Blogging Options: CBOE Morning Update 9.10.14

Wet Chicago and soft opening.  Crude down, metals up, dollar mixed. Traders watching yield creep higher.  Volatility as an asset class:

Apple (AAPL) is  up $0.06 on 22 million shares in the first 45 minutes, a day after the much-anticipated product launch event. September weekly call option implied volatility is at 36, compared to a level  of 59 before the open on September 8, September is at 28, October is at 26, December is at 25, January is at 24; compared to its 26-week average of 25.

VIX methodology for Apple (VXAPL) is at 27.25, compared to its 10-day moving average of 26.85. CBOE.com/VXAPL

Krispy Kreme (KKD) is off $0.67 on Q2 profit increasing 22% on sales growth. September volatility elevated into Q2 and guidance. September call option implied volatility is at 76, October is at 49, January is at 40; compared to its 26-week average of 44.

Palo Alto (PANW) is up $6.24 to $95.52 after the maker of hardware and software for computer-network security forecast revenue for the current quarter higher than analyst expectations. September weekly call option implied volatility is at 93, September is at 56, October is at 46, December is at 41; compared to its 26-week average of 46.

Options expected to be active @ CBOE:  PANW KKD TWTR MBLY EBAY AAPL

CBOE SKEW INDEX (SKEW) at 136.88, compared to its 50-day MA of 133.45. SKEW measures the purchase of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions. An increase of this index indicates greater expectations for an extreme down move.

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CBOE Mid-Day Update 9.9.14

Volatility as an asset class

Apple (AAPL) is recently up $1.22 to $99.64 into its much-anticipated product launch event. September weekly call option implied volatility is at 56, September is at 35, October is at 31, December is at 25, January is at 24; compared to its 26-week average of 25.

VIX methodology for Apple (VXAPL) is down 3.6% to 29.22, above its 10-day moving average of 28.07 into a company sponsored September 9th event. CBOE.com/VXAPL

Yahoo (YHOO) is recently down 72c to $41.08 on the second day of the Alibaba roadshow.  Yahoo September weekly call option implied volatility is at 42, September is at 54, October is at 56, November is at 46, January is at 39; compared to its 26-week average of 34.

McDonald’s (MCD) is recently down 85c to $91.64 after reporting its comparable sales were down 3.7% worldwide in August and that its China supplier issue will negatively impact its Q3 EPS by 15c-20c. September call option implied volatility is at 13, October is at 12, November and January is at 13; compared to its 26-week average of 14.

Actives at CBOE:  AAPL TSLA TWTR YHOO PBR BAC FB AMZN GILD C

Stocks with increasing volume @ CBOE: LNG VNET GTAT EMC WMB UAL MU

CBOE DJIA BuyWrite Index (BXD) down 8c to 270.30, compared to its 50-day moving average of 268.52 cboe.com/micro/bxd/

CBOE Volatility Index (VIX) up 37c to 13.03. VIX September 13, 14 and 15 calls are active on 257K contracts @ CBOE cboe.com/VIX

iPath S&P 500 VIX Short-Term Futures (VXX) up 1.1% to 27.81
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Retail is Tough, But Play it for the Holidays

There is no group that is more disjointed and lacking trend than retail.  Just when you think the group is going to fully tank, a Home Depot or Tiffany comes along and shows stellar numbers.  And when it appears consumer spending may be turning around, we see Abercrombie & Fitch or Guess lay an egg.  Retail is tough, but not impossible.  There have been all sorts of excuses about the rapid drops in consumer spending, yet we see auto sales peaking, Home Depot talking about big ticket items selling at a brisk pace and Signet Jewelers selling very high end merchandise over this last quarter.

I grant you that positive results are lumpy – Williams-Sonoma followed up a stellar quarter in May with a wretched one in August, bringing the stock back down to Earth.  How will it effect a name like Restoration Hardware, who reports this week and is coming off a stunning report in June?  For some of these retailers it’s a ‘crap shoot’ but for others there are some important trends taking hold.

Trying to game any stock around earnings is difficult but when talking retail it is nearly impossible to get it right consistently.  Just when you think a blowup will occur the company delivers a blowout quarter and squashes your dreams of a big payday to the downside.  There is a high correlation between spending and economic/job growth, yet even wealth creation has trickle down effects on the economy, especially retail.  Further, those not ‘effected’ much by a downturn are likely to continue purchasing goods regardless.  Where am I going here?  It appears high-end retail/products is where the action will be over the holidays and into early 2015.  Many of the trends in this group are positive and showing growth momentum which can be sustained by stronger buying power and price raises that stick.

Automakers continue to roll and sell vehicles.  Karmax and Autonation have been talking about pent up demand for months and are posting record numbers lately.  China is another area going unnoticed.   Still a strong economy,  the consumer’s appetite for high end goods is insatiable and many of our retailers will satisfy that need.

Some of the names in the high-end segment include products from Apple, GoPro, Deckers, Ralph Lauren, Nike, Tiffany, Steven Madden and Vanity Fair.  These products for the most part boast strong and growing margins that may not be vulnerable during a marked-down holiday period.  In other words, customers will buy products regardless of any discounts – that is sustainability.  Other names that should hold up well include Costco, Home Depot, Nordstrom and Macys.  One retailer than nobody seems to give credit for making a profits is Amazon.  Certainly the numbers do not lie, but they have such a large reach and are going to be key driver to online holiday shopping.  As Amazon goes, so goes the holiday season.

It is no coincidence the charts of most of these names are in good shape are flashing buy signals.

To sum up, retail is one of the more difficult groups to play – especially with a worried or fickle consumer.  However, this holiday season we are likely to see the biggest, best and brightest start to shine.  Don’t miss your opportunity.

Blogging Options: CBOE Morning Update 9.9.14

Overseas markets seeing contagion fears on Scottish independence vote.  Spanish bonds higher, SPX off 7 points, VIX up 0.30 in first 20 minutes.  MCD with huge drop in same-store-sales in Asia off $0.50. Volatility as an asset class

Apple (AAPL) up $1 in first half hour of trade to $99.36 into today’s press event. September weekly call option implied volatility is at 59, September is at 35, October is at 28, November is at 26, December is at 26, January is at 24; compared to its 26-week average of 25.

VIX methodology for Apple (VXAPL) is at 30.30, above its 10-day moving average of 27.66. CBOE.com/VXAPL

Annie’s (BNNY) is up $12.54 to $46.05 on the natural and organic packaged food company being acquired by General Mills (GIS) for $820M. Overall option implied volatility of 38 is below its 26-week average of 42.

Titan Machinery (TITN) is down $1.41 to 11.75 after cuts FY15 adjusted EPS view to 30c-60c from 70c-$1.00. September call option implied volatility is at 62, October is at 46, December is at 42; compared to its 26-week average of 37.

Options expected to be active @ CBOE: HDS HD BNNY GIS DKS CVX YHOO AAPL

CBOE SKEW INDEX (SKEW) at 132.91, compared to its 50-day MA of 133.49. SKEW measures the purchase of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions. An increase of this index indicates greater expectations for an extreme down move.

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Walking The High Wire: Weekly Market Outlook 9.8.14

The bulls appear to be in charge, judging from Friday’s bullish kick… bullishness that formed despite a lethargic week and despite the fact that stocks are still overbought from August’s big runup.  Yet, being bearish or bullish at this point isn’t just a matter of taking the market’s current temperature.

The upside and downside for stocks is hashed out below, after a quick look at last week’s and this week’s major economic news.

Economic Data

Although there was a pretty steady stream of economic news last week, none of it was as interesting and important as Friday’s employment report.  And, while the market responded favorably to that news, it wasn’t necessarily for a “good reason”.  The jobs update was on the weak side of the spectrum, and assuming the Federal Reserve is going to nip any problems in the bud, investors gambled on a more dovish environment for the foreseeable future.  Right or wrong, it’s what happened.

In any case, the basic gist of employment news was, a few more people are working, fewer are unemployed, and it was enough progress for the Department of Labor to say 142,000 (net) jobs were created last month.  Those numbers slightly overstate the official stated increase in the number of employed individuals and the stated number of unemployed individuals… enough to whittle the unemployment rate down from 6.2% to 6.1%.  The problem is, the pros were expecting the addition of 223,000 new payrolls.

While the news showed progress, it’s inadequate progress.  That’s why investors presumed the Fed was going to stop any bleeding before it started in earnest.  And, that’s why investors were willing to renew their buying effort to close out the week on Friday, regardless of the fact that stocks are overbought here.  As for the actual employment trends, they are on the chart below:PH 9 14-employment

All the rest of last week’s big data is on the following grid:

Economic Calendar

PH 9 14-econ-dataSource:  Briefing.com

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CBOE Mid-Day Update 9.8.14

Volatility as an asset class

Apple (AAPL) is recently down 28c to $98.72 into a company sponsored September 9 press event.  September weekly call option implied volatility is at 53, September is at 35, October is at 31, December is at 25, January is at 24; compared to its 26-week average of 25.

VIX methodology for Apple (VXAPL) is up 28c to 30.73, above its 10-day moving average of 27.70 into a company sponsored September 9th event. CBOE.com/VXAPL

Yahoo (YHOO) is recently up $1.30 to $40.89 on the start of the Alibaba roadshow.  Yahoo September weekly call option implied volatility is at 43, September is at 57, October is at 52, November is at 42, January is at 37; compared to its 26-week average of 34.

Rackspace Hosting (RAX) is recently up $2.02 to $39.24 on CenturyLink (CTL) is looking to acquire the open cloud company says Bloomberg, citing sources. September call option implied is at of 67, October is at 48, December is at 41; compared to its 26-week average of 46.

Actives at CBOE:  AAPL TSLA TWTR YHOO ABX PBR BAC FB AMZN MSFT

Stocks with increasing volume @ CBOE: ABX VALE PCLN SNDK SBH RBS NAVI LUK PPP TITN SONS YNDX HRB

CBOE DJIA BuyWrite Index (BXD) down 6c to 270.46, compared to its 50-day moving average of 268.45 cboe.com/micro/bxd/

CBOE Volatility Index (VIX) up 59c to 12.68. VIX September 17 and 18 calls are active on 109K contracts @ CBOE cboe.com/VIX

iPath S&P 500 VIX Short-Term Futures (VXX) up 0.3% to 27.55
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Blogging Options: CBOE Morning Update 9.8.14

Polling in Scotland showed the independence supporters leading for the first time, a week before the election.  Profit taking, unrest in Ukraine, confusing export numbers out of China and UK uncertainty have sent bulls to the corral.  CBOE Risk Management Conference Europe getting nice comments, a recap will be published in this space soon.  Volatility as an asset class

Campbell Soup (CPB) is down $1.22 to $42.92 after the soup maker lowered its 2015 expectations. September call option implied volatility is at 21, October is at 19, January is at 17; compared to its 26-week average of 19.

Hertz Global (HTZ) is up $0.66 to $29.12  after announcing Mark Frissora is stepping down as Chairman and CEO. Overall option implied volatility of 35 is near its 26-week average of 36.

Multimedia Games (MGAM) is higher by $8.05 to $35.83 on Global Cash Access (GCA) purchasing for $36.50 per share, for an aggregate purchase price of approximately $1.2B in cash. Overall option implied volatility of 41 is near its 26-week average of 42.

VIX methodology for Apple (VXAPL) is higher this morning by $0.70 at 31.14, above its 10-day moving average of 27.07 into a company sponsored September 9th event. CBOE.com/VXAPL

Options expected to be active @ CBOE:  BP GTAT AAPL YHOO FEYE PANW LULU FXB HTZ MGAM CPB BP RIO GE

CBOE SKEW INDEX (SKEW) at 137.49, compared to its 50-day MA of 133.49. SKEW measures the purchase of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions. An increase of this index indicates greater expectations for an extreme down move.

CBOE S&P 500 BuyWrite Index (BXM) is off 0.22 at 1107.38 compared to its 10-day moving average of 1105.33 cboe.com/BXM

CBOE DJIA BuyWrite Index (BXD) lower by 0.12 at 270.38 compared to its 50-day moving average of 268.37 cboe.com/micro/bxd/
‏CBOE Nasdaq-100 Volatility Index (VXN) is up 0.30 to 13.54; compared to its 50-day moving average of 13.71.

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This Week in VIX – 9/5/2014

A general takeaway from the CBOE RMC Europe conference last week is that the stock market seems ready for some sort of correction. You would not get that sense by looking at VIX and seeing a 12 (or lower) closing handle for every day over the past three weeks. However, looking at things in context, none of those closing levels have been below 11.00. We saw several 10’s back in June and July. Of course the S&P 500 is just over 1% higher than when we saw the last closing 10. I’m not saying VIX is high, but just pointing out that it is higher than it was when the S&P 500 made some of those other all-time highs this year.

VIX PA

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This Week in Russell 2000 and Nasdaq-100 Volatility – 9/5/2014

The Russell 2000 continues to lag the Nasdaq-100 and S&P 500 in 2014. RUT was down slightly on the week while NDX and SPX were both higher. For the year RUT is up just over 0.5% while the other two broad based indexes with tradable volatility markets are up 13.86% and 8.62% respectively. The result has been RVX at a premium for most of 2014 relative to VXN and VIX.   That premium is at the low end relative to VIX this week which may indicate a change in attitude about domestic stocks or US risk versus global risk.

RVX PA

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This Week in VXST – 9/5/2014

VXST moved up a little on Monday, as it always does after a long weekend and worked higher into Friday’s employment report on Friday. Note that on Friday, with the S&P 500 under a little pressure, VXST actually opened lower. We are still getting a feel for how VXST acts around big economic numbers and it seems to display some of the behavior that we normally associate with individual stock implied volatility around an earnings event.VXST PA

The curve flattened a bit with the employment report and a three day weekend behind us. Checking in on the VXST option market there are several lines with open interest of 1000 or more expiring next week. The VXST Sep 10th 15, 18, and 20 Calls all seem to be generating some noise.

VXST CURVE

This Week in Emerging Market Volatility – 9/5/2014

This past week I was lucky enough to get to participate in CBOE’s Risk Management Conference just outside of Dublin, Ireland. There was one session where the presenter asked for members of the audience to raise their hands if they feel the emerging market sector is a safe place to get equity exposure these days. A good number of attendees raised their hands and he noted how interesting it is, with EEM up 10% this year, that people feel safe about the emerging market sector when no one was recommending putting money into emerging market stocks at the beginning of 2014. VXEEM, at pretty low levels, reflects this same positive outlook for EEM.

VXEEM PA

If people like EEM which is up 10% they must love EWZ (Brazil) which is up over 21% in 2014. However, Brazil is in its own little world, at least for the next few weeks, while we wait for national elections in early October. Hence the relative high level of VXEWZ which should come back down once the election result seems certain.

VXEWZ PA

The most interesting thing showing up on the charts below should stand out to even the most casual volatility market. To use one of my mother’s favorite phrases (imagine the southern Alabama twang), “That VXEWZ curve just ain’t right”. No, it is not, however, it does tell a little story, and not the kind that contain a few white lies for illustration purposes.   The drop from October (the first future to expire after the elections) to November can be taken as the market expecting quick resolution once the Brazilian election is over. Now whether the results will be positive of negative for Brazilian stock is another story.

VXEEM VXEWZ CURVES

This Week in Volatility Indexes and ETPs – 9/5/2014

The S&P 500 pulled out a gain for the week through shaking off what was called a bad employment report this past Friday. VXST and VIX rose as well for the week while the longer dated volatility indexes were down slightly. We have to attribute some of the VXST and VIX gains to rebounding from the three day weekend.

