Weekend Review – Russell 2000 Options and Volatility – 8/8 – 8/12

The race between large cap and small cap stocks came down to a photo finish last week as the Russell 1000 (RUI) was up 0.06% while the Russell 2000 (RUT) ended up losing 0.13%.  This slight win for RUI didn’t do much as far as the year to date performance comparison goes as RUT is still ahead of RUI by 1.4% as RUT is up 8.27% in 2016 while RUI is up only 6.87%.

RUT RUI

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The Weekly Options News Roundup – 8/12/2016

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

Another Expiration to Trade
CBOE’s suite of Weeklys options offerings on the S&P 500 Index (SPX) continues to grow with Wednesday, Friday and now — Monday — expirations.  The first series in CBOE’s new SPX Monday Weeklys will be listed tomorrow, Monday, August 15.  Time to get that weekend hedge on.  For more information, visit CBOE Weeklys Options.

“New SPX Monday-Expiring Weeklys Options to Launch on August 15” – Matt Moran, CBOE Options Hub
http://bit.ly/2aRvtjv

VIX FIX: Markets Olympic Triad
Just as the U.S. extends its medal count in the 2016 Olympics Games, markets have achieved CNBCtheir own victory this week. The Dow Jones, S&P 500 and Nasdaq all reached for a gold medal, each hitting new highs on Thursday, the first time this has happened on the same day since 1999.  The CBOE Volatility Index (VIX) remains in lower than normal territory, hovering in the mid-11 range.  As this period of calm continues, some investors are wondering just how high the markets — and how low volatility — can go.

“VIX Fear Index at Lowest Level in 2 Years” – Robin Wigglesworth, Financial Times
http://on.ft.com/2bjUJBs

“Why This Complacent Market may not be That Bad” – Evelyn Cheng, CNBC
http://cnb.cx/2b1zfaE

“Hedge Funds All in on VIX Plunge as S&P 500 Hovers Near Record” – Joseph Ciolli, Bloomberg
http://bloom.bg/2aVHshu

“The US ‘Fear Gauge’ Provokes Fretting” – Jamie Chisholm, Financial Times
http://on.ft.com/2aJGguh

“Players Await Higher Vol Despite Complacent Market” – Daniel O’Leary, EQ Derivatives
http://bit.ly/2aRsbwt

“Why You’ve Been Reading the Stock Market’s ‘Fear Gauge’ All Wrong” – Mark Hulbert, Market Watch
http://on.mktw.net/2aMAfwF

“The VIX Just did this for the First Time Since te Financial Crisis” – Andrea Kramer, Schaeffer’s Investment Research
http://bit.ly/2bk1cMM

“Indicator of the Week: What Does the Low VIX Mean for Stocks?” – Rocky White, Schaeffer’s Investment Research
http://bit.ly/2aMEUyu

“Riding the Volatility Wave” – Katherine Goh, Private Asset Management
http://bit.ly/2aZBgT3

VIDEO
“The Ultra-Low VIX is a Warning Sign for Stocks: Traders”
CNBC
Brian Kelly, Brian Kelly Capital and Dennis Davitt, Harvest Volatility Management
Air Date: Wednesday, August 10, 2016
http://cnb.cx/2aOJEDG

VIX Futures Record Open Interest of 543,192, as VIX Index Hits 2-Year Low

On August 5 the CBOE Volatility Index® (VIX®) closed at 11.39 (its lowest daily close in more than two years) and the VIX futures established a new all-time record high open interest of 537,201. On August 9 the VIX Index closed at 11.66, and the VIX futures open interest hit a new all-time record of 543,192

VIX MM

RELATIONSHIP BETWEEN VIX INDEX AND OPEN INTEREST

While many market watchers believe that trading activity often picks up at times when volatility and the VIX Index rise, it is interesting to note in the chart above that the VIX futures open interest often has risen when the VIX Index has been at relatively low levels.

PRICING FOR VIX FUTURES – IN CONTANGO

Newer investors who are considering VIX futures are encouraged to learn more about VIX futures pricing. The table below shows a snapshot of the pricing for the VIX Index and for 14 expirations of VIX futures. The VIX futures have both standard expirations (e.g., with a price of 12.67 on Wednesday, August 17), and new Weeklys expirations (e.g., with a price of 13.85 for Week 34 on Wednesday, August 24). 

VIX MM

To learn more about ways in which VIX futures and options can be used to help manage your portfolio, please visit www.cboe.com/VIX.

