CBOE Mid-Day Update 7.31.14

Volatility as an asset class

Yum! Brands (YUM) is recently down $4.05 to $68.95 after the company disclosed a “significant negative impact to same store sales” in China due to the latest China food supplier issue. August call option implied volatility is at 22, September and January is at 19; compared to its 26-week average of 21.

L-3 Communications (LLL) is recently down $18.35 to $101.17 following the announcement of the Aerospace segment internal accounting review and the $84M pre-tax charge. August call option implied volatility is at 33, October and January is at 23; compared to its 26-week average of 19.

T-Mobile (TMUS) is recently up $2.08 to $33.05 after France’s Iliad (ILIAF) confirmed interest in T-Mobile. August call option implied volatility is at 29, September is at 33, November is at 27; compared to its 26-week average of 35.

Actives at CBOE:  AAPL TSLA GILD C WFM NFLX RFMD TWTR AMZN

Stocks with increasing volume @ CBOE:  TMUS S TSLA MU GPRO EXPE HIMX

CBOE S&P 500 Short-Term Volatility Index (VXST) is recently up $4.46 to 17.75; compared to its 10-day moving average of 12.66. VXST is a market-based gauge of expectations of 9-day volatility stks.co/r0CS2

CBOE DJIA BuyWrite Index (BXD) down 2.96 to 266.51, compared to its 50-day moving average of 268.13 cboe.com/micro/bxd/

CBOE Volatility Index (VIX) up 2.70 to 16.03. VIX August 13, 16, 17, 18 and 20 calls are active on 721K contracts @ CBOE cboe.com/VIX

iPath S&P 500 VIX Short-Term Futures (VXX) up 6.6% to 31.

CBOE DJIA Volatility Index (VXD) up 2.33 to 15.03; compared to its 10-day moving average of 12.20.

CBOE Nasdaq-100 Volatility Index (VXN) up 2.54 to 16.47; compared to its 50-day moving average of 13.43.

S&P 100 Options (OEX) recently is recently down $12.42 to 864.50 following the lead of international markets that were also lower overnight after Argentina defaulted on its debt.

Blogging Options: CBOE Morning Update 7.31.14

Weekly Jobless Claims came in slightly higher than consensus at 302k, but the Employment Cost component jumped the most in 6 years.   The FED tapering by $10b had little effect on markets yesterday afternoon.  XOM off $1.50 after reporting earnings up 28% and a beat in Quarterly revenue.  Decent volume yesterday with CBOE trading 4.9mm of 17.6mm options traded.  Futures jittery this morning.  European stocks lower, Banco Espirito Sancto lost $3.5B Euros last quarter and talk of deflation in Europe. 10-year ~2.59%.  VIX Futures trade 21k this morning in extended hours session. Volatility as an asset class

Yelp (YELP) is down $4.71 to $70.75 in the premarket after reporting stronger than expected results. August weekly call option implied volatility is at 186, August is at 75, September is at 61, January is at 52; compared to its 26-week average of 62.

Akamai (AKAM) is off $3.73 to $57 after the online distributor reported a Q2 profit increases of 18%. August weekly call option implied volatility is at 144, September is at 39, January is at 31; compared to its 26-week average of 35.

Whole Foods (WFM) is down $2.08 to $37.03 in the premarket, earnings beat by $0.01 butafter guidance was below expectations.  August weekly call option implied volatility is at 99, August is at 44, November and January is at 29; compared to its 26-week average of 33.

CBOE Equity Options Volume on July 30: 1,175,991 calls, 673,820 puts, 1,849,811 total CBOE.com

Options expected to be active @ CBOE: ALU YELP TWTR HOS APA MA DDD YELP GOOG GOOGL MU WFM GLUU HOLX

CBOE SKEW INDEX (SKEW) at 140.54, below 50-day MA of 131.73. 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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Part #3 of 4 – Using SPX Options in a Diagonal Spread

Back in May and June we posted two videos on using Index options and SPX Super LEAPS®, this is the third in a four part series on using SPX Index options. You can watch the previous videos by visiting http://www.cboeoptionshub.com/author/shawn-howell/

For this third segment I’m using the SPX LEAPS and Super LEAPS as a foundation for a Diagonal Spread selling, SPX Weeklys to offset time decay or as an income generating strategy.