VXST VIX VXV VXMT Curve

The long ETNs continue to suffer from no real sustainable move to the upside in VIX. VXX was down only 2.35% on the week, but it has given up over 35% for 2014. The short volatility ETPs (XIV and SVXY) both gained just over 2.3% and are both up about 29% for the year.

Options ETNs Table

This Week in CBOE Strategy Indexes – 9/5/2014

We go through periods where good news is good news for the stock market. Then there are periods where bad news is good for the market (like economy looks bad so the Fed will help). However, I rarely recall a period where all news was good news. Even war drums all over the place, but apparently that’s our current market environment.

STRAT PA

PUT beat the S&P 500 Total Return by a tad this past week while BXM and BXY trailed slightly. For those of us that pay attention to these strategy indexes we are well aware that underperformance comes about during bull market periods. With the S&P 500 return up 10% this year the performance of all three strategy indexes is just as would be expected. They are holding their own and over the course of a couple of weeks can easily close the performance gap for 2014.

STRAT TABLE

Day 3 CBOE RMC Europe Recap

The final day of the 2014 edition of CBOE RMC Europe began with an excellent keynote presentation from Pete Clarke the Global Head of Equity Derivatives Strategy at UBS. He spoke on Global Equity Derivatives Trading Themes – Dislocations and Opportunities for a Diverse Investor Base. He discussed several trading themes but did end with a warning that there are still nickels to be picked up but investors and traders should be cautious as the steamroller seems to be getting bigger.

http://www.cboeoptionshub.com/2014/09/05/keynote-speaker-pete-clarke-usb-presents-cboe-rmc-conference/

Yoshiki Obayshi, Founder of Applied Academics and Angel Serrat, Partner and Chief Strategist, Capula Investment Management teamed up for a widely anticipated presentation on Friday morning where they discussed Cross Asset Volatility Strategies for Tail Hedging and Alpha Generation. The day before it was announced that CBOE would commence trading on VXTYN futures in November and this area was touched on during their presentation along with other relative trading strategies and how to go about implementing those ideas.

http://www.cboeoptionshub.com/2014/09/05/presentation-vxtyn-futures-interest-rate-volatility-delivered-yoshiki-obayashi/

Pin Chung from R+V International Business Services Limited and Rachid Lassoued from Bloomberg were co-presenters in a session that was found useful to insurance companies and other variable annuity market participants. In Management of Asian and Cliquet Option Exposures for Insurance Companies they covered the design of equity-linked insurance products and how to handle risk through hedging with both listed and OTC options.

http://www.cboeoptionshub.com/2014/09/05/management-asian-cliquet-option-exposure-cboe-rmc/

One of the final presentations of this year’s conference covered Structured Products and Their Impact on Markets: What You Need to Know. Equity Derivatives Specialist Delphine Leblond-Limpalaer from Societe Generale and Peter Murphy Founder of PM Murphy Limited discussed the structured product market, the different market participants, and their thoughts on how this market is evolving.

http://www.cboeoptionshub.com/2014/09/05/cboe-rmc-presentations-structured-products-impact-markets/

I personally found the last presentation of the conference one of the most educational. Danile Danon from Assenagon Asset Management and Tim Edwards from S&P Dow Jones Indexes offered up a presentation on Correlation and Dispersion, What They Mean and How to Trade Them. During their presentation they clearly showed the impact of dispersion on market participant performance along with discussing examples of how trading strategies are implemented.

http://www.cboeoptionshub.com/2014/09/05/correlation-dispersion-trading-discussion-cboe-rmc-conference/

This was my fourth RMC since joined the Chicago Board Options Exchange. I know I am biased, working at CBOE and all, but I continue to feel lucky that part of my job allows me to be exposed to so many quality market practitioners two times a year. I am already looking forward to March 4 – 6 when the US version of RMC returns to Carlsbad, CA.

Presentation on VXTYN Futures & Interest Rate Volatility Delivered by Yoshiki Obayashi

Earlier today in Dublin, Ireland. Yoshiki Obayashi, Founder and Managing Director, Applied Academics, delivered a presentation at the CBOE Risk Management Conference Europe in Ireland on the subject of the CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (VXTYN) and interest rate volatility.

The VXTYN Index measures the expected volatility of the price of 10-year Treasury Note futures. Futures on 10-year Treasury Notes are the most actively traded of all U.S. futures on U.S. Treasuries.  VXTYN provides a measure of expected volatility specific to the fixed income market. This is important because the volatilities of equities and Treasuries have often followed distinct paths. The index is calculated from CBOT’s options on 10-year Treasury futures using the same methodology as VIX®. VXTYN represents the variability of percentage changes in the price, as opposed to the yield of 10-year Treasury notes. Price and yield volatility are related to each other through duration, and yield volatility is typically higher than bond price volatility. As noted in a recent CBOE Blog, the VXTYN Index rose by more than 55% in the months of Sept. 2008 and May 2013.

Futures trading on the VXTYN is scheduled to begin in November.

Here are some of the key points made by Yoshiki Obayashi in his presentation –

- The correlation between VXTYN and diversified bond portfolios kicks up when concerns about interest rate volatility become heightened.

- The correlation between VXTYN and diversified bond portfolios have been significantly elevated since April 2013, indicating persistent investor anxiety about the future interest rates movements.

- The dynamics between VXTYN and returns on portfolios of specific fixed income assets, such as mortgages, muni bonds, and TIPS all differ from one another.

- On sharp drawdowns in bond portfolios, VXTYN tends to experience outsized movements, thereby smoothing bond portfolio returns hedged by VXTYN.

- The volatility term structure of Treasury options differs from that of S&P options, and suggests that the roll-down of VXTYN futures may not be as severe as that of VIX futures.

-CBOE’s VXTYN and SRVX indexes are not ad hoc weighted averages of model-dependent ATM volatilities, but are grounded in a rigorous theory of fixed income variance pricing.

For more information, including charts, data, and new research papers, please visit the VXTYN webpage at www.cboe.com/VXTYN.

CBOE RMC Presentations on Structured Products & Their Impact on Markets

Informative presentations on “Structured Products & Their Impact on Markets: What You Need to Know” at the CBOE Risk Management Conference Europe on Sept. 5th in Ireland by –

(1)   Ms. Delphine Leblond-Limpalaër, Equity Derivatives Specialist, Société Générale, and

(2)   Mr. Peter Murphy, Founder, P. M. Murphy Ltd.

Topics covered by the speakers included –

- Structured products around the world: who and what

- How the market is evolving: drivers and outlook

- A significant impact of the traditional vol/skew relation

-The other major parameters: Repo and dividends

Many structured products have optionality features, and in past years there have been structured products that tracked the returns of CBOE indexes such as the CBOE S&P 500 BuyWrite Index (BXM) and the CBOE S&P 500 PutWrite Index (PUT).

PRESENTATION BY PETER MURPHY

Mr. Murphy said his firm provides (1) Investment advice and portfolio construction mainly for high-net-worth clients on a fee-only basis; (2) Distribution of investments (structured products and funds) to other advisers, stockbrokers and others; and (3) Sub-advisory mandates to funds (for example, a multi-asset fund looking to run a structured product strategy within the fund). Mr. Murphy said his clients want strong returns but most clients are not aware of investment concepts such as gamma and theta.

He said that the most common structured products include –

(1)   Autocallable bonds = 65-70% of market (estimate for UK market) (a) Classic autocall based off an index or indices; (b) Defensive autocall (index or indices), (c) The above but the underlying is a stock basket.

(2)   Reverse convertible. Coupon of (say) 6% annually as long as the underlying index is above say 80% of its starting level.

(3)   Hybrid of those two: Autocallable above 100%, coupon payable above 80% and a European protection barrier above 60%

(4)   Not so common but very interesting: Twin win on an index, i.e., straddle

All of the above have conditional capital protection, usually between 50-70% of strike and can be American but most often European barrier.

Mr. Murphy said that in the future it is possible that we will see — More institutional use of structured products; Wider variety of underlyings; Better quality product (when interest rates go up!); and Possible alternatives to using a zero coupon bond as the capital protection.

PRESENTATION BY DELPHINE LEBLOND-LIMPALAER

In her presentation on structured products, Delphine Leblond-Limpalaër noted that –

-       Variable annuities are popular in the USA, while autocallables and capital guaranteed products are popular in Europe.

-       Differences across regions are driven by product, liquidity, balance of flows.

-       Asia is all about volatility and skew.

-       Europe focuses on dividends and repo.

OPPORTUNITIES: in all cases the slope is key. There are a lot of opportunities for those who know the flow.

The Weekly Options News Roundup – 9/05/2014

Your weekly recap of CBOE features, options industry news and VIX and volatility-related articles from print, broadcast and online and social media outlets.

More Interest In Volatility
CBOE continues its legacy of innovation with its latest addition to their volatility suite.  On November 13th, the CBOE/CBOT 10-year U.S. Treasury Note Volatility Index will begin trading under the symbol VXTYN.

“CBOE CEO Edward Tilly on Growing the Volatility Space” – CBOE Options Hub
http://bit.ly/1tyIHGV

“CBOE Plans Trading on Government-Debt Volatility Index” – Saumya Vaishampayan, WSJ
http://on.wsj.com/1CxDWQA

A New Reflection 
The use of “weeklys” in the options market has continuously grown since their introduction, representing almost 33% of volume in the SPX.  This is why “weeklys” will now be included in calculations for the VIX capturing a better snapshot of expected volatility.

“CBOE Adds Weekly Options To The VIX Mix” – Saumya Vaishampayan, WSJ
http://on.wsj.com/1t8XuE9

Your Daily Fix of VIX
This is for all the Vixoholics.

“Stocks in Summer Slumber as VIX Tumbles Most Since 2012” – Callie Bost, Bloomberg
http://bloom.bg/Z06z9z

“Does Back To School Mean Back To Volatility?”- JJ Kinahan, Forbes
http://onforb.es/1rGeAe

Band of Brothers
In the past there have been instances in which erroneous trades have roiled markets caused by fat fingers or software malfunctions.  For that reason, all 12 U.S. options exchanges have banded together to create rules that will protect investors when unintended trades take place.

“U.S. options exchanges craft rules to fend off turmoil” – John McCrank, Reuters
http://reut.rs/Wli89

“Options Exchanges Unite for Erroneous Trade Rules” – John D’Antona Jr., Traders Magazine
http://bit.ly/1qkISmS

 

 

Next Week in Weeklys – 9/8/2014

I’m not sure if there are any new names on the Weeklys list as I wrote this a couple of weeks before you are reading it.  CBOE is holding the annual European version of our Risk Management Conference so my access to the data needed to produce this blog is a bit limited.  If you want to check the current list of Weeklys check out www.cboe.com/weeklys

The combination of a holiday week and where we are on the calendar resulted in a pretty light earnings calendar for next week.  Here are the two stocks with short dated options available reporting next week -

Weeklys 09082014

CBOE Mid-Day Update 9.5.14

Volatility as an asset class

TASER (TASR) is recently up 62c to $18.17 after New York City Police Department Commissioner William Bratton yesterday announced that the department would begin testing two types of body cameras that will allow police officers to record audio and video during their interactions with the public. The two devices that will be used during the pilot program are the Axon Flex, made by TASER (TASR) and the LE3 made by Vievu, the department stated. September call option implied volatility is at 49, October is at 50, December is at 49; compared its 26-week average of 50.

Avago (AVGO) is recently up $1.32 to $87.41 after Citigroup wrote that the dollar value of the company’s content in each iPhone is likely to double in the upcoming version of the device, compared with the current version. Overall option implied volatility of 27 is below its 26-week average of 31.

Gilead Sciences (GILD) is recently down $3.90 to $103 following reports about the company nearing a deal to offer its Sovaldi hepatitis C drug at a lower cost in poorer countries. September call option implied volatility is at 41, October and November is at 40; compared to its 26-week average of 33.

Actives at CBOE:  AAPL TSLA NFLX HPQ AMZN X C TWTR HPQ GILD

Stocks with increasing volume @ CBOE: VALE MCP KORS WAG GM PCLN

CBOE DJIA BuyWrite Index (BXD) up 15c to 270.21, compared to its 50-day moving average of 268.37 cboe.com/micro/bxd/

CBOE Volatility Index (VIX) down 18c to 12.46. VIX September 15 and 17 calls are active on 202K contracts @ CBOE cboe.com/VIX

iPath S&P 500 VIX Short-Term Futures (VXX) down 1.1% to 27.68
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RMC Presentation on Tail Hedge Management

Mr. Angel Serrat, Partner and Chief Investment Strategist of Capula Investment Management, delivered a presentation on Tail Hedging at the CBOE Risk Management Conference Europe on Sept. 5th in Ireland.

CHANGES FOR INDEXES DURING 2008 FINANCIAL CRISIS

One of the reasons for increased interest in tail hedging in recent years is the fact that, during the drawdown period from Oct. 31, 2007 through Feb. 28, 2009 several major “traditional” traditional indexes experienced big drops of worse than 50% (in total returns with reinvested dividends), while the CLL Index dropped 35.4% and the S&P 500 VIX Mid-term Futures Index rose 131.7% –

-61.6%                 MSCI Emerging Markets Index

-56.7%                 MSCI EAFE Index

-53.4%                 S&P GSCI Index

-52.0%                 Russell 2000 Index

-50.9%                 S&P 500 Index

-35.4%                 CBOE S&P 500 95-110 Collar Index (CLL)

131.7%                 S&P 500 VIX Mid-term Futures Index

After the 2008 drawdown, many investors became more concerned about higher correlations among certain asset classes during periods of market stress.

MR. SERRAT’S PRESENTATION

Mr. Serrat noted that there are a many possible strategies that one could consider for tail risk hedging. An investor could deleverage the portfolio to lessen tail risk.  Mr. Serrat is exploring the use of VIX options to use in tail hedging.  He presented a table in which he compared the Sharpe Ratio, standard deviation and correlations for the S&P 500 versus four tail hedge strategies: (1) dynamic tail risk strategy, (2) VIX (short maturity), (3) VIX (long maturity), and rolling of 3-month SPX puts. He noted that it can be difficult for a systematic hedging strategy (that consistently uses one hedging instrument in the same way) to add value over the long term, but he suggested that a dynamic strategy that uses a variety of hedging instruments and adjusts to market conditions does have the potential to add value with a higher Sharpe Ratio and lower standard deviation than the S&P 500 Index.

To learn more about hedging strategies, please visit www.cboe.com/Strategies

Weekly Market Commentary 9.5.14

The bullish news is that $SPX has made a new all-time intraday high
for the last three days in a row.  The not-so-bullish news is that $SPX
has failed to close at a new all-time on any of those days.  This is the
action of a tired market.LM 9 5 spx

 

The $SPX chart (Figure 1) remains bullish unless $SPX closes below
1985 — the upper horizontal line.
 

 

Equity-only put-call ratios remain on buy signals, however, despite the recent action.
Market breadth has been weakening of late.  In fact, both
breadth indicators are on the verge of sell signals at this time.  Any
further negative breadth will generate sell signals.

Volatility indices ($VXST, $VIX, $VXV, and $VXMT) have
begun to edge higher, but they  are still at low levels and thus don’t
present a bearish problem for stocks — yet.LM 9 5 vix

 

 

 

 

 

 

 

In summary, the indicators are becoming more mixed.  But if $SPX
breaks down and $VIX breaks out, the situation will quickly change to bearish.

