Earnings season peaked this past week, but there are plenty of companies left to report. The numbers below represent three years of history with a couple of exceptions which have not been around long enough to provide a full three years of history. In those cases the data appears in italics. After the ticker the columns show the biggest gain, biggest drop, average move (non-directional) and stock price reaction last quarter.
We had two big trades come through the VIX pit today and about the only thing they have in common is that they both used March VIX options.
First, there was an out of the money bull call spread. With spot VIX around 22.60 there was a buyer of 80,000 VIX Mar 27 Calls at 1.95 who then sold 80,000 VIX Mar 35 Calls at 0.91 for a net cost of 1.04. A spike to just over 28.00 gets this trade to the point of profitability. This requires a closing high for 2016 in VIX since that current number for 2016 is 27.59. If the trader is nimble, they may find a good exit opportunity if the intraday high for VIX in 2016 (32.09) is tested between now and March settlement. Needless to say for this trade to pay off the equity market will need to take a dive from current levels and do it in a dramatic fashion.
A new 10-page study examines both the CBOE S&P 500 PutWrite Index (PUT) and the CBOE S&P 500 One-Week PutWrite Index (WPUT), comparing their performances with that of traditional benchmark stock and bond indexes. This is the first comprehensive published study that examines the performance of a benchmark strategy index that incorporates WeeklysSM options. Written by Oleg Bondarenko, professor of finance at the University of Illinois at Chicago, the study — “An Analysis of Index Option Writing with Monthly and Weekly Rollover”– analyzes the performance of the two indexes through the end of 2015.
The new paper discusses 19 Exhibits. In this Blog I highlight 5 of the Exhibits.
1. HIGHER AGGREGATE GROSS PREMIUMS USING S&P 500® WEEKLYS OPTIONS
CBOE introduced Weeklys options in 2005. In the initial years of Weeklys trading, it appeared to me that some observers thought that Weeklys might be used primarily by retail speculators, but in recent years I have heard from multiple institutional investors that they are writing S&P 500 Weeklys options for the purposes of prudent income enhancement. The new study found that, from 2006 to 2015, the average annual gross premium collected was 24.1 percent for the PUT Index and 39.3 percent for the WPUT Index. While a one-time premium collected by the weekly WPUT Index usually was smaller than a premium collected by the monthly PUT Index, the WPUT Index had higher aggregate annual premiums because: (1) premiums were collected 52 times, rather than 12 times, per year, and (2) time decay (or theta) usually works in favor of the WPUT Index vs. the PUT Index.
We all know that 2016 has not started out too well for either small or large cap stocks. This morning a large trade was executed in the Russell 1000 Index (RUI) option pit that appears to be based on fear (or hope) that bearishness in the large cap equity segment continues.
Just before 11:00 am Chicago time, with RUI at 1041.59 a buyer of just under 3000 (2980 for the quants) RUI Dec 850 Puts paid 33.00. We have no idea what the motivation is here, it could be a bearish call on the market or hedging a portfolio that is tied to the large cap focused Russell 1000. Either way, the payoff at December expiration appears below.
Break even for this deep out of the money put purchase is at 817. This is a price level not seen by the Russell 1000 since just over three years ago. Also, on top of what the Russell 1000 has already accomplished this year that would place the large cap benchmark down almost 30% for 2016 for this trade to work out.
After a scary start to the shortened trading week, Wednesday’s intraday turnaround followed-through quite nicely all the way to the end of Friday’s trading. By the time the closing bell rang that day, the S&P 500 (SPX) (SPY) had gained 1.4% after being down as much as 3.6% at one point on Wednesday.
Better still, there’s room for the market to keep rising. It’s still too soon to say this is the beginning of what will be a prolonged rally; there remains an entanglement of resistance lines all around SPX 2020. Nevertheless, this reversal presents an opportunity for the bulls.
We’ll serve up the details of this rebound effort after a closer look at last week’s and this week’s economic news.