Earnings Next Week – 8/15 – 8/19

Next week we start to reach the end of a pretty uneventful earnings season.  The week is dominated by retailers which is always a signal that earnings season is coming to a close.  As always the data below is based on the last three years of earnings results unless the ticker is in italics.  The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings.

Earnings

New SPX Monday-Expiring Weeklys Options To Launch on August 15

CBOE plans to list S&P 500® Index (SPX) Monday-expiring Weeklys options, beginning August 15, pending regulatory approval. SPX Weeklys are one of CBOE’s fastest-growing products, with volume in 2015 setting a 10th consecutive annual record. With the expected introduction of SPX “Monday Weeklys,” CBOE will offer SPX options with Monday, Wednesday and Friday expirations.

AVAILABLE EXPIRATIONS

The table below shows the S&P 500 options expirations (through Sept. 9) that are or will become available.

MM11

FEATURES OF WEEKLYS OPTIONS

Contracts with weekly expirations allow investors to implement more targeted buying, selling, spreading or hedging strategies. In addition, futures and options with weekly expirations can help investors take advantage of breaking news or known economic events, such as earnings, monthly U.S. economic reports and Federal Reserve announcements.  Additional information on Weeklys options and futures can be found at www.cboe.com/Weeklys. CBOE pioneered short-term options trading in 2005 by introducing the first weekly expiring options contract.

As shown in the chart below, average daily volume for SPXW Wednesday-Expiring Weekly options grew from 26,652 in February 2016 (their launch month) to 88,761 last month.

MM12

FEATURES OF THE NEW SPX MONDAY-EXPIRING WEEKLYS OPTIONS

Trading Hours — Extended and Regular Trading Hours currently in place for the existing SPX/SPXW options will be followed.

Ticker Symbol — SPX Monday-expiring Weeklys series will be available for trading under option symbol SPXW.

Expiration and Final Trading Day

    • SPX Monday-expiring Weeklys options are PM-settled.
    • The expiration date (usually a Monday) will be identified explicitly in the expiration date of the product. If the Monday of the week in which the options expire coincides with an Exchange holiday, the expiration date will be on the next business day (usually a Tuesday). The expiration date for each option is also the last trading day for that option.
    • SPX Monday-expiring Weeklys may expire on any Monday of the month, other than a Monday that coincides with an End-of-Month (“EOM”) expiration date.
    • Expiring SPX Monday-expiring Weeklys options will cease trading at 3:00 p.m. Central time on their last trading day. All non-expiring SPX Monday-expiring Weeklys options will continue to trade until 3:15 p.m. Central time.
    • SPX Monday-expiring Weeklys option series will not be included in the strip of option series that will be used to calculate the CBOE Volatility Index (“VIX Index”) spot value or the exercise or final settlement value of VIX Index options and futures.POTENTIAL FOR MORE GROSS PREMIUM WITH SPX WEEKLYS

SPX Weekly options have the potential to provide index option sellers with more opportunities to generate premiums. Exhibit 8 of the 2016 paper by Professor Oleg Bondarenko -. An Analysis of Index Option Writing with Monthly and Weekly Rollover – showed that the aggregate gross premiums received by the CBOE S&P 500 One-Week PutWrite Index (WPUT) were greater than those received by CBOE S&P 500 PutWrite Index (PUT) in every calendar year from 2006 through 2015

MM13

The WPUT Index tracks the performance of a hypothetical strategy that sells an at-the-money (ATM) S&P 500 Index (SPX) put option on a weekly basis. The maturity of the written SPX put option is always one week to expiry. The written SPX put option is collateralized by a money market account invested in one-month Treasury bills.

MORE INFORMATION

The microsite for SPX Weeklys options is at www.cboe.com/SPXW.

For an overview of SPX Monday Weeklys options contract specifications and other operational details, please see CBOE Regulatory Circulars RG16-119 and RG16-135.

How Admiral Beat Maury at His Own Game

Maury felt pretty smug about taking the Admiral’s FB trade, however, he was not prepared for BIDU. The Admiral had his mojo working as he went stalking an uber Maury trade, and it ended up a doozie!

1

On 7/28, BIDU was scheduled to report earnings after the close.

The Admiral sent out a Bearish 3x9x6 AUG Put Vertical Ratio Spread: +160/-145/+140 strikes, paying $2.35 x 3

2

While EPS was slightly above expectations, BIDU opened down and the Admiral sent an order for a partial exit #732A: Sell 2 x160/Buy 6 x145/Sell 4x 140 puts, for a credit of $3.86 twice, leaving us a +1/-3/+2 Put Vertical Ratio and a credit of $.67

3

Not bad for overnight, eh Maury!

