Look at the chart below, especially the lines and comments. The chart provides historical information, telling us where we can look for clues and base our conclusions on real evidence – not opinion.

Bob Lang

CBOE Mid-Day Update 4.21.14

Volatility as an asset class

Pinnacle Entertainment (PNK) is up $1.81 to $23.90 on the company says will continue to ‘review all strategies’.  May call option implied volatility is at 41, June is at 35, December is at 33; compared to its 26-week average of 33.

Micron (MU) is higher by $1.10 to $25.01 on Drexel Hamilton raising its rating to Buy and increasing its price target to $50 from $30 due to higher pricing and margin trends. April weekly call option implied volatility is at 49, April is at 62, May is at 41, July is at 40; compared to its 26-week average of 46.

Newmont Mining (NEM) is up $1.14 to $24.70 after WSJ says the company and Barrick Gold (ABX) could resume merger talks as soon as today. May call option implied volatility is at 37, July and September is at 33; compared to its 26-week average of 34.



Busiest US Factories Since Early 2008 – Weekly Market Outlook

Remember how awful things were two weeks ago?  The S&P 500 (SPX) (SPY) plunged 2.6% that week, and it looked like the market was ready to finally dole out that overdue correction.  Guess not.  Last week, the S&P 500 erased nearly all of the prior week’s loss, and ended the (shortened) trading week on a high note.  This bodes well for a bullish start to this week.

But is last week’s rebound just another fake-out, merely delaying an inevitable corrective move?  Possibly, though it’s possible the market’s truly back in rally mode.  Whatever the case [and we'll handicap the odds of both outcomes below], it may actually be a while before we get a clear answer.  We’ll show you why in a second.  Let’s first get the analysis of last week’s economic data out of the way.

Economic Calendar

All in all, as of last week the economy not only appears to be pointing in the right direction, it appears to be accelerating its growth.

The fireworks got started on Monday of last week with March’s retail sales.  Retail spending was up 1.1% overall, and up 0.7% when taking automobiles out of the equation.  Both are not only better than the expected numbers, but outright strong numbers.

We also got a decent dose of housing and real estate news.  Although housing starts failed to meet expectations of a pace of 955,000, the annualized rate of 946,000 topped February’s figure of 920,000.  As for permits, March’s pace of 990,000 was shy of the expected 1.003 million as well as short of February’s 1.014 million, but it’s still a solid figure when we needed to see some clues of a rebound on the housing and construction front.

Real Estate and Housing Trends Chart

ph 42014-real-estateSource:  Census Bureau, Standard & Poor’s, and FHFA


Weekly Market Commentary 4.18.14

Editors Note:  This was sent by larry on friday, a trading holiday.

The stock market abruptly ended its decline of a week ago and rallied all week. Wednesday’s strongly higher opening turned into an overall bullish day, and as a result a number of indicators rolled over to buy signals or generated new buy signals as well.

$SPX is now right back in the middle of the old 1840-1880
trading range.  In effect, we have now had a false upside breakout in early April and now have had a false downside breakout.  This is extremely distressing to both the bulls and the bears.
lm 4 18 spx

Equity-only put-call ratios remain on sell signals, and they will continue to do so for a while.

Market breadth has been influential.  The breadth indicators
are now both back on buy signals once again.

Volatility indices ($VIX, $VXO, and $VXST) collapsed heavily,
although they did close above their lows.  This produced a $VIX
buy signal.
lm vix

So, $SPX has turned from bearish to neutral, while market
breadth and volatility have turned from bearish to bullish.  Only the equity-only put-call ratios remain bearish.  Overall, the evidence is slightly to the bullish side.

Blogging Options: CBOE Morning Update 4.21.14

Lots of earnings reports this morning, most meet or exceed estimates slightly.  GM in another recall.  Japan with huge trade deficit.  Many European markets closed for Easter celebration.  Playoffs not going well in Chicago.  Volatility as an asset class 

Halliburton (HAL) is up $0.46 to $61.51 in the premarket on a Q1 profit compared to a year-earlier period loss that was impacted by a charge related to litigation from the 2010 Deepwater Horizon disaster.   April weekly call option implied volatility is at 31, July is at 22, October is at 23; compared its 26-week average of 25.

AstraZeneca (AZN) is up $3.56 to $6705, as Pfizer (PFE) is said to have approached to propose a $101B takeover, says the Sunday Times. Overall option implied volatility of 20 is above its 26-week average of 18.

Sarepta (SRPT) is up $15.50 to $39.50 in the premarket on plans to submit NDA for Eteplirsen by year end 2014. Overall option implied volatility of 145 is above its 26-week average of 104.


CBOE S&P 500 PutWrite Index (PUT) at 1409.75, compared to its 10-day MA of 1398.26 and its 50-day moving average of 1394.64.


Next Week in Weeklys – 4/20/2014

First the easy part, there were no new stocks, exchange traded products, or indexes added to the list of markets with short dated options available this past week.  Now the hard part – there are over fifty stocks with short dated options available for trading reporting next week.  The list below is not complete and we can blame author procrastination along with some systems work going on at CBOE for the long weekend.  Monday I’ll add the handful of stocks that report on Friday to this list and fill in a couple of gaps.  Consider my laziness your opportunity.  Monday morning update – CL, F, and FB added to list below.

For now here’s the list of companies reporting next week with their historical performance on the trading day after earnings for the last 12 quarters.  If the font is in italics it means the company has not been around long enough to have 12 quarters of history.

Earnings Part 3