Blogging Options: CBOE Morning Update 9.5.14

August Non-Farm Payroll fell to 142K, far below the 200K + estimates.  The Unemployment Rate dropped from 6.2% to 6.1%.  The gain of 142K jobs was the smallest rise in 2014.  Stock Futures were off before the report but rallied back to unchanged, as some traders think this may give pause to the FED on increasing rates soon.  CBOE Risk Management Conference Europe wraps up this afternoon.  Volatility as an asset class:

BP (BP) is up $0.39 to $45.28 in the premarket after Citigroup raised its rating on the oil conglomerate to Buy from Neutral, saying the sell-off yesterday after a judge found the company grossly negligent for the Macondo spill presents a buying opportunity. September option implied volatility is at 21, October is at 18, November is at 17; compared to its 26-week average of 15.

Ciena (CIEN) is up $0.42 to $18.93 after the telecom equipment maker was upgraded by Goldman Sachs to Buy citing valuation, following the company’s Q3 results. Goldman has $26 price target for the shares. September call option implied volatility is at 35, October is at 37, January is at 38; compared to its 26-week average of 43.

Gap (GPS) is down $3.08 to $43.51 in the premarket following disappointing August comps. Overall option implied volatility of 23 is below its 26-week average of 26.

VIX methodology for Apple (VXAPL) is at 30.79, above its 10-day moving average of 26.46 into a company sponsored September 9th event. CBOE.com/VXAPL

CBOE Interest Rate 5 Year Note (FVX) at 17.14, compared to 10-day moving average of 16.59, 50-day MA of 16.57 into August job report.

Options expected to be active @ CBOE:  KORS TUMI TASR GPS LOCO BP AAPL TSLA GLD BLOX COO

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Correlation and Dispersion Trading Discussion at CBOE RMC Conference

One of the final sessions of the day teamed up Daniel Danon, Senior Vice President, Portfolio Management and Structuring at Assenagon Asset Management and Tim Edwards, Director of Index Investment Strategy at S&P Dow Jones Indices. Their presentation was titled Correlation and Dispersion: What They Mean and How to Trading Them.

Tim Edwards began the presentation stating that many correlation traders are actually acting a dispersion traders.   He notes that dispersion is a measure of the spread of performances among components of an index or portfolio. He showed a chart depicting dispersion of returns for the components of the S&P 500. Like volatility dispersion is a range bound and mean reverting measure. Both dispersion and volatility are highly correlated, but do have some differences. For instance in August 2011 there was low dispersion but high volatility in the markets.

While discussing dispersion he brings up the phrase “stock pickers market”. This is generally thought of as market components having low correlation. The feeling is this is not the correct way to think of a stock picker’s market. Return available from security selection is more naturally associated with dispersion. He followed on this thought by showing that “good” managers outperform when dispersion is high. Also, he points out that dispersion is directly connected to the degree of diversification achieved by a portfolio.

Dan Danon took over from Tim and showed some examples of how to go about trading dispersion. He states that the standard dispersion strategy involves trading index volatility versus the volatility of its components. He cites the Volatility Pair Index (VPI) which is a measure of implied volatility over 150 stocks worldwide minus the average implied volatility over 5 main stock indexes worldwide. An interesting historical example that Danon noted was based on the fiscal cliff situation at the end of 2013. He said that traders were focused on market volatility and bid up VIX while individual stock volatility was not impacted by this potential pending event. This created an opportunity to short index volatility and buy individual stock volatility.

Three methods of investing in dispersion were mentioned – using individual options, variance swaps, or volatility swaps. His firm is using options to implement their outlook. He notes that he is able to easily actively manage their position due to listed options being liquid and the pricing transparent. The next step beyond a basic dispersion trade which may also be thought of as a pair trade is to what he calls a selective dispersion trade.  This method involves more active management and again lends itself to using listed options to implement the strategy.

A good resource to learn a little more about dispersion trading can be found at –

http://us.spindices.com/documents/research/research-dispersion-measuring-market-opportunity.pdf

Management of Asian and Cliquet Option Exposure at CBOE RMC

The speakers for this session were Pin Chung Chief Financial Officer and Chief Investment Officer, R+V International Business Services Limited and Dr. Rachid Lassoued, Head of Financial Engineering from Bloomberg. The session title was Management of Asian and Cliquet Option Exposures for Insurance Companies.

Dr. Chung began the session by reviewing Asian and Cliquet options. In general an Asian Option is an exotic option contract with a path dependent payoff. This means the payoff of the option depends on the average price of the underlying over a predetermined period of time. This average price can be either arithmetic or geometric. The option may also be an average price or average strike price option. The time period that the price is calculated may be over the whole life of the option, aver the last few days before expiration, or even over a select number of days agreed upon at inception of the trade. The strike may be fixed or floating and the majority of Asian options are European style with some also being American style.

Asian options may be useful when approaching foreign exchange markets when it is less risky to deal with an average over a period of time than a foreign exchange rate on a single date.   An Asian option may also be useful if there is concern regarding price manipulation on a certain date or when a market is thinly traded.

Dr. Lassoued follow up discussing the state of the variable annuity industry noting that some firms have exited the market. Ability to create diverse payout profiles to meeting client’s needs and customize risk reward profiles through adapted structuring. Firms need solutions that allow them the create products that will generate a locked-in profit with no sensitivity to market moves. A core challenge is that traditional long dated hedges are not dynamic enough and may be costly. There is also basis risk associated with long dated hedges.

CBOE is now offering FLEX Index Options that have Asian and Cliquet style settlement. Historically insurance companies have had to trade in the over-the-counter (OTC) market to get the exposure that is offered through these exotic options. The introduction of Asian and Cliquet FLEX index options provides insurers an alternative to the OTC markets. These alternatives offer benefits like enhanced price discovery, transparency, and centralized clearing.

More information on the FLEX Index Options – www.cboe.com/flex

Keynote Speaker Pete Clarke of USB Presents at CBOE RMC Conference

Pete Clarke was the keynote speaker for the final day at the CBOE Risk Management Conference in Europe today. Clarke is the Global Head of Equity Derivatives Strategy at UBS and his talk was appropriately titled Global Equity Derivatives Trading Themes.

As part of his opening comments he said that risk may be greatest when everyone is completely happy about their performance and the market environment. He noted that when VIX is low it also turns out that volatility is most rich (to use his word) versus realized volatility. He notes that traders may sit around waiting for the next volatility event while being prepared to take advantage of it. He cites how Warren Buffett approaches purchasing stocks where he may be patient for a long period of time, but ready to buy when the price is right.

Just three years ago VIX futures hit the 30’s and now we have VIX futures traders willing to sell in the low teens. In addition to VIX being low, a large number of US stocks have individual volatility at historically low levels. Clarke mentioned that skew can be impacted by low current volatility. He emphasized this point by saying that when considering the angle of skew you should take into account the premium of an option.

Buying at the money calls has better risk adjusted returns versus buy and hold. It allows you the ability to benefit from the upside, but you miss the drawdowns. Clarke invokes Buffett again by saying effectively you are being patient since your downside is limited when buying call options and if you are not applying all your capital to the call purchases you have the ability to be patient.

He noted that there is a high level of interest in Europe to spread trade US versus European volatility or VIX versus VSTOXX. This sort of trading has been made much easier since CBOE extended VIX futures trading hours to coincide with European market hours.

Something I found particularly interesting was a demonstration of the cost of owning puts on the S&P 500. He showed consistently buying puts and that when volatility is very low or volatility is very high the costs are greater than when volatility is in the middle third of historical levels.

Clarke finished up his presentation by noting that clients are still looking to make money through carry trades. In this environment look to some convexity through long VIX calls. His analogy for the current environment is that we all know selling premium is like picking up nickels in front of a steamroller. The nickels are getting smaller and the steam roller is getting bigger.

CBOE RMC Europe Day Two Recap

Day 2 is a wrap in Ireland and the presentations covered a wide spectrum of information.

The day began with CBOE CEO Ed Tilly making welcoming remarks as well as discussing new initiatives at CBOE that include expansion of SPX and VIX option trading hours as well as the introduction of futures trading on the CBOE/CBOT 10-year Treasury Note Volatility Index (VXTYN).

http://www.cboeoptionshub.com/2014/09/04/cboe-ceo-edward-tilly-growing-volatility-space/

David Hauner, Head of EEMEA Cross-Asset Strategy and Economics at Bank of America Merrill Lynch follow the introductory remarks from Ed Tilly with an in depth discussion of the emerging markets space.

http://www.cboeoptionshub.com/2014/09/04/emerging-markets-investing-discussed-cboe-rmc-europe/

Following a discussion of emerging markets there was a talk about different volatility environments. Gerry Fowler, Head of Equity & Derivative Strategy, Global Equities & Commodity Derivatives at BNP Paribas.

http://www.cboeoptionshub.com/2014/09/04/volatility-regime-presentation-cboe-rmc-europe/

The first presentation after lunch was a panel discussion led by a good friend of CBOE Robert McGlinchey who is the Director and Co-founder of EQDerivatives. The panel discussion covered trends in institutional options and volatility product usage.

http://www.cboeoptionshub.com/2014/09/04/panel-trends-institutional-options-volatility-product-usage/

The afternoon sessions began with simultaneous presentations on different topics. In one room there was a talk covering Asset Allocation Rebalancing Using Short Options –

http://www.cboeoptionshub.com/2014/09/04/asset-allocation-rebalancing-using-short-options/

While next door there was a very interesting discussion about the behavior of volatility of volatility –

http://www.cboeoptionshub.com/2014/09/04/volatility-volatility-discussion-cboe-rmc-europe/

The final sessions of the day were a review and preview of recently launched and soon to be launch products at CBOE that was led by Bill Speth and Dominic Salvino –

http://www.cboeoptionshub.com/2014/09/04/contract-design-trading-vix-listed-volatility-derivatives/

Shelly Natenberg was joined by Natasha Jhunjhunwala is a presentation titled The Volatility Surface: Skew and Term Structure –

http://www.cboeoptionshub.com/2014/09/04/volatility-surface-skew-term-structure/

Tomorrow the day finishes with five more sessions, we’ll be on the job

The Volatility Surface: Skew and Term Structure

In one of the final sessions of Day Two, Sheldon Natenberg, Co-Director of Education, Chicago Trading Company, and Natasha Jhunjhunwala, Director, Equity Derivatives Product Management, Credit Suisse, presented on “The Volatility Surface: Skew and Term Structure.” Natenberg is the author of “Option Volatility and Pricing,” one of the most widely read books by option traders around the world. Jhunjhunwala said she was honored to be sharing the stage with a “derivatives legend.” Despite being the last session of the day, the room was jam-packed.

Natenberg’s first slide said: “Traders have long noted that implied volatilities vary across both expiration date (the term structure of volatility) and the exercise price (the skew). When taken together, the term structure and volatility skew form a volatility surface.”

Some highlights:
- most underlying contracts have a typical/average volatility which they tend to revert to over long periods of time
- term structure is important for risk management
- volatility tends to be mean reverting
- short-term implied volatilities almost always change more quickly than long-term implied volatilities
- long-term implied volatilities tend to remain close to the mean volatility
- term structure of volatility has important implications for implied volatility products such as VIX
- volatility skew: the tendency of options with the same expiration date, but with different exercise prices to trade at different implied volatilities

He then listed some assumptions on which traditional theoretical pricing models are built:
- price changes are normally distributed
- volatility is constant over the life of the option
- trading is continuous, with no gaps in price of the underlying contract
- volatility is independent of direction in which underlying contract moves
In demonstrating some trading examples, Natenberg said “in order to model risk, a trader will want to consider how market conditions will affect the location of the skew and the shape of the skew.” It was noted that volatility skews are often described in terms of their tilt (skew) and their curvature (kurtosis). Some trading examples of each were shown.

Jhunjhunwala talked about different ways to look at skew and how traders can read the information within the volatility surface. Key points included:
- different measures of skew represent very different information sets
- both skew and term structure offer forward looking information about the volatility surface
- skew and term structure are typically highly correlated, excepting for some anomalies, such as Japan 2013

In talking about using skew as an indicator of market risk, she noted that it has, historically, signaled periods of high risk. The Credit Suisse Fear Barometer is an alternative measure of skew. She said a high level of the CSFB indicates an increased demand for put protection and a decreasing value accorded to call options. The CSFB is typically higher as the market rises and is lower on market lows.

She discussed trading the volatility surface:
- Long Skew: implemented through delta hedged options offers attractive features for hedging tail risk
- Short Skew: may be implemented through exotic variance swaps and offers a carry trade slightly different than typical short volatility trades
- Term Structure: can be seen as a market with its own unique properties

Highlights from Day Three of CBOE RMC Europe coming tomorrow…

Interest-rate Volatility and VXTYN Futures – Presentations on Friday at RMC

In recent years we at CBOE have heard many inquiries on the subjects of managing interest rate risk and interest rate volatility. CBOE Holdings offers successful futures and options on the popular CBOE Volatility Index® (VIX®) that reflects expected stock market volatility; we have been asked if futures and options on an interest-rate volatility index also could be launched.

Today, CBOE Futures Exchange (CFE®) announced that it plans to launch futures trading on the CBOE/CBOT 10-year U.S. Treasury Note Volatility IndexSM (VXTYNSM) beginning on November 13, pending regulatory review. The announcement was made by CBOE CEO Edward Tilly at the CBOE Risk Management Conference Europe, currently taking place in Dublin. In the press release, Tilly notes that “Interest rate derivatives represent the largest asset class, by far, in the over-the-counter market, outweighing the equity derivatives market by many multiples. We are pleased to tap into this space by introducing a CBOE Volatility Index futures product that offers customers a way to hedge pure interest rate volatility risk based on U.S. government debt with a single product for the first time.”

MORE RISK FOR TREASURY INSTRUMENTS WITH DECLINE IN INTEREST RATES

As shown in the chart below, the month-end interest rates on the 10-year U.S. Treasury Notes dropped from 15.84% in Sept. 1981 to 2.35% in Aug. 2014.

image001

While this drop in interest rates facilitated some attractive risk-adjusted returns for many fixed-income investments during this 33-year time period, many experts are concerned about the potential for weak returns and more risk for Treasury instruments.

In a March 2012 op-ed piece in the Wall Street Journal, Burton Malkiel of Princeton University wrote – “ … Bonds are the worst asset class for investors. Usually thought of as the safest of investments, they are anything but safe today. At a yield of 2.25%, the 10-year U.S. Treasury note is a sure loser.  … Investors with long memories should recall that over the entire period from the 1940s until 1980, bonds were a horrible place to be. Given the likely trends, U.S. Treasurys and high quality bonds are likely to be extremely poor investments and are very risky. … “

VXTYN INDEX

The CBOE/CBOT 10-Year U.S. Treasury Note Volatility Index (VXTYNM) is the first exchange-traded volatility benchmark for U.S. Treasuries. Similar to the CBOE Volatility Index (VIX), VXTYN measures expected percentage changes in its underlying over a one-month period. The underlying CBOT futures on 10-year Treasury Notes are the most actively traded U.S. Treasury futures, and their volatility is aligned with the volatility of a variety of fixed income assets, such as spot Treasuries, interest rate swaps, mortgage-backed securities, and corporate bonds. VXTYN is calculated every 15 seconds from 7:00 am to 3:15 pm Central time and is disseminated to data vendors under the ticker VXTYN.

image002

image003

Potential users of futures of VXTYN could include mortgage-backed securities investors and other large credit managers seeking to hedge against adverse interest rate movements; large bond funds that are naturally long interest rate volatility and are seeking a yield-enhancing mechanism; and hedge funds, volatility arbitrage firms and global macro participants seeking to express their views on forthcoming monetary policy events or to capture mispricing anomalies between cross-asset volatility (e.g., fixed income versus equity volatility).