But wait, the Admiral had another trade up his sleeve.

Order #732B adjusting our remaining +1/-3/+2 Put V Ratio: Sell to close 2×140 Puts/ Buy to Close 3×145 Puts. The spread cost $1.20, leaving us with a debit of $.53. (Maury is now nervous; as he only likes to collect, not pay).

4

No worries, Maury, How about this?

The Admiral wasn’t done: Sell 2x 155 Puts/ Buy 1×150 Puts for a credit of $3.38.

5

We now have a $2.85 profit and +1/-2/+1 160/155/150 AUG Put Butterfly currently with a market value of $.96.

After all said and done, Maury was all smiles.

Weekly Market Outlook – Upside Breakout Amid VIX Lows

Against the odds, though with the bigger-picture tide, last Tuesday’s alarming intraday pullback ended up being just the regrouping the bulls needed to finally stage a breakthrough rally.  On the heels of a better-than-expected jobs report for July, the S&P 500 (SPX) (SPY) pushed up and off a key short-term moving average line to finally punch through a resistance line that had been nagging it since mid-July.

Do we take the clue at face value and treat it as a breakout?  Or, was Friday’s bullishness the proverbial last hurrah for the rally, setting up a pullback that some would say is overdue?

We’ll look at the matter from both sides of the table below, right after a quick review of last week’s and this week’s economic news.

Economic Data

There’s little doubt as to last week’s major economic headline – Friday’s jobs report from the Bureau of Labor Statistics (which dished out a better-than-expected payroll-growth figure) prompting Friday’s bullishness.

All told, the United States added 255,000 new jobs last month versus expectations of only an additional 185,000 new positions.  That wasn’t enough to alter the unemployment rate from June’s reading of 4.9%.  But, more people are working now than we’ve ever seen before.  The unemployment rate didn’t budge mostly because more people officially threw themselves into the labor pool.

Unemployment, Job Growth Trend Chart

1

Source: Thomson Reuters

Underscoring the argument that last month’s payroll numbers were indeed more positive than negative is the fact that employees worked more hours per week in July than they have in months, and hourly wages went up by a respectable 0.3%.  Friday’s BLS report confirmed a different report from earlier in the week saying personal incomes were up 0.2% in June.

The employment news wasn’t the only big news from last week, however.  We also saw both ISM Index updates…  the manufacturing index as well as the services index.  The former was down from 53.2 to 52.6, while the latter fell from 56.5 to 55.5.  Optimists will be quick to point out that both are still above the critical 50.0 level, but it’s noteworthy that both are peeling back from higher levels now.

ISM Indices Chart

2

Source: Thomson Reuters

Finally, automobile sales painted a mixed picture last month.  Most manufacturers fell short of their projected sales targets, though overall domestic sales of vehicles was up at a point in time when the industry needed to pull itself out of a six-month stretch of deteriorating numbers. Note that sales of cars continue to tumble fast.  Truck sales are carrying more than their fair share of weight.

Auto Sales Chart

3

Source: Thomson Reuters

Something that doesn’t show up on the unit sales chart – buyer incentives continue to be generous, loosely hinting that automakers are inducing somewhat artificial demand.

Everything else is on the following grid:

Economic Calendar

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Noise Levels Rising – Time to Turn it Down

The pitch level of noise surrounding the markets is starting to elevate, and wouldn’t you know it – right near the all time highs.  Right on cue!  As we saw markets take out resistance on Friday following the strong jobs report, we continue to hear the drumbeat from the bearish side, that this most unbelievable market rally has to end soon.  Of course, no time estimate on that prediction – like the old economist’s saw, ‘give em a number or a date, but never both’.  Especially at all time highs, everyone is reaching for advice on what to do next.  Clue:  the market will tell you first and always.

There are a million reasons to sell but only ONE reason to buy.  The latest being ‘August is always a bad month, volatility rises’.  Tell that excuse to the markets this week, which rallied .50% or more – pound sand!  So, while we have markets at these elevated levels we have to focus on the internals, the quality of the market rallying.  It is this examination that will tell us how strong/weak the market is currently and whether it will retreat or continue higher.  The rhetoric, hyperbole and threats coming from those in disbelief is strengthening.  Remember just a couple months ago we heard Icahn, Soros, Druckenmiller and several others predicting doom and gloom for markets?