We got a fair amount of economic news last week, but only a couple of items were hard-hitting.
As for inflation, there’s none to speak of… with or without the price of oil factored in. Overall inflation fell 0.1% in December, and on a core (ex food and energy) basis is was only up 0.1%. The annualized inflation rate now stands at 0.7%.
The only chart-worthy data from last week was December’s housing starts and building permits. They were good. The uptrend continues on both fronts.
Housing Starts & Building Permits Chart
Source: Thomson Reuters
Still trying to stab at that bottom? Not a game I like to play. Frankly, taking a grab at falling knives has proven more dangerous than fun. This market is proving there is very little reason to step in and buy for any length of time longer than few hours, maybe a full day. So many want to get in on this very oversold market. Why? Just look at last August and October, or October 2014 where deep oversold conditions existed. Utilizing patience will serve you well.
Markets were so beaten up (as they are now) we saw huge slingshot rallies to the tune of 150-200 SPX 500 handles. Those were fast, sharp and most with gaps that did not give many a chance to get on board. Gap opens will mess with your mind, convincing you that buying is not the right thing to do – rather, wait for that perfect dip. This time around, you have probably vowed to yourself that you won’t miss it – and will be early, even if it means you’ll have pain prior to a big move up.
Well, as we know the market is never that convenient, friendly or accommodating. Instead, we have to go with our knowledge, experience and belief in where we see the next market move happening. Many will say market moves are identical, we cannot separate them into categories – fear and greed reign. This I do believe, however times are different as are circumstances, and while history may not repeat it can certainly rhyme.
Investors got a slight reprieve from what has been a difficult start to the year as both the Russell 1000 (RUI) and Russell 2000 (RUT) rose last week. RUI gained 1.36% while the small cap focused RUT was up by 1.28%. There has been nowhere to hide in 2016, but large cap stocks have held up pretty well versus small caps. RUI is down just over 7% in 2016 while RUT is down a little more than 10%. The chart below indexes RUI and RUT to 100 as of December 31st 2015 for comparison’s sake.
The stock market rally on Friday put pressure on VIX and pushed the spot index down enough that the front month February future closed at a slight premium. This is the first premium for the front month VIX futures relative to spot since January 4th. I’ll discuss this a bit more toward the end of this blog.
The S&P 500 rebounded by about 1.4% last week and SPX option volatility moved a bit lower. The VXST – VIX – VXV – VXMT curve shifted lower and flattened. However for a bit of perspective I show where we ended 2015. I think the comparison is a good indication that we may not be completely out of the woods, at least based on the expectations indicated by the various S&P 500 oriented volatility measures.
Stocks remain under extreme pressure, but it finally looks like the oversold conditions are starting to have some effect. An oversold rally is now underway.
You can see, in Figure 1, that $SPX bounced off the support level at 1820. That level was also the low of both April and October 2014. In essence, nearly two years of gains — back to April 2014 — had been wiped out at Wednesday’s lows. By the time $SPX reached those levels, the oversold conditions were myriad, and a rally has ensued. We expect this rally to push $SPX up to at least its declining 20-day moving average, which is currently at 1980 and falling.
Equity-only put-call have issued fresh new buy signals within the last two days. This is the first intermediate-term indicator to turn bullish.
Market breadth has been terrible, and both breadth oscillators remain on sell signals, in deeply oversold territory.
Volatility has been — let’s say “interesting.” The trend of $VIX is higher, and that is intermediate-term bearish.
In summary, there are a lot of short-term, oversold indicators turning bullish right now. So a short-term rally seems likely. But the intermediate-term trend is bearish until proven otherwise.
The Weekly News Roundup is your weekly recap of CBOE features, options industry news and VIX and volatility-related articles from print, broadcast, online and social media outlets.
Vector: CBOE’s New Trade Engine, is Coming Soon
CBOE continues preparations to unveil its next generation trade engine, CBOE Vector. The state of the art platform is being designed to provide greatly increased transaction speeds while handling constantly increasing message traffic and industry demand for additional functionality, such as risk controls. Vector is slated to roll out with futures at CFE in the third quarter of 2016, with options at CBOE and C2 to follow.