PRESENTATIONS AT RMC EUROPE

At a 75-minute session on Friday Sept. 5 at the CBOE Risk Management Conference Europe in Ireland, presentations on Cross-asset Volatility Strategies for Tail Hedging and Alpha Generation (indexes to be covered will include the VXTYN) will be delivered by Yoshiki Obayashi, Founder, Applied Academics, and by Angel Serrat, Partner and Chief Strategist, Capula Investment Management. www.cboermc.com.

For more information on futures on VXTYN and the VXTYN Index, please visit www.cboe.com/VXTYN.

 

 

Asset Allocation Rebalancing Using Short Options

Dr. Christoph Gort, Partner, SIGLO Capital Advisors and Pav Sethi, Chief Investment Officer, CEO, Gladius Investment Group, teamed up for the “Asset Allocation Rebalancing Using Short Options” session on Thursday afternoon.  In the presentation, they highlighted results from an empirical study on the use of SPX options to implement allocation shifts with market moves.  Interestingly, the genesis for the study was a conversation between SIGLO and CBOE at last year’s CBOE Risk Management Conference Europe in Portugal.  SIGLO’s recently published study found that while not a new concept, rebalancing with options can be very efficient.  With the recommended strategy, an investor would define a Strategic Asset Allocation (SAA) point, with an upper and lower boundary, and aim for constant proportion exposure.  As Dr. Gort stated, “with a rebalancing strategy, you’re effectively making an implicit correlation bet.”

Smart rebalancing using options:
- allows to capture more of the option premium
- adds value if markets exhibit price reversals
- implies counter-cyclical behavior and constant proportion SAAs

Rebalancing using options:
- systematizes the rebalancing
- improves discipline in the process
- lowers emotionally charged discussions
- is pretty simple to implement

It was discussed that asset allocation can be used as a key determinant of long-term portfolio performance.  And rebalancing in general, reduces risk and enhances risk-adjusted returns.  Two different approaches to rebalancing were presented. In physical rebalancing, an investor is buying and selling physical assets directly (sell equities, buy bonds). In options-based rebalancing, an investor accomplishes the buying and selling of physicals assets, but with the added benefit of collecting upfront cash premiums (selling options with strike prices that correspond to rebalancing triggers).

The complete study by SIGLO Capital Advisors can be viewed at:

http://www.cboe.com/Institutional/pdf/RebalancingUsingOptionsAbsoluteFinalMarch2014.pdf

Weekly Weekly’s for 9.4.14


Apple leads the way in my report on Weekly’s. The highly anticipated new product launch is next Tuesday.

Today, I’m covering weeklys set to expire this Friday and next Friday, September 12th.

It’s been a wild week for Apple (AAPL) traders. The stock is now trading below $100. Some people say it’s profit taking ahead of next week’s product launch, others say Samsung’s big reveal this week of its new products worries investors. Either way, its creating super-sized action in the options paper this week. Traders love to play the wide range moves in the stock and the fast changes in premium prices as the stock becomes the most volatile it’s been in a while. Today in Apple weekly options there’s a decent sized bulk buy in the 98 puts. But, call buyers are emerging at the 99 and 100 strikes. In traditional options (9/19) there are traders buying 105 calls. One popular play in AAPL is being long premium. Implied volatility for this week’s expiration is 44 and 43 for next week.

Also starting to move in the weekly options Home Depot. The home improvement retailer is dealing with a possible massive data breach.

As HD trades near $90 the 91 strike has a few call buyers and there are put traders in the 88 line. October traditional’s the 89 calls & puts are active.

That leads me to a security firm trading in the weeklys: Fireye. There’s just a smattering of

32 calls contracts. I think it’s just worth mentioning weeklys are available in FEYE, which has captured attention in the past.

Netflx is on a high this week. The stock is trading now at $480 and calls are active at 485.

As a side note, there are 500 and 510 traditional calls getting action.

Tesla, according to the Wall Street Journal is going to name Nevada as the location of its giant battery gigafactory. As that stock trades at $282, call positions are building at 285, 290 and 300. Puts are also in motion at 270, 272 and 277. Some traders seem to be setting up for TSLA to be a mover.

Gopro is exciting this week. The stock is trading around $55 as some analysts believe the 3-week rally maybe calming. That has traders in this week’s weekly options coming for 51, 53 and 55 puts. Some of that may be a put spread.

And, in SPX the 2,000 strike is generating interest by traders in the calls and puts.

Onto the list of stocks added to the weeklys: American Eagle Outfitters, Yamana Gold, Himax Technologies (in the digital camera business) Halcon Resources Corporation (independent energy company), Ciena, Kandi Technologies, Opko Health, Radio Shack, Banco Santander, Sandridge Energy and Weyerheuser.

Deleted names include: Actavis, Intuitive Surgical, Intermune and Pharmacyclics.

That’s a wrap for now. Thank you for watching and feel free to find me on Twitter: @Angie Miles

CBOE Mid-Day Update 9.4.14

Volatility as an asset class

SolarCity (SCTY) is recently up $4 to $71.12 after announcing plans to open 20 new operations centers in seven states. September 12 weekly call option implied volatility is at 44, September is at 45, October is at 46, January is at 49; compared to its 26-week average of 60.

BP (BP) is recently down $2.79 to $44.93 following the company was found grossly negligent by a judge. September 5 weekly put option implied volatility is at 48, September is at 20, October is at 21, November is at 20; compared to its 26-week average of 15.

Proshares UltraShort Barc 20 Year Treasury (TBT) is recently up $1.11 to $56.57 into the August jobs report and after David Tepper of Appaloosa said: “beginning of the end” of the bond market bubble has occurred as thanks to the ECB decision to cut rates, he said on Bloomberg TV. September 12 weekly call option implied volatility is at 26, September is at 25, October is at 23, December is at 21; compared to its 26-week average of 22.

Actives at CBOE:  AAPL TSLA PBR BIDU X C TWTR

Stocks with increasing volume @ CBOE: BP VMW SCTY X GE MBLY VALE DDD CODE PH

CBOE DJIA BuyWrite Index (BXD) up 23c to 270.30, compared to its 50-day moving average of 268.31 cboe.com/micro/bxd/

CBOE Volatility Index (VIX) down 30c to 12.06. VIX September 16 and 17 calls are active on 288K contracts @ CBOE cboe.com/VIX

iPath S&P 500 VIX Short-Term Futures (VXX) down 1.7% to 27.47

CBOE S&P 500 Short-Term Volatility Index (VXST) is recently up 5.8% to 10.92; compared to its 10-day moving average of 10.38. stks.co/r0CS2

CBOE DJIA Volatility Index (VXD) up 0.4% to 10.87; compared to its 10-day moving average of 10.38.

CBOE Nasdaq-100 Volatility Index (VXN) down 1.2% to 13.40; compared to its 50-day moving average of 13.69.

S&P 100 Options (OEX) recently is recently up 2.50 to 890 as the European Central Bank lowered its benchmark rate to .05% from .15%.

Contract Design & Trading of VIX and Other Listed Volatility Derivatives

Dominic Salvino from Group One and Bill Speth of CBOE covered a variety of topics this afternoon at CBOE RMC Europe. The presentation titled Contract Design & Trading of VIX and Other Listed Volatility Derivatives covered CBOE Short-Term Volatility Index (VXST), S&P 500 Variance Futures, the change to the VIX calculation that was announced today, the VIX settlement process, and the soon to trade CBOE/CBOT 10-year US Treasury Note Volatility Index Futures (VXTYN).

VXST

Dominic gave a review of VXST price action over the last six months. He notes VXST is different in that short dated volatility is more reactive to the market that longer dated volatility. VXST would be more reactive to an individual event such as an announcement from the Fed or ECB. As we have learned over the past few months VXST tends to have lower lows and higher highs than VIX. When VXST is higher than VIX it is a form of backwardation which we use to only measure with VIX futures relative to the index.

Re-launch of S&P 500 Variance Futures

Bill Speth took over and discussed the status of S&P 500 Variance (VA) futures. These contracts replicate the pay-off profile of an OTC variance swap using a daily-margined future contract. VA futures use the RIVET methodology which was developed by DRW Innovations which aligns the economics between OTC variance swaps and a listed variance future. This allows for direct comparison of pricing and size with OTC contracts. Bill cited several advantages of VA futures relative to OTC swaps such as

VIX Calculation Change

Bill expanded on the change announced this morning with respect to the VIX calculation. Highlights of this change are that it allows for a more precise measurement of 30-day volatility interpolation between 23 and 37 day SPX options. It was emphasized that this is not a change to the VIX formula, just a change to the SPX option series that are used to calculate “cash” or “spot” VIX index values. This is not a change to the pricing of VIX futures and options. The final settlement value for VIX futures and options will continue to use the same VIX formula and the opening prices of standard (third Friday expiration) SPX options series.

VIX Settlement Process

As there is often a lot of confusion around the VIX settlement process Bill spent some time reviewing how VIX settlement is determined along with SPX option trading on VIX settlement dates. On settlement date a special opening quotation of VIX using the opening prices of constitutent SPX options series which are determined through a special auction process. This process is open to customers and broker-dealers. Any strategy orders must be submitted by 8:15 am Chicago time. Even if an option has an opening price, it needs to have a bid price after the opening trade match to be used in the SOQ calculations.

CBOE/CBOT 10-year US Treasury Note Volatility Index Futures

Dominic spent a few minutes talking about VXTYN futures which will be launched on November 13 (pending regulatory approval). VXTYN futures will have a $5000 multiplier with a tick size of 0.01 ($50). The settlement process will be 30 days prior to the expiration of constituent options on the 10-year T-Note futures. This settlement will be based on the closing prices at 2:00 pm in the afternoon which is a slight difference relative to VIX option and futures settlement.

Volatility of Volatility Discussion at CBOE RMC Europe

Abhinandan Deb from Bank of America Merrill Lynch and Jean-Gabriel Prince from BlackRock split duties discussing the Volatility of Volatility.

Deb led things off noting that we need to care about the volatility of volatility as we continue to see robust growth in volatility related option trading volumes and open interest. He showed several examples of how VIX price changes are skewed to the upside which demonstrates the distribution of volatility. He also showed how VIX futures react relative to changes in VIX and how the time left to expiration for a VIX future impacts how the contract reacts relative to the index. Stated differently shorter dated VIX futures have more beta relative to VIX than longer dated VIX futures.

Prince followed up on Deb’s comments by highlighting tail risk hedging with VIX options and generating carry with VXX options. He first points out that VIX is a risk, not just a tail risk measure. For tail risk he cites the SPX 90% – 110% one month option skew or VIX at the money implied volatility as better tail risk measures. In addition he notes that volatility tends to rise as markets fall which may increase the magnitude of gains or losses. He then cites several reasons to consider VIX options for a tail hedge including high liquidity, that they are exchange traded, VIX gives exposure to volatility through delta by also through volatility of volatility, VIX options offer non-linear exposure to VIX futures, and capital efficiency where $1 vega of VIX exposure tends to hedge against $100 of equity exposure.

Panel on Trends in Institutional Options and Volatility Product Usage

Today at the CBOE RMC Europe conference Robert McGlinchey, Director and Co-founder of EQDerivatives led a lively panel discussion on Trends in Institutional Options and Volatility Product Usage.

Robert introduced the panelists which represent US and European institutions as well as a variety of types of firms –

Jean-Francois Bacmann, Portfolio Manager and Head of Volatility Strategies, Man AHL

Stephen Crewe, Portfolio Manager, Fulcrum Asset Management

Jack Hansen, Chief Investment Officer, Parametric Clifton Group

Andrew Rozanov, Former Managing Director, Permal Investment Management

The first question was about each panelist’s experience with volatility –

Jack Hansen cited the consistent performance of BXY and PUT as evidence that volatility selling strategies work over time.  Stephen Crewe said his firm looks to selling 25 – 30 delta calls to take in premium. He also mentioned that his firm recently looked to the option market to develop a strategy based on a macro view that small cap stocks would underperform large cap stocks. The specific trade combined SPX and RUT options. Jean-Francois Bacmann stated that his firm will often look to the option market to opportunistically implement tail risk protection. Andrew Rozanov finished out this question noting that all equity investors will claim to be concerned about volatility, but they rarely have volatility managers or specialists working for them.

The next question addressed gaining alpha through the volatility markets.

Crewe noted an earlier speaker today commented on VSTOXX being cheap relative to VIX and that there may be opportunities in spreading cheap and expensive volatility markets. Bacmann continued with this theme and stated that regional volatility versus VIX often makes sense because some regional issues may not impact VIX, but global issues would impact volatility across the globe. In an answer to a later question, but along this theme, it was pointed out that selling volatility has worked even in a low volatility environment. For instance, at the beginning of June VIX was close to 11 but the realized volatility for the S&P 500 ended up being around 5 or 6 during that month. Hansen added that selling 5% OTM puts versus buying 5% OTM calls to hedge against a move to the upside was an idea he had seen implemented. This trade steep skew and low interest rates make this an attractive trade.

Blogging Options: CBOE Morning Update 9.4.14

ECB cut rates again, 0.15% to 0.05% and the Deposit Rate went from -0.10% to 0.20%.  Cookie jar and mattress sales expected to rise.  US Dollar moved higher against Euro.  ADP private payroll for August showed a gain of 204K jobs, below consensus and the lowest number in six months.  Day 2 of CBOERMC in Dublin is currently in session – highlights here during the day.  Volatility as an asset class:

TIBCO Software (TIBX) is up $1.47 to $22.51 in the premarket after announcing that it is reviewing strategic alternatives. Overall option implied volatility of 38 is near its 26-week average of 37.

PVH (PVH) is higher by $9.69 to $126.81 after the clothing company reported Q2 margins increased and sees growth in Tommy Hilfiger.  September call option implied volatility is at 59, October is at 29, December is at 25; compared to its 26-week average of 26.

Yum! Brands (YUM) is down $2.13 to $69.35 in the premarket after updating Q3 China division Same Store Sales guidance. Overall option implied volatility of 18 is below its 26-week average of 23 according to Track Data, suggesting decreasing price movement.

VIX methodology for Apple (VXAPL) is at 31.71, above its 10-day moving average of 25.84 into a company sponsored September 9th event. CBOE.com/VXAPL

CBOE Interest Rate 5 Year Note (FVX) at 16.89, compared to 50-day moving average of 16.51, 50-day MA of 16.56 into Friday’s August job report.

Options expected to be active @ CBOE:  YUM TIBX BOLT PVH CIEN JOY MBLY

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Volatility Regime Presentation at CBOE RMC Europe

I was excited to see the Gerry Fowler presenting again at CBOE RMC Europe as I thoroughly enjoyed his presentation in 2013. Fowler is Head of Equity & Derivative Strategy, Global Equities & Commodity Derivatives BNP Paribas and this year delivered a presentation entitled Volatility Regimes and an Analysis of Where We Were, Where We Are, and Where We Are Going at the CBOE RMC Europe conference today. This most definitely could be considered one of the more timely presentations at this year’s conference.

He cites the credit cycle as being a major driver for different volatility regimes. A common theme among central banks is an attempt to target slower, less extreme credit cycles, which could have an impact on market volatility. He believes slow growth may continue until 2017 which could be interpreted as the US currently being close to the mid-point of the current cycle.

He covered how the four different stages of the credit cycle impacts credit, equity, and equity volatility markets.  Focusing on equity volatility -

During de-leveraging volatility moves lower, the volatility of volatility rises, and skew rises as well. In co-recovery volatility, volatility of volatility, and skew all move lower together.  During the re-leveraging stage volatility remains flat, volatility of volatility moves higher, and skew remains flat.  Finally during a debt crisis volatility, volatility of volatility, and skew all move up in sync. He noted that the US is in the re-leveraging stage while the European markets are at the end of the co-recovery stage.