Here’s the general premise, as discussed in the first video when interest rates are low and we buy an option with a long expiration, the cost of time is much lower than if we bought a near-term option. In our example April 23 the SPX was at 1875 and buying an at-the-money option expiring December 16, 2016 would cost $17,200*. With 968 days to expiration this amounts to a daily cost to carry this option of $17.77 using a straight-line calculation for time decay.

sh 1   7 30

A trader that takes this position is anticipating that the SPX index will rise and the price appreciation of the option will outpace the time decay. As you can see, as of July 27th the SPX is at 1975 and our SPX LEAPS that we paid $17,200* for is now worth $22,470. As a side note, the index is up 5.3% and the option is up 31%. This is a good example of leverage afforded to us through options.

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Although the SPX has had a strong run up since April 23, the past 30 days there is evidence of overhead resistance around the 1990 level.

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CBOE Mid-Day Update 7.30.14

Volatility as an asset class

US Steel (X) is recently up $5.36 to $33.03 on a less than expected Q2 loss. August call option implied volatility is at 36, September and January is at 30; compared to its 26-week average of 34.

Hess (HES) is recently up $2.05 to $101.47 after reporting better than expected Q2 adjusted EPS, boosting its share buyback and announcing its intention to pursue the formation and initial public offering of a master limited partnership. August call option implied volatility is at 17, September is at 16, January is at 18; compared to its 26-week average of 22.

Buffalo Wild Wings (BWLD) is recently down $23.99 to $143.01 on strong Q2 results, but its earnings forecast fell short of street expectations.  August call option implied volatility is at 32, September and December is at 30; compared to its 26-week average of 32.

CBOE Interest Rate 5 Year Note (FVX) is recently up 5.3% to 17.73, above 50-day MA of 16.52 into Fed concluding its 2-day FOMC

Actives at CBOE:  AAPL TWTR AMZN NFLX FB TSLA YHOO WFM NFLX C

Stocks with increasing volume @ CBOE: MTL NQ RFMD S X EXAM ASML TQNT NFX RFMD RATE BPI GALT

CBOE S&P 500 Short-Term Volatility Index (VXST) is recently up 89c to 14.36; compared to its 10-day moving average of 12.61. VXST is a market-based gauge of expectations of 9-day volatility stks.co/r0CS2

CBOE DJIA BuyWrite Index (BXD) down 65c to 269.14, compared to its 50-day moving average of 268.07.  cboe.com/micro/bxd/

CBOE Volatility Index (VIX) up 57c to 13.85. VIX August 16 and 25 calls are active on 280K contracts @ CBOE cboe.com/VIX

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Bearish RUT Trade from Yesterday

Going through the block index option trades from yesterday, something caught my eye and it wasn’t bullish. Someone came in to the market about 10:30 Chicago time yesterday and bought 2,200 puts on the Russell 2000 Index (RUT). The specific trade was buying 2,200 RUT Oct 1010 Puts @ 9.50 for a total cost of just over $2 million. At the time RUT was being quoted around 1140.00. If held to expiration the payoff diagram below shows the outcome for this trade –

RUT PO

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Blogging Options: CBOE Morning Update 7.30.14

ADP July number misses expectations (gain of 219k jobs versus 230k expected and 281k rise in June), but first peek at Q2 GDP showed a jump to + 4% (+3% expected).  Part of the GDP data was estimated due to incomplete June #’s, so expect revisions when second look and final Q2 announced).  Q1 GDP revised to a drop of 2.1% from a 2.9% slide.  10-year yield pops to ~2.51%.  Stocks liked the GDP #, FED expected to continue to taper. Volatility as an asset class

Twitter (TWTR) is up $9.54 to $48.10 in the premarket after the company reported stronger than expected Q2 results and user metrics, and provided higher than expected EBITDA guidance. August weekly call option implied volatility is at 168, August is at 70, September is at 57, November is at 56; compared to its 26-week average of 56.

Panera Bread (PNRA) is up $2.68 to $149.30 after reporting Q2 EPS $1.82, compared to consensus $1.74. August weekly call option implied volatility is at 41, September is at 29, January is at 24; compared to its 26-week average of 28.

SodaStream (SODA) is up $2.48 to $32.25 in the premarket after reporting Q2 EPS 43c, consensus 31c. August weekly call option implied volatility is at 139, September is at 61, October is at 54, January is at 47; compared to its 26-week average of 49.