“CBOE to Roll Out Next Generation Trading Platform in Late Summer” — Renee Caruthers, Fierce Finance IT
Livevol: Enhancing Customers’ Trading Experience
Through its 2015 acquisition of Livevol, a leading provider of equity and index options technology and market data services for professional, retail traders, CBOE is enhancing its trade support services and educational offerings.
“CBOE Preps SPX, VIX, Livevol Integration for Investors to Back-Test Options Strategies” — Max Bowie, Waters Technology
VIX FIX: Nightmare on Wall Street Continues
It was a roller coaster ride for the VIX Index this week as the major indexes posted triple digit swings. The VIX touched 32 on Wednesday, and has since retreated down to 22. Buckle up, we could be in for a bumpy ride.
“VIX Sends a Scary Signal: Market Rout Far From Over” – Steven M. Sears, Barron’s
“Fear is Spiking, but No Bear Territory Yet” – Jacob Pramuk, CNBC
“The Last Time VIX Closed Above Oil, it was Time to Buy Stocks” – Eric Chemi, CNBC
“Treasuries Hedged Against Equities Keep VIX Becalmed” – Jamie Chisholm, Financial Times
“A Blasé VIX Says There Is More to This Selloff” – Mark Sebastian, The Street
“Should We Be More Worried?” – Adam Warner, Schaeffer’s Investment Research
“Rising Stock Market Volatility: A Sign of the Times” – Ronald Delegge, Investor Place
U.S. small companies that derive the majority of their revenues within the U.S. are somewhat insulated from the gyrations of the Chinese market and oil prices crumbling. As a barometer for U.S. Small-cap companies, the Russell 2000® Index is down -12.24% year-to-date (based on close 1/20/16).
According to Bloomberg’s latest Monthly Survey Table of U.S. GDP Forecasts (1/14/16): The range of GDP forecast was Low = 0%, High = 3.7%, and Average = 2.4% (83 economists surveyed)
Recently the IMF released their latest World Economic Outlook (WEO) on January 19, 2016. Here are some excerpts…
“Overall activity remains robust in the United States, supported by still-easy financial conditions and strengthening housing and labor markets. But there are also challenges stemming from the strength of the dollar, which is causing the U.S. manufacturing sector to shrink marginally”
“The WEO Update now projects global growth at 3.4% this year and 3.6% in 2017.”
VIX Indexes Moderate Despite Little Closure on Global Economic Outlook
The bleak outlook for world economic growth, oil prices and low inflation drove equity markets lower for most of this week, although stock prices trimmed losses Friday on a bounce in oil prices and talk of possible central bank easing in Europe and Japan. VIX benchmarks for volatility in equity, fixed income and currency rates moderated (with the exception of JYVIX).
Figure 1. Statistical update
Next week is the heaviest part of earnings season as you can see on the table below. It is a holiday shortened week next week, but there’s plenty going on in the world of earnings as we start to move into the heavier part of earnings season. The numbers below represent three years of history with a couple of exceptions which have not been around long enough to provide a full three years of history. In those cases the data appears in italics. After the ticker the columns show the biggest gain, biggest drop, average move (non-directional) and stock price reaction last quarter.
After yesterday’s waterfall-like selloff, a number of global indices are now in bear market territory (20% off highs).
- Germany’s DAX benchmark is 24% of April 2015 highs
- France’s CAC 40, as of yesterday’s close was nearly 22% of 2015 heights
- The Spanish IBEX is off a full 30% from last April’s highs – Ay, caramba!
Yesterday, the Brits joined this ignominious group, with the FTSE 100 losing 3.3% on the day and falling 20.13% from April ’15 highs. While the London market has clawed back above the 20% mark with a Thursday rally, it’s worth pointing out that the primary U.S. benchmark (SPX) continues to outperform most of their global counterparts.