Some time was spent on the fundamentals of the US stock market. I knew that US companies had been aggressively buying back shares, but was surprised to hear the impact on earnings. Since 2010 revenues are up 20% for S&P 500 companies while earnings have risen 60% of the same time period.

Something else that I was very interested to learn was the relationship between low operational and financial leverage for companies and market volatility. When low leverage is being implemented earnings estimates tend to be more accurate and there are fewer earnings surprises. This reduction in earnings surprises lowers market volatility as well. It is an accepted fact that the stock market reflects market fundamentals over time, it is interesting to see the fundamentals show up in market volatility as well.

He finished up discussion how investors are rewarding companies that have low profit volatility. Stocks that have had low profit volatility have outperformed companies that show more volatility with respect to results. He went on to note that investor confidence has increased with respect to low volatility strategies so more leverage is being applied to these strategies.

 

Finally, during his talk Fowler cited two interesting articles which may be worth a read –

A Comprehensive Look at Financial Volatility Prediction by Economic Variables by Charlotte Christiansen, Maik Schmeling and Andreas Schrimpf –

http://www.bis.org/publ/work374.pdf

Investment Risk and Performance – Risk Factors as Building Blocks for Portfolio Diversification: The Chemistry of Asset Allocation by Eugene L. Podkaminer, CFA –

http://tinyurl.com/pue654m

Emerging Markets Investing Discussed at CBOE RMC Europe

The keynote speaker for today’s CBOE RMC Europe conference was David Hauner who is the Head of EEMEA Cross-Asset Strategy and Economics at Bank of America Merrill Lynch. His presentation was titled Emerging Markets: Attractive Investment of Global Systemic Risk? I found this particularly interesting as I closely monitor the CBOE Emerging Markets ETF Volatility Index (VXEEM) as well as the CBOE Brazil ETF Volatility Index (VXEWZ) as part of my duties for CBOE.

Hauner began showing a survey indicating that a sell-off in US treasuries is the biggest perceived risk for emerging market stocks.

He touched on volatility saying that VIX normally does not pick up until after interest rates start to rise, based on his interest rate outlook he believes VIX will stay low until well into 2015.

The weak Euro has helped fund the emerging markets while the USD has not been a contributor to emerging market performance. A breakdown of the Euro – emerging market carry trade could be negative for emerging markets.

Emerging Market GDP growth is running at 5% and BofA Merrill Lynch model expects the same levels to continue – this translates to half of global GDP growth coming from emerging markets. He sees 5% growth becoming the new normal.  The expectation is that Chinese GDP growth will trend down to 6% from a current growth rate of around 7.5%. What he sees is China managing down growth while trying to avoid any sort of hard landing.  The government is managing this through periods of mini-stimulus to cushion the fall. On a trading basis he suggests fading optimism as well as fading pessimism in China – the Chinese market has been and will continue to be a range trade.

Regionally, he sees economic improvement in central and eastern Europe (Czech Republic, Poland, and Hungary) while South America is on the other end of the spectrum (Argentina, Venezuela, Peru, and Brazil). Also, foreign holding of Latin American and Asian debt has consistently trended higher over the last three years. EEMEA debt holdings topped out in the summer in June 2013 and has been trending slightly lower.

BofA Merrill Lynch monitors emerging market inflows and outflows. The level of this indicator recently gave a sell signal which backs up Hauner’s near term outlook. He follows up by saying that for the long term a correction will offer a good buying opportunity.

Sentiment is positive for China and Indonesia but pretty much negative for all other areas of the emerging market sector. He believes Chinese weakness could impact the whole emerging market sector. Currently he would overweight exposure in China, South Africa, Taiwan, and Indonesia. Finally he would underweight Poland, Philippines, Mexico, and Malaysia.

He finished up with brief comments on investing in Russia. He stated we are at a point where a positive breakthrough in the Ukrainian situation needs to be seen before buying Russia. He cautions against trying to buy in anticipation of any agreement as the situation continues to be very chaotic.

CBOE CEO Edward Tilly on Growing the Volatility Space

Day Two of CBOE RMC Europe kicked off with a welcome from CBOE CEO Edward Tilly. He said the agenda for RMC reminds him that “we are really at the beginning of the evolving VIX story” and highlighted several new CBOE initiatives designed to continue to grow the volatility space.

Tilly noted that “though, by definition, a measure of U.S. market volatility, VIX has become the de facto measure for market volatility worldwide.   The global reach of VIX can be seen by the early and very favorable response to our Extended Trading Hours initiative in VIX futures.”

Late in 2013, CBOE introduced expanded trading hours for VIX futures, adding 5 hours and 45 minutes to the trading day. In June, trading hours for VIX futures were further expanded to nearly 24 hours, which accommodates Asian market hours and a growing worldwide user base. Tilly said that presently, nearly 10 percent of all VIX futures trading takes place outside of regular U.S. trading hours and on days when global events trigger higher volatility, it can be as high as 20 percent.

Tilly noted that CBOE is prepping to launch extended trading hours for SPX and VIX options later this year, pending regulatory review and completion of necessary systems enhancements. The new session will run from 2:00 a.m. to 8:15 a.m., Chicago time.

Tilly then made the first of two announcements – CBOE Futures Exchange (CFE) will launch futures on the CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (VXTYN), the first volatility index based on U.S. government debt, on November 13. He noted that VXTYN futures “can enable customers to better manage interest-rate risk.”

Turning to the continued growth in CBOE’s S&P 500 Index (SPX) options complex, Tilly highlighted the remarkable growth in SPX Weeklys, which now average over 250,000 contracts per day – one-third of all SPX options traded. This set the stage for the morning’s second announcement – on October 6, CBOE will begin to include SPX Weeklys option series in the CBOE Volatility Index calculation.  Tilly said the inclusion of SPX Weeklys “will allow VIX ‘spot values’ to be calculated with the S&P 500 Index option series that most precisely match the 30-day target timeframe for expected volatility that the VIX Index is intended to represent. The robust market in our SPX Weeklys product enables that change and makes it a meaningful one.” This enhancement does not impact the tradable VIX products or the final settlement values.

The press releases for both announcements will be available here later today.

Tilly concluded his remarks by saying that CBOE truly values the setting at the Risk Management Conference. “By working closely with customers like you, in forums like this one, we can continue to create products and services that add value to your trading experience and expertise. Over the years, we’ve received great feedback and suggestions from RMC participants on ways to improve products and services.” We’d expect this year to be no different.

RMC is in full swing. See www.cboermceurope.com for more highlights.

Day One CBOE RMC Europe Recap

The 3rd edition of CBOE’s Risk Management Conference held in Europe commenced today with three presentations covering a diverse range of topics.

The day began with an informative and educational presentation on Option and Volatility Strategies by Paul Stephens and Colin Bennett.  More color from this colorful presentation may be found at -

http://www.cboeoptionshub.com/2014/09/03/rmc-kicks-primer-options-volatility-strategies/

Bill Looney and Oleg Lugovkin coordinated efforts in a presentation that covered Managing Directional Trading Strategies.  It was noted that the option industry has been experiencing an increase in directionally oriented strategies implemented using options.  More on this presentation can be found here -

http://www.cboeoptionshub.com/2014/09/03/directional-option-trading-strategies-discussion-rmc/

The day finished up with some insights into US Options and Volatility Market Client Demographics which included contributions from Andy Nybo, Steven Sears, and Leaf Wade

http://www.cboeoptionshub.com/2014/09/03/us-option-market-demographics-discussion-rmc/

The evening finished with dinner and lively discussion.  I sat with Nabil Kobeissi and Yasmine Hayek from LTW Capital Partners at dinner.   Both noted that they came away with new trading ideas that will keep them busy when they return to London next week.  I think that sentiment sums up how many attendees felt about today’s sessions.

Tomorrow the day begins with welcome comments from Ed Tilly, CEO of CBOE Holdings, Inc. where he will also offer an update on activities at CBOE.  The day is pretty full with seven presentations on topics ranging from the institutional use of options to the volatility of volatility.  I’m sure attendees will come away with an improved knowledge of the listed options and volatility markets along with more things to work on when they return home next week.

 

 

RMC Presentations on Asset Allocation and Rebalancing Using Short Options

At a 75-minute session on Sept. 4 at CBOE Risk Management Conference Europe, presentations on Asset Allocation and Rebalancing Using Short Options will be delivered by Pav Sethi, CEO and CIO of Gladius Investment Group, and by Dr. Christoph Gort, Partner, SIGLO Capital Advisors. www.cboermc.com

Here are some of the points that are planned for the presentations –
Institutional investors usually define a strategic asset allocation (SAA). An SAA does not only contain percentage points for allocations but also lower and upper boundaries (constant proportion SAA). Boundaries are used to keep exposures constant over time and his implies  rebalancing. Results from an empirical study on use of SPX options to implement allocation shifts will be presented, as will case studies on how dynamic rebalancing has been accomplished in practice.

Dr. Gort will present this a number of findings, including this table with a comparison of a rules-based implementation, buy-and-hold, and other strategies –

Rebalance table

Links to papers by SIGLO Capital Advisors and other consulting firms are at www.cboe.com/benchmarks.

CBOE Mid-Day Update 9.3.14

Volatility as an asset class

Market-Vector Russia ETF Trust (RSX) is recently up $1.24 to $24.83 on hopes for a Ukraine conflict resolution. September weekly call option implied volatility is at 31, September is at 27, November is at 25; compared to its 26-week average of 25.

Mobileye (MBLY) is recently up $4.39 to $47.41 after Morgan Stanley sees potential for stock to double, September call option implied volatility is at 75, October is at 61, December is at 59; compared to its 5-day average of 53.

Netflix (NFLX) is recently up $2.85 to $479.16 after trading at a record high of $487.60.  September weekly call option implied volatility is at 30, September is at 27, October is at 26, January is at 31; compared to its 26-week average of 37.

NFLX 9/5/14 calls 485, 490, 495, & 500 calls and 475, 480 puts on 88K contracts at the CBOE.

Actives at CBOE:  AAPL TSLA PBR GILD BIDU GILD X FB C TWTR

Stocks with increasing volume @ CBOE: INFI BCS TRMB HMSY FL END GRUB

CBOE DJIA BuyWrite Index (BXD) down 2c to 270.09, compared to its 50-day moving average of 268.22 cboe.com/micro/bxd/

CBOE Volatility Index (VIX) up 28c to 12.52. VIX September 14 and 17 calls are active on 112K contracts @ CBOE cboe.com/VIX

iPath S&P 500 VIX Short-Term Futures (VXX) down 0.4% to 28.17
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US Option Market Demographics Discussion at RMC

The final presentation of the first day of the CBOE RMC Europe conference was delivered by Andy Nybo from TABB Group, Steven Sears from Barron’s, and Leaf Wade of UBS. I was personally looking forward to this presentation, US Options and Volatility Market Client Demographics, and was not disappointed. The specific discussion centered on the results of TABB Groups research of US listed options trading along with insights into the different uses of products.

Andy Nybo from TABB Group went through the client demographic report. Some of the highlights include –

From 2000 to 2014 the compounded annual growth rate for US option volume has been 14%

Growth Drivers –

  • Demand for index and ETF options
  • The introduction of Weeklys
  • Retail investors have returned to the market
  • Demand for volatility exposure

With respect to volatility exposure it was noted this increase in volume has come in a low volatility environment. The question is what will happen when volatility returns. Currently the average daily notional value of volatility option trading (VIX & VXX) is over $2 billion and growing.

In the first half of 2014 71% of option volume occurred in the top 100 names and 41% in the top 10 names.

Focusing on Europe – 9% of US option volume originates from European desks. Currently the retail volumes in Europe are very low, but the expansion of electronic trading is sparking interest from individual traders. A big difference between the US and European option markets is the clearing situation. There are twelve different exchanges in the US, but they share clearing (OCC), while in Europe there are twelve different clearing houses.

Steven Sears discussed the change he’s noticed through increased access to the option markets by individuals. Institutionally he noted that put writes and buy writes are very commonly implemented strategies. With respect to VIX or volatility he noted that Blackrock has been calling volatility an asset and also have said it is the last low priced asset to own in the world.

Leaf Wade noted that spiked in volatility are quickly met with supply which pushes volatility right back down. He also thinks that the Fed backing out of the market will not be enough to push volatility to higher levels. It may take more of a market surprise to push volatility higher. He also said that both long and short volatility are being used by more sophisticated investors.

Directional Option Trading Strategies Discussion at RMC

Bill Looney from CBOE and Oleg Lugovkin who is a volatility portfolio manager at Argentiere Capital AG led the second session of the day at CBOE’s European Risk Management conference. The title of their discussion was Directional Options Trading Strategy and Position Management.

One of the interesting comments at the beginning of the presentation was that the range of customers using derivative strategies has never been greater. Many of these managers are using options to implement a directional outlook.

Any directional trade is a three step process –

    1. Define View
    2. Structure Trade
    3. Risk Management

The view or objective may be either hedging, speculating, or enhancing yield. The goal of a trade should be defined in advance – this means that structuring and managing the trade will be easier as the trade develops. For targeted price moves around events short dated or weekly options have definitely changed the game a bit.

Some reasons to consider using options for directional trades include leverage, limiting downside moves, and to express vies on timing or trading ranges. An interesting point was that the lower the volatility the higher the leverage using options to trade your outlook.

There were several directional trading examples given over the course of the presentation that covered relative equity market trades, directional trades on silver, and directional VIX trades. The VIX trade was one of my favorite structures which is selling an out of the money VIX put and also buying an out of the money call spread which may usually be done at a low cost or maybe even a credit. Recently a VIX Sep 12 put could be sold for 0.30 and a VIX Sep 17 / 23 call spread could be purchased for 0.30 which comes to even money. The payout diagram at expiration for this trade appears below –

VIX Payoff

The risk to this trade is VIX below 12.00 at September expiration. A spike in volatility to 23.00 could result in a profit of 6.00. This sort of approach to trading demonstrates both the flexibility of options along with the great insight that can be gained from attending the CBOE Risk Management conference.

RMC Kicks off with Primer on Options and Volatility Strategies

The first session kicking off the 2014 CBOE Risk Management Conference Europe was led by Paul Stephens from CBOE and Colin Bennett Head of Quantitative and Derivative Strategy at Banco Santander Central Hispano.   Bennett is also the author of Trading Volatility which may be found at www.trading-volatility.com.

This session was a great primer for the information that is going to be delivered throughout the rest of the conference. The three topics covered were volatility risk premium, hedging and long volatility strategies, and VIX and volatility trading.

Volatility Risk Premium

The discussion of volatility risk premium actually began by showing the performance of the CBOE BuyWrite Index (BXM) on an absolute and risk adjusted basis. It was then noted that BXM has worked well over time due to the volatility risk premium or that realized volatility has been consistently overpriced by implied volatility.

Hedging and Long Volatility Strategies

The most common hedging strategy involves buying puts which defines risk and also allows a position to be held so an investor may still participate in upside price moves.  A strategy that is often discussed is a portfolio tail hedge  which may be implemented through buying VIX calls or buying out of the money SPX puts.  Many investors have started implementing tail hedge strategies that combine long SPX puts and long VIX Calls.   It was also noted that the best protection against a big equity market move to the downside will depend on the nature of the market drop. Sometimes going to cash works best, while at other times hedging with puts through either a long option position or spread will be the most effective strategy.