Lately, veteran hedge fund manager Jeff Gundlach, who has been a bull on bonds (and been very correct) alerted everyone that he is avoiding stocks, and just last week the famed Bill Gross said he hates stocks, bonds and just about everything except gold.  Are these the experts we need to pay attention to?  If you want to lose money, perhaps that is true.

Well, the markets hit all time highs regardless of the poorly-timed guesses.  Thanks for nothing, guys!  While they may eventually be right (heck, all markets go down at some point), we choose to let the markets tell us.  Trying to time a market top is an exercise in futility, yet we hear so much of it these days.  ‘Generational low’ or ‘generational bottom’ tell us NOTHING about what the current market or future is going to look like.  It’s easy to guess with no timeframe, perhaps some will forget about your poor call and you won’t have to be accountable.

But does that help us make the money?   Of course not!  We need to focus on what the market is actually doing and not the noise in media, which is all about nothing.  My advice, just turn it all off, focus on the market action, as it will always tell you how to proceed.

Mob

Let’s take a look at the SPX 500 chart.  A breakout Friday on expanded turnover after a sideways consolidation that could have gone either way.  However, basing at a high level historically indicates the breakout will be higher, which is what we see.  Confirmation is always key.  But the indicators continue to reflect overbought conditions.  The quality of this breakout is solid.  But, we know that is NOT a reason to sell or become bearish.  Momentum trends can/do stay strong longer than most expect, hence why it is so difficult timing the markets. For now, we’ll stay with the market trend with the expectation there will be some give back at some point.  If a breakdown does occur, we’ll see it – but won’t rely on any noisy pundits with their guesses.

 

The Weekly Options News Roundup –8/5/2016

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

Ready…Set…Ring
DecathlonOn Wednesday, CBOE hosted representatives from The Decathlon Organization and Rush University Medical Center for an opening bell-ringing ceremony commemorating the inaugural Chicago Decathlon.  This event unites amateur athletes from around the world to compete in a series of world-class events, raising money for pediatric oncology treatment therapies.  For more information regarding this cause visit The Decathlon.

VIX FIX: Volatility’s Uncomfortable Silence
After seven consecutive days of losses, markets rebounded Friday on news of a positive jobs report, adding a surprising 255,000 positions in July.  The Dow Jones rallied while volatility remained muted.  The CBOE Volatility Index (VIX) retreated from a small spike earlier in the week, falling nine percent to the mid-11 range on Friday, well below its historical average of 20.  The market is tranquil now, but traders know it’s only a matter of time before volatility returns.

“VIX Plunges to Lowest Level In Two Years” – Chris Dieterich, Barron’s
http://on.barrons.com/2b1Clev

“This Quiet Market has Traders on Edge” – Liz McCormick, Joseph Ciolli and Rebecca Spalding, Bloomberg

http://bloom.bg/2aO3K3O

“Is the Extreme VIX Discount Cause for Concern?” – Bernie Schaeffer, Schaeffer’s Investment Research
http://bit.ly/2aYXida

“The ‘Short Vol’ ETN is Soaring; Who Dares Buy More?” – Chris Dieterich, Barron’s
http://on.barrons.com/2aMTjjX

“Are People Betting on Bad News?” – Helene Meisler, TheStreet.com
http://bit.ly/2aiicOU

“Fear in the Stock Market Can Mean Profit, but Know the Risks” – Stan Choe, TriCities: National Business
http://bit.ly/2aTOsMq

VIDEO
“Options Insight: How Low Can The VIX Index Go?”
Mark Sebastian, Option Pit
Bloomberg TV
Air Date: Friday, August 5, 2016
http://bloom.bg/2aAZojY

 

 

Weekend Review – Russell 2000 Options and Volatility – 8/1 – 8/5

Last night we were (somewhat) entertained by the opening ceremonies for the Summer Olympics and for the next 17 days will be subjected to story enhanced competitions.  I have been monitoring a competitive struggle already this year.  The battle between small cap and large cap stocks.  It has been like a marathon with the Russell 2000 (RUT) falling way back, but pacing itself relative to the Russell 1000 (RUI).  RUI had quite a lead after the first six weeks or so of 2016.  However, since February RUT has held a stronger pace (up almost 30% from 2016 lows) than RUI and has now taken the lead.  We will see if the underdog representative of small cap stocks everywhere will be able to maintain its lead through the end of the year or will the better capitalized Russell 1000 rebound and take the performance prize for 2016.

RUI RUT

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