Options expected to be active @ CBOE: TWTR BWLD SODA AXP DWA PNRA AMGN X BCS FB VIX

CBOE S&P 500 BuyWrite Index (BXM) at 1093.48, compared to its 10-day moving average of 1092.67 cboe.com/BXM

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Zero Hedge and Bond Volatility

There are two things that most financial markets professionals have in common. First, we all read Zero Hedge. Second, we don’t admit we read Zero Hedge. Before people get upset, the second part is a joke. This morning as I got settled in at The Options Institute I came across a tweet from Zero Hedge showing a disconnect between the 10 Year Yield and the S&P 500. To see what I’m talking about you can click on the link below –

http://www.zerohedge.com/news/2014-07-29/usdjpy-surge-sends-stocks-higher-bond-yields-tumble

Of course when I read anything about the markets I think…VIX. In this case my first thought was about VXTYN, which is the CBOE/CBOT 10 Year US Treasury Note Volatility Index. VXTYN is based on option prices on the 10 Year Treasury Note Futures that trade at the Chicago Board of Trade (CME Group). If the Ten Year is supposed to follow along with the S&P 500 then it may be worth checking out to see if VXTYN and VIX have any sort of relationship. After painstaking quantitative work, the result is they don’t. In fact we (giving Hannah credit for the leg work) got the closing prices for VXTYN, VIX, the S&P 500, Yield on US 10 Year Treasury Yield, and just for the heck of it we threw in the iShares 20+ Year Treasury Bond ETF (TLT). The table below shows the correlation for the daily price changes from January 28, 2008 to July 28, 2014.

VXTYN Table

The result is another Seinfeld blog where I take ‘nothing’ and make it into a story. In all seriousness, there is something to the lack of relationship between VIX and VXTYN. This is where things get a bit subjective, but there is always a reason for market behavior. The opinion as to what the reason is may result in this lack of connection between VXTYN and the other instruments in the table may have to do with the behavior of the option prices on the 10 Year Treasury Futures. It just may be that since interest rates are very sensitive to economic numbers that at times the implied volatility of TY options would move up in front of an FOMC meeting or Employment report from the Labor Department. Interestingly enough, we have both on the calendar this week. So for now, we plan on watching the market reactions and VXTYN price action before and after both numbers and putting up a summary this coming weekend.

CBOE Mid-Day Update 7.29.14

Volatility as an asset class

Merck (MRK) is recently up $1.19 to $59.15 on Q2 sales and profits that beat expectations.  August call option implied volatility is at 15, September is at 14, January is at 15; compared to its 26-week average of 18.

Pfizer (PFE) is recently down 10c to $30 after backing its fiscal year adjusted EPS view but lowered its adjusted revenue view for the year. August call option implied volatility is at 17, September is at 16, October and December is at 15; compared to its 26-week average of 18.

Men’s Wearhouse (MW) is recently down $3.09 to $54.25 after the company gave long-term guidance during its analyst day meeting. August call option implied volatility of 29, September is at 33, November is at 28; compared to its 26-week average of 37.

Actives at CBOE:  AAPL TWTR AMZN NFLX FB GILD VZ C

Stocks with increasing volume @ CBOE:  WYNN RPRX EWH CVC EXAS TQNT VMC TEF OTEX FTR GALT

CBOE S&P 500 Short-Term Volatility Index (VXST) is recently down 3c to 11.99; compared to its 10-day moving average of 12.05. VXST is a market-based gauge of expectations of 9-day volatility stks.co/r0CS2

CBOE DJIA BuyWrite Index (BXD) up 36c to 271.05, compared to its 50-day moving average of 260 cboe.com/micro/bxd/

CBOE Volatility Index (VIX) down 10c to 12.46. VIX August 16 and 21 calls are active on 81K contracts @ CBOE cboe.com/VIX

iPath S&P 500 VIX Short-Term Futures (VXX) down 31c to 28.33.
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Blogging Options: CBOE Morning Update 7.29.14

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

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

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

Options expected to be active @ CBOE:  HLF PFE MRK UPS TWTR PLUG GLW WYNN UPS COST WMT LNKD DDD TSLA VIX

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

CBOE DJIA BuyWrite Index (BXD) at 270.69, compared to its 50-day moving average of 267.87 cboe.com/micro/bxd/

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

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

CBOE S&P 500 Short-Term Volatility Index (VXST) at 12.02, compared to its 50-day moving average of 10.97 stks.co/r0CS2

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

Calls with increasing volume at CBOE:

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

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

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

spx 072614

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

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

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

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