VIX and Volatility Trading

To start the final part of this session, the VIX calculation and settlement process were touched on. VIX is actually a measure of a portfolio of out of the money SPX options which tend to have different levels of volatility. The result is that VIX is a constant volatility exposure over several strike prices. VIX settlement is based on opening trades on a wide variety of option contracts which means settlement is based on the pricing of a strip of options and not at the money implied volatility. Additionally, VIX option pricing that should be based off the forward VIX price was covered.

 

Hedging the Market with Volatility

(Editors Note: We’d like to welcome Vance Harwood as a CBOE blog contributor. Vance is a consultant whose interests include macroeconomic forecasting, investor psychology, and volatility as an asset class. His investment activities include trading index ETFs, volatility related ETPs and their associated options. He blogs at sixfigureinvesting.com – mostly about volatility, but occasionally about options strategies, bond funds, and general market topics. We’ll have a link to his site up shortly. Welcome Vance).

It’s expensive to buy securities that track volatility. Their holding costs are so high that your timing has to be exquisite in order to end up with a profit. However, if you’re hedging a short volatility position, or poised to jump into the general market at a possible transition point a long volatility position might make sense.

Consider this chart:

pic 1

Will the market bounce off this trend line for the fifth time, or will it go into a correction?

If the market breaks through the trend line it’s likely volatility will really spike.   Alternately if the market rallies then volatility will quickly fade, so an asymmetric bet (e.g., call options) is attractive.   If volatility spikes you benefit from the rapid run-up, but if it’s a false alarm your losses are limited.

The next question is to determine what underlying volatility product is best for this hedge and how large a position is needed to balance the risk in your general market position.  Investing in the CBOE’s VIX® would be ideal, but unfortunately there’s no way to directly invest in the VIX, so we’re left with a set of compromised choices—volatility Exchange Traded Products (ETPs) like TVIXVXX, or VIXM  (see volatility tickers for the complete list), or VIX futures.  Later in this post I’ll analyze how three specific investments would have performed during an actual correction, but first I’ll examine a key issue—how much will the volatility products move up if the market drops.

The Choices

The chart below shows how the volatility ETPs have historically reacted during negative S&P 500 (e.g., SPY) market moves.  The data uses simulations of ETP prices from 2004 until their inceptions and actual data after that.

pic 2

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CBOE SKEW Index Averages 129.6 in 2014; High Demand for Bearish Index Puts

Investors are inquiring about the cost of hedging as the S&P 500 (SPX) Index hit its all-time monthly closing high value of 2003.37 last Friday, and we are entering the historically volatile months of September and October

In the Aug. 30 Striking Price Column in Barron’s, Steve Sears wrote –

“… Investors are increasingly discussing what it means that the CBOE Volatility Index (VIX) is historically low while bearish put prices are expensive. … Stephen Solaka, a partner with Belmont Capital, a Los Angeles money-management firm, is advising clients interested in hedging stocks to use a ‘put spread collar.’ …”

After reading Mr. Sears’ comment on “bearish puts are expensive” I developed the two updated charts below that show that there indeed appears to be high demand for out-of-the-money protective index puts.

CBOE SKEW INDEX – HIGH LEVELS IN 2014

CBOE SKEW Index values, which are calculated from weighted strips of out-of-the-money S&P 500 options, rise to higher levels as investors become more fearful of a “black swan” event — an unexpected event of large magnitude and consequence. The value of SKEW increases with the expected tail risk of S&P 500 returns. If there were no tail risk expectations and concerns, SKEW would be close to 100.

The average daily closing levels for the CBOE SKEW Index were –

> 129.6 in 2014 (through August)

> 117.2 in the 24 years from 1990 through 2013.

Since the beginning of the SKEW time series in 1990, nine of the fourteen highest daily closing levels for the CBOE SKEW Index have occurred in 2014.

SKEW Index thru Aug 2014

 

VOLATILITY SKEW FOR AAPL, USO, AND SPX OPTIONS

The graph below shows Bloomberg estimates for different slopes for the volatility skews for 30-trading day implied volatilities for AAPL, USO and SPX. For the at-the-money options, the implied volatilities are 24 for AAPL and 9.3 for SPX. For the options at 90% moneyness, the implied volatilities are 27.1 for AAPL and 19.7 for SPX.

Vol skew AAPL USO SPX

HOW TO USE THE SKEW INFO

The CBOE SKEW Index and the Volatility Skew graph can provide valuable information and signals to investors above and beyond the information supplied by the VIX Index. The SKEW Index and Volatility skew graph could be –

(1)  helpful to both hedgers and traders in identifying times in which OTM SPX puts are relatively expensive compared to ATM options.

(2)  valuable informational tools to investors who are considering engaging in the vertical spread strategy, an options trading strategy with which a trader makes a simultaneous purchase and sale of two options that have the same expiration dates and same underlying security but different strike prices.

(3)  Valuable to hedgers who contemplate the purchase of SPX OTM protective puts; the SKEW Index and Volatility Skew graph can help hedgers to gain a better idea of the relative cost of the strategy. As suggested in the recent Striking Price column, investors could consider the put spread collar strategy.

More information on the CBOE SKEW Index is at www.cboe.com/SKEW.

DISCUSSION AT RMC EUROPE

At the CBOE Risk Management Conference Europe this week in Ireland (1) Mr. Sears will participate in a panel discussion on Sept. 3, and (2) on Sept. 4, Natasha Jhunjhunwala, Equity Derivatives Product Management, Credit Suisse, and Sheldon Natenberg, Co-Director of Education, Chicago Trading Company, will deliver presentations on The Volatility Surface: Skew and Term Structure. www.cboermc.com.

CBOE Mid-Day Update 9.2.14

Volatility as an asset class

Norwegian Cruise Line (NCLH) is recently up $3.88 to $37.19 after agreeing to acquire upscale peer Prestige Cruises for $3B. September call option implied volatility is at 28, October and December is at 23; compared to its 26-week average of 27.

Under Armour (UA) is recently up $2.02 to $70.39 after ESPN.com reported the athletic apparel company signed Gisele Bundchen as part of new campaign. September and October call option implied volatility is at 28, January is at 30; compared to its 26-week average of 32.

Tesla Motors (TSLA) is recently up $13.48 to $283.13 after hitting a 52-week high following Stifle’s upgrade to Buy from Hold. September weekly call option implied volatility is at 40, September is at 33, December is at 37; compared to its 26-week average of 48.

Actives at CBOE:  AAPL TSLA PBR GILD RSH BIDU DOW LVS TWTR

Stocks with increasing volume @ CBOE: HRB NVS SEE CSLT JIVE NRF CCK RBS CONN NVO

CBOE DJIA BuyWrite Index (BXD) up 8c to 270.66, compared to its 50-day moving average of 268.17 cboe.com/micro/bxd/

CBOE Volatility Index (VIX) up 50c to 12.48. VIX September 13, 14, 15 and 25 calls are active on 224K contracts @ CBOE cboe.com/VIX

iPath S&P 500 VIX Short-Term Futures (VXX) up 0.5% to 28.25
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Avoid Overexuberance As September Begins – Weekly Market Outlook

Although it was a low volume week, the bulls clearly outnumbered the bears last week.  The S&P 500 (SPX) (SPY) managed to close at a record high close on Friday after hitting a record intraday-high on Thursday.  Well supported or not, the momentum continues to carry us higher.

The advent of a new month against the backdrop of an overbought market, however, is a potential opportunity for the bears to take control again.  And, from a statistical perspective, that potential is there for September.  We’ll take a look at the market’s potential stumbling blocks after dissecting last week’s and this week’s economic numbers.

Economic Data

We got a fairly big batch of economic information last week.  We’ll stick with the highlights, beginning with Monday’s and Tuesday’s real estate data.  On Monday we learned July’s new home sales fell from a pace of 422,000 to 412,000.  The overall uptrend is still in place, however.  On Tuesday the Case-Shiller Index showed home prices were 8.5% higher in June than they were a year earlier, and the FHFA says home prices grew 0.4% between May and June.

Although the media raised a small red flag about the slump in new home sales, the worry wasn’t merited.  Looking at the whole real estate picture – last week’s data too - the real estate and construction picture still looks like it’s pointed in the right direction.

On Friday the media once again rattled investors’ cages by obsessing about the fact that consumer spending slumped 0.1% in July.  It was the first dip in a long time, and since all big trends start as small ones, this one could be the beginning of trouble.  But, that’s probably not going to be the case.

While consumers may have spent less in July, it’s not because they’re worried.  The Conference Board’s consumer confidence measure reached a multi-year high of 92.4 for last month.  The Michigan Sentiment Index also rose to a multi-month high of 82.5 in August, and both data sets are in strong uptrends.

And of course, we also got the second reading on second quarter’s GDP growth.  Rather than the first guess of 4.0%, it was actually up by 4.2%.  The third/final reading will come in mid/late September, but isn’t likely to change much from the second estimate.

Here’s the rest on the following Calendar:

Economic Calendar

PH 83114-econ-data

Source:  Briefing.com

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Blogging Options: CBOE Morning Update 9.2.14

Investors in the US return after the Labor Day holiday and stock futures are modestly higher.  Eyes focus on Ukraine and the jobs reports later this week.  Asian markets mixed to lower but European stocks slightly positive.  Oil and Gold each off 1%+. A report circulating by a large bank shows Manufacturing in over half of the European countries surveyed contracting. CBOE’S Risk Management Conference kicks off tomorrow near Dublin (I checked the airfares from London to Dublin for you procrastinators, fares start at £17). Volatility as an asset class:

Conn’s (CONN) is down $11.39 to $33.39 in the premarket after the southern hard-goods retailer Q2 earnings fell and bad-debt provisions increased.  September call option implied volatility is at 71, October is at 53, January is at 46; compared to its 26-week average of 58.

Compuware (CPWR) is up $1.25 to $10.60 on the software developer in advanced talks with a private equity buyer, the Wall Street Journal reports. Overall option implied volatility of 28 is near its 26-week average of 30.

VIX methodology for Apple (VXAPL) is at 26.20, as shares APPL shares trade near record high into a company sponsored September 9th event CBOE.com/VXAPL

Options expected to be active @ CBOE:  DG FDO DLTR CPWR AAPL NVS CIEN CONN SWKS INVN

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The Weekly Options News Roundup – 8/29/2014

Your weekly recap of CBOE features, options industry news and VIX and volatility-related articles from print, broadcast and online and social media outlets.

Financial Leaders Unite
Leaders in the financial industry from LaSalle Street to Wall Street have joined together answering the call of the Ice-Bucket Challenge, raising money for ALS Research. CBOE CEO Ed Tilly accepted the challenge issued to him, and accompanied by the CBOE community, raised money for this great cause.

“CBOE’s Ed Tilly Takes ALS Ice-Bucket Challenge” – Ed Tilly, CBOE Options Hub
http://bit.ly/1AUy5Tz

 VIX: Good For All Occasions
Volatility remained subdued in contrast to stocks, which reached new all-time highs this week.  The CBOE Volatility Index, and VIX options and futures, are very useful tools, even in times of low volatility.

“Our Trade Suggestions, Updated” – Jim Strugger, Barron’s
http://on.barrons.com/1leR9rY

“Short Sellers Boost Bets Against VIX as Volatility Fades”- Callie Bost, Bloomberg
http://bloom.bg/1veCXTp

“When’s The Right Time To Buy Options?” – Brad Zigler, Wealth Management.com
http://bit.ly/1AOcRXB

“VIX Jump on Ukraine Invasion May Portend Volatility Rise Ahead” – Steven Sears, Barron’s
http://on.barrons.com/VSJuDU

VIDEO: “Enriching your understanding of VIX and volatility”- Russell Rhoads, CBOE
http://www.cboe.com/VIXms/ArchivedWebinars.aspx

A Valuable Combination
CBOE Holdings offers innovative products that create value for customers and shareholders alike.  “The options exchange’s stock should benefit further from a revival in volatility in the fall and beyond.”

“Options on CBOE Shares Offer Play on a VIX Pop” – Steven M. Sears, Barron’s
http://on.barrons.com/1AUlP5y

Options Education = Options Expansion
The use of options by investors has steadily grown over the last several years, with ongoing industry educational efforts cited as one of the main factors.  According to a recently published study by the Options Industry Council,  registered investment advisors, in particular, are expanding their use of options.

“RIAS Expand Options Usage” – Markets Media
http://bit.ly/1spsKi2

“New Study Shows Advisors’ Use of Options Increased 13% Since 2011
http://bit.ly/1n4kEII

Erin go bragh!
The 3rd annual CBOE Risk Management Conference Europe kicks off next Wednesday in Dublin.  Keep up to date on all the happenings at the conference through the live blogs and tweets (#CBOERMC) at www.cboermceurope.com.

 

CBOE Mid-Day Update 8.29.14

Volatility as an asset class

Tesla Motors (TSLA) is recently up $6.90 to $270.66 as shares trade at a record high on signing an agreement with China Unicom (CHU) to construct 400 charging points in 120 cities at the China’s company’s outlets, according to Bloomberg, citing comments from Tesla spokeswoman Peggy Yang. September weekly call option implied volatility is at 27, September is at 29, December is at 36; compared to its 26-week average of 50.

Facebook (FB) is recently up 80c to $74.65.  September weekly call option implied volatility is at 21, September is at 25, October is at 26, December is at 30; compared to its 26-week average of 40 according to Track Data, suggesting decreasing price movement.

Twitter (TWTR) is recently down 7c to 49.67 on 160K contracts at the CBOE.  September weekly call option implied volatility is at 40, September is at 41, November is at 48; compared to its 26-week average of 50.

Actives at CBOE:  AAPL TSLA C TWTR NFLX BAC AMZN C

Stocks with increasing volume @ CBOE: OXY HD RSH UTHR IRF

CBOE DJIA BuyWrite Index (BXD) down 5c to 269.84, compared to its 50-day moving average of 268.12 cboe.com/micro/bxd/

CBOE Volatility Index (VIX) up 11c to 12.16. VIX September 16 and 21 calls are active on 128K contracts @ CBOE cboe.com/VIX

iPath S&P 500 VIX Short-Term Futures (VXX) down 0.9% to 28.16

CBOE S&P 500 Short-Term Volatility Index (VXST) is recently up 5.2% to 10.37; compared to its 10-day moving average of 11. stks.co/r0CS2
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Weekly Market Commentary 8.29.14

$SPX broke out to new all-time intraday and closing highs this
week.  New all-time closing highs were made on 4 of 5 consecutive
days, which confirmed the move, so the $SPX chart is bullish once again.   lm 8 29 spx

Equity-only put-call ratios have finally rolled over to buy signals. To the naked eye, they rolled over more than a week ago, but to the computer, the confirmed buy signals only arrived a couple of days ago.

Market breadth has remained positive, and the breadth indicators thus continue to remain on buy signals.

Volatility indices ($VXST, $VIX, and $VXV) have remained subdued for the most part this week.  As long as that is the case, stocks can continue to rise.  As long as $VIX remains below 14, we view it as being bullish for stocks.

lm 8 29 vix
In summary, all of the intermediate-term indicators are bullish,
and thus so is our outlook.

Blogging Options: CBOE Morning Update 8.29.14

July Income rose 0.2% and Spending fell 0.1% (+0.3 and +0.2 expected).  Savings rate grew slightly. Two more reports later this morning and then long weekend begins. Train empty on way in. Bonds close early today. Volatility as an asset class

Splunk (SPLK) is up $2.91 to $48.20 in the premarket after reporting better than expected Q2 EPS of $0.01 on revenue of $101.5 million versus the consensus estimate of $93.93 million. The data-software company sees Q3 2014 revenue of $105M-107M, versus the consensus of $104M. August weekly call option implied volatility is at 158, September is at 69, October is at 66, November is at 56; compared to its 26-week average of 52.

Fred’s, Inc. (FRED) is indicated lower after regional retailer reporting less than expected Q2 EPS results of on revenue of $491M versus the consensus estimate of $488M. Overall option implied volatility of 42 is above its 26-week average of 35.

Big Lots (BIG) is down $0.65 to $46.55 in the premarket after reporting Q2 results and a $250M share repurchase program. September call option implied volatility is at 50, October is at 38, January is at 32; compared to its 26-week average of 34.

Options expected to be active @ CBOE:  BIG SPLK FRED AZN CONN

CBOE SKEW INDEX (SKEW) at 137.94, compared to its 50-day MA of 134.08. SKEW measures the purchase of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions. An increase of this index indicates greater expectations for an extreme down move.

CBOE S&P 500 BuyWrite Index (BXM) at 1104.72 compared to its 10-day moving average of 1101.81 cboe.com/BXM

CBOE DJIA BuyWrite Index (BXD) at 269.89 compared to its 50-day moving average of 268.08 cboe.com/micro/bxd/
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Next Week in Weeklys – 9/1/2014

I’m not sure if there are any new names on the Weeklys list as I wrote this a week before you are reading it.  CBOE is holding the annual European version of our Risk Management Conference so my access to the data needed to produce this blog is a bit limited.  If you want to check the current list of Weeklys check out www.cboe.com/weeklys

The combination of a holiday week and where we are on the calendar resulted in a pretty light earnings calendar for next week.  Here are the stocks with short dated options available reporting next week -

Weeklys  09012014

Weekly Weekly’s for 8.28.14


As we inch closer to the long Labor Day Holiday weekend, I’m mostly focused on weekly’s with options expiration for this Friday. I have a feeling many traders will be using this strategy with the weeklys for a quick turnaround play before taking off for the weekend. It’s going to be very interesting to see where some of the more active stocks of the week land Friday…

Salesforce (CRM) is among them. The weekly 57 strike puts popped up earlier this morning with 2,7000 contract trading as that stock trades around $58.

Gilead Sciences is another popular stock. Options players have been all over this one buying calls and many traders were happily on the right side of the trade as the stock rallied to a 52-week high above $108 this week. Today there seems to be a change of pace with puts trading at the 104 strike into this week’s expiration and 106 puts for next week (Sept.5 expiration). GILD is trading around $107.

Another stunning stock this week has been Amazon. I know some traders may be looking to short AMZN through the options as the stock trends higher. Puts are active in multiple strikes going down to the 314 strike,along with 322 and 335 strikes. There are some call buyers at the 342 strike.

Yahoo (YHOO) has plenty of options action this week, some of that may have been related to traders building positions into the Alibaba IPO expected next month. Alibaba reported an earnings surge this week. Yahoo shares are trading not far off from a 52-week high. The options paper is on the light side, but still something I like to track. Calls are active at 38 and there is light paper in the calls in the September 40 weekly call strike.

In the traditional options traders are building positions in the 38 and 39 call strikes. Traders may even be playing the Weekly’s off the traditional options.

Tesla is another one that has moved up with the market today the stock is relatively flat around $263. TSLA calls active at 265 and puts at 260 strikes.

GT Advanced Technologies bounced higher this week as reports suggest the company’s sapphire glass could be used in the iPhone 6 that might be unveiled (possibly) September 9th. There are call buyers at the 18 strike as the stock trades around $17.

Action is also picking up in the Emerging Markets Index EEM this week, today it’s tamer with 600 of the 45 put contracts trading for this week’s expiration and 44.5 puts for next week’s expiration.

Checking SPX, the S&P 500 made it over the 2,000 mark this week but today trader are reaching for downside put protection down to the 1,940 put line, also activity in the 1975 puts. The weekly call buyers still persisting at the 2,000 strike. I’m Angela Miles. I’ll see you next time.. Twitter: AngieMiles

CBOE Mid-Day Update 8.28.14

Volatility as an asset class

Market-Vector Russia ETF Trust (RSX) is recently down 73c to $24.39 as the Ukraine conflict worsens. September weekly call option implied volatility is at 27, September and October is at 28, November is at 26; compared to its 26-week average of 25.

GoPro (GPRO) is recently $2.22 to $47.73, near a record high of $49.90.  September weekly call option implied volatility is at 47, September is at 40, October is at 36, January is at 32; compared to its 8-week average of 56.

Dollar General (DG) is recently up 93c to $64.63 after the retailer reported its sales rose less than expected. September weekly call option implied volatility is at 29, September and October is at 27, January is at 24; compared to its 26-week average of 32.

Active calls @ CBOE; AAPL 8/29/14 102, 103, Oct 101.43 & Nov 110

Active puts @ CBOE; AAPL 8/29/14 102, Sep 104 & Nov 110

Actives at CBOE:  AAPL TSLA GILD C TWTR NFLX PBR BAC AMZN C

Stocks with increasing volume @ CBOE: WLT CLF RSH SIG

CBOE DJIA BuyWrite Index (BXD) down 23c to 269.91, compared to its 50-day moving average of 268.09 cboe.com/micro/bxd/

CBOE Volatility Index (VIX) up 33c to 12.31. VIX September 14, 16 and 25 calls are active on 131K contracts @ CBOE cboe.com/VIX

iPath S&P 500 VIX Short-Term Futures (VXX) up 0.8% to 28.06
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Blogging Options: CBOE Morning Update 8.28.14

Traders are hearing Russian troops have entered Ukraine – or haven’t, depending on whether you are hearing Ukranian, NATO or Russian comments.  On the economic front Weekly Jobless Claims remained under 300k, unchanged from last week.  Q2 GDP first revision showed the economy grew 4.2% (original estimate +4.0%, higher than the 3.9% to 4.0% estimates), Commodities higher.  Volatility as an asset class:

Abercrombie & Fitch (ANF) is down $2.41 to $41.59 in the premarket after the teen retailer reported Q2 sales decreased more than expected. August weekly call option implied volatility is at 100, September is at 49, October is at 45, December is at 38; compared to its 26-week average of 45.

Williams-Sonoma (WSM) is off $8.29 to $66.60 after the high end home retailer forecast a less than expected outlook. September call option implied volatility is at 30, October is at 25, November is at 24; compared to its 26-week average of 25.

Guess (GES) is down $1.99 to $23.65 in the premarket after the apparel retailer lowered its outlook for the year. September call option implied volatility is at 45, October is at 35, December is at 32; above its 26-week average of 30.

Options expected to be active @ CBOE:  TKMR FEYE WSM WDAY SPLK YNDX RSX JCP ANF

CBOE SKEW INDEX (SKEW) at 135.41, compared to its 50-day MA of 133.92. SKEW measures the purchase of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions. An increase of this index indicates greater expectations for an extreme down move.

CBOE S&P 500 BuyWrite Index (BXM) at 1105.43 compared to its 10-day moving average of 1100.78 cboe.com/BXM

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Expiration Friday – At Last

Expiration Friday.

Since the beginning of time (OK, the last 40 years we’ve had listed options), options expired on the Saturday following the 3rd Friday of the month.  Why Saturday?

Let’s take a walk to the way-back machine with Mr Peabody.   I was a floor trader at the CBOE and I am trading front-month options on the Friday of expiration.   My trading cards would have to be delivered to my clearing firm and key-punched (yes they were youngsters).  There would be a first pass Friday night where clerks would have unmatched trades (My acronym was KNY, a trader or broker selling me 5 calls might have written or his/her keypuncher might have inserted KMY).  The second pass early Saturday morning was where the problems were discovered – I was trying to buy puts and a broker was selling calls.  I thought I paid $2 and the other trader was selling at $2 1/4 ($2.25 for those into decimals). Traders would come to the CBOE in Chicago’s Loop Saturday morning and resolve “out-trades”, if any, in the expiring options.   The final resolution would be sent to the Options Clearing Corp (OCC) and cleared later Saturday morning, hence Saturday settlement.

Today the majority of our market makers are trading from computers somewhere in the world, and traders still on the trading floor use hand-held computers.  Everything is computerized.  Traders don’t have to do anything on Saturday (except what they are told by their spouse).

Weekly’s options now expire on Friday’s, but a few regular (3rd Friday) options are still Saturday settlement.  So why can’t Friday expiration options expire on Friday?  They will very soon.

The CBOE, other exchanges and the OCC are moving to a Friday expiration date for new series expiring after February 1, 2015, pending regulatory approval.  LEAPS will also be listed with a Friday expiration date.  When new Regular expiration (3rd Friday) options are listed, the new regular options listed have Friday as expiration.

What does this mean to you or me as investors using options?  Not much.  The only thing I want to keep an eye on is how my broker counts the number of days until expiration.  Is November expiration 62 days away or using Saturday, 63 days away?  I should know that, but don’t.

Additional information regarding the standard monthly option
expiration date move from Saturday to Friday can be found in:

CBOE Regulatory Circular RG12-135.

So in the very near future, a few straggling months with Saturday being shown as expiration will be gone, and Expiration Friday will be Expiration Friday.  mk

Buying and Selling Waves

This market does not make life easy, does it? What we would all prefer is some predictability about the action and a few reliable patterns that show us exactly where markets are going (more on that later).

It seems impossible to establish a rhythm to our trading/investing. We are unable to find the flow as markets go up and down. We often find ourselves facing north when we should be looking south, and vice versa. Unfortunately, our time frame as traders is often not the time frame of the markets, and that inevitably leads to frustration and disappointment. The market will do its thing, and we have to be ready to move.

From the previous highs in early July, the SPX 500 dropped about 80 handles (nearly 50 in about two days), and then it rallied up about 90 handles. All of that action occurred in about a month. If that doesn’t make your head spin out of control, then I don’t know what will! Could you have correctly been on both sides of the trade with your options trading strategies? The selling wave was sharp and swift, and volatility spiked as fear ran rampant., How does one react to that kind of speed?

Just two weeks ago, markets appeared headed for the danger zone – the SPX 500 was testing the 100 MA and closing in on the 200 MA (a long-standing bullish support area for institutional investors), and the 50 MA had just turned lower. The Dow Industrial’s tested that 200 MA and looked ready to break it. After all, it had been many months since price had met the average. The Russell 2K had already been flirting under the 200 MA for awhile and could not seem to get the ship righted after a steep drop from recent highs in early July.

Despite these signals and very oversold conditions, the markets came back with ferocity. The SPX 500 hit new all-time highs and was knocking on the door of 2K for the very first time. In fact, the SPX futures have rallied a stunning 100 handles in that time, a breathtaking 5.5% move up without much in the way of resistance. Along the way, a large group of stocks established strong price leadership and solid breadth, which was lacking during the last move to new highs in May and early July.

All of this illustrates that being in sync with the markets is nearly impossible on a regular basis. Just a small rumor of an attack in the Russia/Ukraine conflict can send stock futures into a tailspin. Who can prepare for that? We can always buy protection via index puts or going long on some volatility, but that won’t pay off on a regular basis, and in fact it has only worked well a couple of times this year.

Paying attention to signals, indicators, patterns and trends can help us become better aware of these waves, allowing us to position accordingly. For instance, say the McClellan Oscillator drops to extreme lows, there is a very high put/call ratio, the VIX spikes and sentiment polls turning bearish – the time is right to be a contrarian. If we don’t, the boat will tip over, as too many people are leaning heavily to one side of the boat.

This was exactly the case around August 7 and 8, when a slingshot move occurred that most did not expect. Now we have the opposite condition, with too many bullish people and indicators showing extreme conditions. In a bull market like this one, we can expect a quick correction.  Want to know how to prepare? Lighten up on your longs, and get ready for the next wave.

CBOE Mid-Day Update 8.27.14

Volatility as an asset class

Chico’s FAS (CHS) is recently down 57c to 15.45 after the woman’s seasonal merchandise reported a Q2 profit decline of 31% on promotions. September call option implied volatility of is at 27, October is at 26, January is at 27; compared to its 26-week average of 33.

Express (EXPR) is recently up $1.79 to $16.38 after the retailer reported Q2 earnings and guidance come in higher than analysts predicted. September call option implied volatility is at 37, October is at 35, January is at 34; compared to its 26-week average of 44.

August 27Michaels (MIK) is recently up $1.33 to $16.43 after the arts and crafts retailer reported Q2 results above analysts’ consensus estimates. September call option implied volatility is at 38, October is at 33, December is at 32; compared to its eight-week average of 33.

Actives at CBOE:  AAPL TSLA GILD C TWTR NFLX PBR BAC AMZN

Stocks with increasing volume @ CBOE: RSH WFM VALE RIO BKW ARUN SWHC INFN

CBOE DJIA BuyWrite Index (BXD) up 10c to 269.94, compared to its 50-day moving average of 268.04 cboe.com/micro/bxd/

CBOE Volatility Index (VIX) up 13c to 11.76. VIX September 15 and 17 calls are active on 124K contracts @ CBOE cboe.com/VIX

iPath S&P 500 VIX Short-Term Futures (VXX) up 0.6% to 27.80

CBOE S&P 500 Short-Term Volatility Index (VXST) is recently down 1.4% to 10; compared to its 10-day moving average of 11.20. stks.co/r0CS2
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Biggest Past One-Day Moves – VXST Up 81.8%; GVZ Up 61.7%

Investors who explore volatility and diversification strategies often are looking for instruments that provide a lot of “bang-for-the-buck,” and they may ask – if most items in my portfolio are falling, are there any products with negative correlations that can experience sharp jumps in uncertain times?

The charts below show nine volatility indexes and their biggest one-day up moves (in %) since April 2011.  CBOE Futures Exchange (CFE) offers futures on all of the indexes, (except that futures on the VXTYN Index have not yet been officially announced or launched), and CBOE offers options on most of the indexes below.

The  CBOE Short-Term Volatility Index (VXST) rose 81.8% on Apr. 15, 2013, the CBOE Gold ETF Volatility Index (GVZ) rose 61.7% on April 15, 2013, and the VXEZW, VXEEM, VIX, and RVX indexes all rose by more than 35% on August 8, 2011 (after the downgrading of US Treasury debt).  mm 1

Biggest Past One-Day Moves – VXST Up 81.8%; GVZ Up 61.7%

mm 3

Please note that the futures on volatility indexes often do not move as sharply as the spot volatility indexes.  To learn more about futures and options on volatility indexes, please visit www.cboe.com/volatility.

Blogging Options: CBOE Morning Update 8.27.14

Markets overseas fairly quiet and down fractionally.  Ukraine situation causing flight to safety with US & German Treasuries.  Record highs but light-holiday volume.  10K VIX futures in early session, pretty average volume.  Jackie Robinson West parade in Chicago today, good weather & big crowds expected.  Volatility as an asset class

Tiffany (TIF) is up $2.23 to $103 in the premarket after reporting Q2 EPS 96c, compared to consensus 85c as worldwide net sales increased 7% and comparable store sales increased 3% largely due to growth in the Americas and Asia-Pacific. September call option implied volatility is at 31, October is at 23, November Is at 21, January is at 23; compared to its 26-week average of 23.

Aruba Networks (ARUN) is higher by $1.63 to $21.86 after the network solutions provider for the mobile enterprise reported a Q4 quarterly loss and announcing a 3.7% workforce reduction. September call option implied volatility is at 55, October is at 48, January is at 45; compared to its 26-week average of 47.

Smith & Wesson (SWHC) is down $1.54 to $11.56 in the premarket after the firearm company reports Q1 results, and lowering guidance. September call option implied volatility is at 37, December is at 34; compared to its 26-week average of 37.

Options expected to be active @ CBOE:  TIVO SWHC ARUN BOBE ADI TIF CHS MIK EXPR WDAY SPLK

CBOE S&P 500 BuyWrite Index (BXM) at 1104.78 compared to its 10-day moving average of 1099.21 cboe.com/BXM

CBOE DJIA BuyWrite Index (BXD) at 269.88 compared to its 50-day moving average of 268 cboe.com/micro/bxd/

‏CBOE Nasdaq-100 Volatility Index (VXN) at 12.34; compared to its 50-day moving average of 13.66.

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Are You Making These Common Financial Mistakes by LaTisha Styles

 

The social media team at CBOE is proud to welcome a new contributor.  I met LaTisha Styles when visiting Kennesaw State University a few years ago.  She is one of the brightest and most articulate students I have had the pleasure of meeting while traveling on behalf of CBOE.  In 2010 LaTisha started YoungFinances.com and has been posting videos that offer financial advice to the newest generation of investors – Russell Rhoads

 

It’s easy to try to coast through your twenties. College comes and goes and you start a new career. In the meantime, you ignore your finances because you think, hey, I don’t have to think about that yet.

But ignoring your personal finances can be detrimental to your personal success. Here are four common mistakes that millennials make and what you can do to take control.

Mistake #1 Missing Out on the Free 401k Employer Match

If your employer offers a 401k match, take advantage of it. Whenever there’s free money, take advantage.

Mistake #2 Stalling Student Loan Payments

Don’t wait too long to pay your student loans! Set up a budget that includes student loan payments and triple your payment if you can. The quicker you can pay those suckers off, the faster you can save for a house or just enjoy a debt free life.

Mistake #3 Ignoring Credit Card Debt

Speaking of debt… Yeah, it’s not going to pay itself off. Don’t make the mistake of thinking everyone has credit card debt. Many Americans use credit but it’s important to get into the habit of paying your cards off in full each month.

Mistake #4 Emotional Spending

And finally, stop spending because you feel like it. Each purchase that you make should have a purpose.

Correct these mistakes and you will be well on your way to becoming a financial success!

 

Labor Day Holiday Trading Schedule

Labor Day is next Monday, this summer went fast.  The following is the trading schedule for Chicago Board Options Exchange® (CBOE®), C2 Options ExchangeSM (C2SM) and CBOE Futures ExchangeSM (CFE®) in observance of the upcoming Labor Day holiday:

Friday:  Regular trading hours for everything.

MondayCBOE & C2 Closed.

CFE:   All products closed with the exception of CBOE Volatility Index® (VIX® Index) futures and VIX TAS, which will be available for trading from 5:00 p.m. Sunday to 10:30 a.m. Monday, Chicago time

TuesdayCBOE & C2 regular trading hours.

CFE:   CBOE Volatility Index® (VIX® Index) futures and VIX TAS will be available for trading from 5:00 p.m. Monday to 8:30 a.m. Tuesday, Chicago time.  Trading for all other products will resume at 8:30 a.m., Chicago time.

So the bottom line is, we’re closed on Labor Day, but CFE will have the Sunday night and Monday night extended hours open for VIX and VIX TAS.   Have a good Labor day Holiday weekend.

CBOE Mid-Day Update 8.26.14

Volatility as an asset class

Ann Inc.  (ANN) is recently up $2.29 to $42.28 after hiring a bank to explore strategic alternatives, Reuters says. September call option implied volatility is at 35, December is at 32; compared to its 26-week average of 34.

Alcoa (AA) is recently up 14c to $16.62 as aluminum trades at a 18-month high. September weekly call option implied volatility is at 20, September is at 21, October is at 22, November and January is at 25; compared to its 26-week average of 28.

_MG_0821Actives at CBOE:  AAPL TSLA GILD C TWTR NFLX PBR BAC AMZN

Stocks with increasing volume @ CBOE: TLM CODE LNG DOW JNS SM

CBOE DJIA BuyWrite Index (BXD) up 21c to 269.99, compared to its 50-day moving average of 268 cboe.com/micro/bxd/

CBOE Volatility Index (VIX) down 9c to 11.61. VIX September 17 and 20 calls are active on 232K contracts @ CBOE cboe.com/VIX

iPath S&P 500 VIX Short-Term Futures (VXX) up 1.2% to 27.74

CBOE S&P 500 Short-Term Volatility Index (VXST) is recently down 4% to 10; compared to its 10-day moving average of 11.45. stks.co/r0CS2

CBOE DJIA Volatility Index (VXD) down 1.7% to 10.65; compared to its 10-day moving average of 11.35.

CBOE Nasdaq-100 Volatility Index (VXN) up 0.3% to 12.47; compared to its 50-day moving average of 13.66.

S&P 100 Options (OEX) recently is recently up $1.96 to 889.16 as orders for long lasting U.S. durable goods posted their largest gain on record in July.

Blogging Options: CBOE Morning Update 8.26.14

The Durable Goods report is considered a volatile number, and the July report just released didn’t disappoint.  Durable Goods spiked higher by 22.6% (helped by a jump of 318% in non-defense aircraft), X-Aircraft Durables dropped 0.8%, a big miss.  Stock futures didn’t budge, up slightly before the opening.  Option volume yesterday a little light as long-weekend approaches.  KITE Pharma up $4.40 as one of its cancer drugs is getting good reviews in clinical trials.  Warren Buffet providing financing to Burger King seems to like Tim Horton coffee more than a loud talking head on a major business channel.  Volatility as an asset class:

Best Buy (BBY) is down $1.11 to $30.89 in the premarket on a Q2 profit that was higher than expected, but its sales fell short and executives remained cautious for the 2nd half. August weekly call option implied volatility is at 96, September is at 46, October is at 40, December is at 36; compared to its 26-week average of 37.

DSW (DSW) is up $3.20 to $31.57 in the premarket after the shoe retailer reported Q2 adjusted EPS 37c, consensus 32c on better than expected revenue $587.1M. Overall option implied volatility of 40 is above its 26-week average of 35.

Regis (RGS) closed at $14.75 into the leader in the haircare industry reporting Q4 revenue of $483.9M, compared to consensus $477.50M. Overall option implied volatility of 29 is at its 26-week average.

Options expected to be active @ CBOE: CVLT CLF YHOO TIVO WDAY BBY DSW

CBOE SKEW INDEX (SKEW) at 135.41, compared to its 50-day MA of 133.69. SKEW measures the purchase of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions. An increase of this index indicates greater expectations for an extreme down move.

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CBOE’s Ed Tilly Takes ALS Ice-Bucket Challenge

I’m a little wet and the water was cold, but I was thrilled to participate in the ALS Ice-Bucket Challenge this afternoon. I’ve challenged three others to do the same – Steve Sears of Barron’s, Rich Repetto of Sandler O’Neill, and market commentator Jon Najarian.

As of this morning, the ALS Association has raised $79.7 million, all in the last four weeks. The ALS Association raised $2.5 million during the same period last year, and only $64 million in all of 2013. I am also pleased that our CBOE team has contributed to this very worthy cause.

Amyotrophic Lateral Sclerosis (ALS), often referred to as “Lou Gehrig’s Disease,” is a progressive neurodegenerative disease that affects nerve cells in the brain and the spinal cord. Although the cause of ALS is not completely understood, the ALS Association has helped increase the number of scientists working on ALS, advanced new discoveries and treatments, and shed light on the complex factors involved in ALS.

Your generous donation of any amount will help this effort.

To donate on-line with a credit card, go to the following link: Online Donation Form

To mail in a donation, click on the following link for the contribution form: Mail-in Donation Form

Or mail to:
The ALS Association
Gift Processing Center
PO Box 6051
Albert Lea, MN 56007

Ed Tilly
CEO, CBOE

Extended Trading Hours Volume at Record High So Far This Month

CBOE will host the 3rd Annual Risk Management Conference Europe on September 3 – 5 at the beautiful Powerscourt Hotel in Ireland.  I anticipate that one of the main topics at the conference will be – how can investors manage risk around the clock, especially during non-US trading hours?

CBOE has positive developments to report regarding management of risk around the clock.  In 2010 CBOE Futures Exchange (CFE) began offering futures on the CBOE Volatility Index® (VIX®) during select limited Extended Trading Hours (ETH). Beginning in June 2014, VIX futures trading hours were expanded to nearly 24 hours a day, five days a week. For VIX futures, the Extended Trading Hours (ETH) run from the start of the new trading day at 3:30 PM, until 8:30 AM Chicago time the following day, and the regular trading hours run from 8:30 AM until 3:15 PM Chicago time.

In addition, CBOE plans to launch Extended Trading Hours for options on both the S&P 500® and the VIX indexes in late October 2014, contingent upon completion of systems enhancements and SEC approval.

RECORD HIGH ETH VOLUME SO FAR THIS MONTH

So far in the month of August (through August 22), the average daily volume for VIX futures during ETH was 24,556 contracts, the highest number when compared to previous full calendar months.

11VIX-ETH Aug 22

Worldwide geopolitical tensions could have impacted the fact that average daily volume for VIX futures during ETH has risen each of the past 3 months.  The table below provides a breakdown of VIX futures average daily volume this month during different daily time periods.  When speaking with European investors next week, I plan to note that the average daily volume for VIX futures during the time period from 2:00 AM to 8:30 AM has been more than 17,000 so far in August.

12VIX-ETH Aug 22 Table

To learn more about strategies to manage risk around the clock, please visit www.cboe.com/VIX and www.cboe.com/ETH.

CBOE Mid-Day Update 8.25.14

Volatility as an asset class

VIX methodology for IBM (VXIBM) up $1.21 to 14.79; below its 50-day moving average of 18.04. cboe.com/VXIBM

VIX methodology for Goldman Sachs (VXGS) up 50c to 18.15; below its 50-day moving average of 18.87. cboe.com/VXGS cboe

VIX methodology for Apple (VXAPL) up 89c to 25.24; below its 50-day moving average of 25.20. cboe.com/VXAPL

VIX methodology for Amazon (VXAZN) up 40c to at 23.37; below its 50-day moving average of 30.67. cboe.com/VXAZN

VIX methodology for Google (VXGOG) up 89c to 18.70; below its 50-day moving average of 22.75 cboe.com/VXGOG

Actives at CBOE:  AAPL TSLA GILD C TWTR NFLX PBR BAC

Stocks with increasing volume @ CBOE: X ITMN

CBOE DJIA BuyWrite Index (BXD) up 36c to 269.78, compared to its 50-day moving average of 267.96 cboe.com/micro/bxd/

CBOE Volatility Index (VIX) down 12c to 11.35. VIX September 14 and 20 calls are active on 242K contracts @ CBOE cboe.com/VIX

iPath S&P 500 VIX Short-Term Futures (VXX) down 0.9% to 27.46
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Weekly Market Outlook 8.25.14

Will Last Week’s Breakout Stick? – Weekly Market Outlook

The market may have gotten last week started with a bang, breaking past some key resistance levels.  Stocks didn’t end the week with quite as much zeal, however.  Maybe it was just some pre-weekend precautionary selling.  Or, maybe the rally is already out of gas.  We’ll talk about the most likely possibility in a moment, after a run-down of last week’s and this week’s economic numbers.

Economic Data

Although there wasn’t a ton of economic data last week, what we got was important stuff, particularly on the real estate front.  That party started on Tuesday with July’s housing starts and building permits.  Both were up, topping estimates.  We saw starts reach an annual pace of 1.093 million, versus June’s pace of 945,000.  Permits hit an annualized rate of 1.052 million, which compares favorably to June’s 973,000.

On Thursday the National Association of Realtors released July’s pace of existing home sales.  They were up to 5.15 million – the highest reading since September of last year. All in all it was an encouraging batch of data, though we’re only about halfway through the real estate roundup for last month.  The rest of the key real estate and construction numbers are due this week. See the calendar below.  Regardless, we’re seeing renewed strength from the real estate market overall.

The only other major data we got was July’s inflation rate.  You can put away any fears that the Fed’s easy-money policy is giving rise to rampant inflation.  As of last month, the annual inflation rate slipped to 1.99%, from June’s 2.07%.

Of course, though it didn’t correlate with any specific data release, the Federal Reserve was the centerpiece of an economic symposium at Jackson Hole, Wyoming, this past weekend,  On the first day of the conference Janet Yellen explained that although the nation’s overall employment situation offered some bright points, by and large it saw still more of a liability.  Ergo, it wasn’t going to be the basis for a rate hike anytime soon.  That message soothed Thursday’s worries of an interest rate increase sneaking up on us sooner than anticipated.

Inflation Trends Chart
82414-inflation

Source:  Bureau of Labor Statistics

Economic Calendar
82414-econ-data

Source:  Briefing.com

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Blogging Options: CBOE Morning Update 8.25.14

Overseas markets mixed to higher – DAX up ~1%.  10-year dips below 2.4%, oil higher, metals flat.  Busy day Friday as CBOE trades ~6.6mm of 23.5mm options trading.  SPX traded over 1mm contracts, VIX with 868K and VIX Futures showed ~365k contracts traded.  Parade in Chicago Wednesday for Jackie Robinson Jr. US Championship Little League team.  CBOE’s Ed Tilly accepts ALS Ice bucket Challenge this afternoon.  Details on how to donate and join the  fight on ALS will be posted here later tonight.  Volatility as an asset class

Tim Hortons (THI) is up $9.66 to $72.50 in the premarket on confirming talks regarding potential strategic transaction with Burger King (BKW). Overall option implied volatility of 19 is below its 26-week average of 22.

InterMune (ITMN) is up $19.42 to $73.23 in the premarket after announcing Roche (RHHBY) will acquire the bio-tech firm for a share price of $74.00 per share in an all-cash transaction. Overall option implied volatility of 67 is near its 26-week average of 68.

Options expected to be active @ CBOE: ITMN THI BKW BG TIVO WDAY SPX

CBOE SKEW INDEX (SKEW) at 135.10, compared to its 50-day MA of 133.54. SKEW measures the purchase of out-of-the-money S&P 500 Index puts that require a very large downside move to profit from long put positions. An increase of this index indicates greater expectations for an extreme down move.

CBOE S&P 500 BuyWrite Index (BXM) at 1102.48 compared to its 10-day moving average of 1094.93 cboe.com/BXM

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Three Gray Swans – Week of August 25 – 29

Here are three things worth watching next week that could influence the financial markets in the US.

Tuesday Before the Open – Durable Goods Orders

The number to watch is the July Durable Goods Orders excluding transportation orders which is expected to rise around 0.6%.   Boeing experienced a large number of aircraft orders which will skew the number including transportation to the upside. This is why there is a number reported to exclude the transportation sector, so we can have a number worth comparing to previous the previous month that makes sense.

Thursday Before the Open – Second reporting of GDP for the Second Quarter

The more accurate estimate of GDP for the second quarter will be reported. The first estimate was 4.0% for the second quarter. The consensus number is that it will be remain unchanged at 4.0%, but there are some forecasts for a slight drop.

Friday Before the Open – Personal Income and Spending

There are a few components to this report and my focus is going to be on the PCE read on inflation which is expected to rise only 0.1%. I believe the eventual rise in interest rates will come in conjunction with concerns regarding inflation. That gives numbers like this a little more importance than they have had in the past few years.

This Week in VIX – 8/22/2014

VIX finished the week down almost 13% at 11.47. This closing price was only 0.17 higher than the 2014 low of 11.30. Do keep in mind that the 11.30 deserves some sort of asterisk as it came Thursday before the 3 ½ day Independence Day holiday. If the S&P 500 moves up this coming week we could easily see VIX with a 10 handle for the first time since before the 2008 crisis.

VIX PA

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