Volatility as an asset class
Costco (COST) is down $1.32 to $121.65 in the premarket after reporting weaker than expected November same-store sales growth. Overall option implied volatility of 19 is near its 26-week average.
Francesca’s (FRAN) is off $2.00 to $16.10 after the boutique operator saw weaker-than-expected results in November. Overall option implied volatility of 73 is above its 26-week average of 48.
Aeropostale (ARO) is down $0.50 to $8.86 after the youth focused apparel retailer reported a Q3 loss on weak sales. December call option implied volatility is at 78, January is at 69, April is at 56; compared to its 26-week average of 53.
Dollar General (DG) is up $1.38 to $57.75 in the premarket after the discount retailer reported Q3 earnings rose 14%. December call option implied volatility is at 41, January is at 35, February is at 29; compared to its 26-week average 30.
CBOE Nasdaq-100 Volatility Index (VXN) closed at 15.08, below its 50-day moving average of 15.41. www.cboe.com/VXN
If you haven’t been paying close attention you may have missed some recent changes in the volatility trading arena. Just in the past few weeks, CBOE and the CBOE Futures Exchange (CFE) listed options and futures on the CBOE Russell 2000 Volatility Index (RVX), the CBOE Short-Term Volatility Index (VXST) was introduced and is now quoted real time, and CFE extended trading hours on VIX futures to overlap with equity market trading in Europe.
With so many changes we have decided to devote a week to offering three different webcasts to explain each of these volatility market developments. We also will be fielding questions before the webcasts and during the presentation as well. You can register for all three or any of the individual presentations that will comprise our “New Tools for Trading Volatility” webcast series.
On Tuesday December 10th from 3:30pm to 4:00pm Chicago time I am going to discuss trading futures and options on the CBOE Russell 2000 Volatility Index. The underlying market for RVX is the Russell 2000 Index which is considered a performance benchmark for small to mid-cap stocks along with being a barometer of performance of the US economy.
On Wednesday December 11th, again from 3:30pm to 4:00pm Chicago time I will introduce the relatively new CBOE Short-Term Volatility Index (VXST). VXST uses the same methodology for calculating volatility as the widely followed CBOE Volatility Index (VIX) but has some characteristics of its own. I will spend time showing what is similar and what is different regarding VXST relative to VIX.
Finally, on Thursday December 12th, this time from 10:00am to 10:30am I will discuss extended trading hours for futures contracts that are based on the CBOE Volatility Index. Trading in VIX futures now begins at 2:00am Chicago time. This allows traders that focus on European markets or trade those hours to take positions based on an outlook for volatility long before the market open in the United States. I talk about why European traders should focus on VIX futures pricing and how they may consider VIX derivatives more of a global volatility instrument.
For more information on registering go to – https://www.cboe.com/AboutCBOE/WebinarTools/default.aspx
If you want to submit any questions ahead of time please send them directly to me at firstname.lastname@example.org
2013 has been a banner year for Covered Writes. The market is up big and this bullish strategy has been like an ATM machine. The S and P’s (S&P 500) have climbed from the 1400 level to its current peak around 1800 . That’s an increase of over 25%! What are your expectations for the rest of 2013? How about 2014? Maybe you are still bullish, but you would like to have a little less exposure on the downside in 2014? If you did 4 covered writes per month in 2013, maybe you’d like to cut back a bit and take a little capital off the table?
How can I diversify my covered write risk? One way is to have a few covered writes for the downside to diversify my exposure in my retirement portfolio. Most stocks are in the upper end of their 12-24 month price range. I will show you an example of a “covered write type” strategy for the downside that doesn’t involve stock. This will keep the cost and margin down significantly. Before I give an example for the downside, let me give an example of a covered write and Long Diagonal for the upside to lay the proper foundation. Using XYZ stock at $100 as our example, a covered write example would be to buy 100 shares of stock at $100 and sell one January 110 call at $1.00. This would be very expensive in an IRA account with your broker because of the cost of the stock. To do this strategy using an in-the-money call instead of the stock purchase would be called a Long Diagonal, and it would reduce the margin at your Broker significantly.
The Long Diagonal alternative might look like this:
Buy 1 March 85 Call and Sell the same January $110 call.
Because the cost of the long call would be much cheaper than the cost of the long stock, the margin on the Long Diagonal would be much cheaper than the Covered Write.And if the shares stay below $110 at January expiration, I could possibly sell February or March calls against the long March 85 call. The graphs would look similar.
The example I will now show , will be a Put Diagonal with a covered write type graph, but on the downside.
Volatility as an asset class
Pandora (P) is recently up $1.43 to $29.69 after reporting November listening hours rose 18% from a year earlier. December weekly call option implied volatility is at 59, December and January is at 47, March is at 55; compared to its 26-week average of 62.
Bob Evans (BOBE) is recently down $2.73 to $52.38 after the full service restaurant operator reported Q2 results and fiscal 2014 profit outlook trailed analysts’ consensus estimates. December option implied volatility is at 24, January and March is at 25; below its 26-week average of 27.
Deere & Company (DE) is recently up $3.21 to $85.97 after its board of directors authorized the repurchase of up to $8B of additional common stock. December weekly call option implied volatility is at 26, December is at 19, January and March is at 18; compared to its 26-week average of 22.
Options with increasing volume @ CBOE: EXH NDAQ GES TITN TRNX PBR SHLD ESS
Volatility as an asset class
J.C. Penney (JCP) is up $0.10 to $10.11 in the premarket after reporting November same-store sale rose 10.1% over the prior year period. December call option implied volatility is at 67, January is at 64, February and May is at 73; compared to its 26-week average of 68.
Sears Holding (SHLD) is down $3.45 to $52.10 after CEO Eddie Lampert’s ESL Partners cut its stake in the retailer to 48.4% from 55.4%. Overall option implied volatility of 45 is near its 26-week average of 46.
CBOE Nasdaq-100 Volatility Index (VXN) closed at 14.93, below its 50-day moving average of 15.40. www.cboe.com/VXN
CBOE S&P 500 BuyWrite Index (BXM) closed at 999.56, above its 50-day moving average of 981.02. www.cboe.com/BXM
Monday morning while getting ready for work I overhead the comment, “the S&P 500 has not had a losing December since 2007”. This comment was interesting to me because I would have assumed either 2008 or 2012 would have been down years for the stock market in December. In the case of 2008 I assumed the market was down in December just because it was 2008. This time last year we almost went over the fiscal cliff so I thought that December would have been a losing month. Well I was wrong on both accounts. The last year the S&P 500 was lower in December was in fact 2007. The numbers that prove this are in the table below.
Analysis of S&P 500 from QuickTakesPro’s Michael Kahn:
S&P 500 (SPX) – At the time of this broadcast, SPX was around 1,792.20 down 8.70 from Monday’s close. It has been in the rising channel going back to November of 2012 and appeared to be in an accelerated rising trend back to this past October. It has since broken down from the accelerated trend after hitting the top levels of the longer term channel, which is not surprising. It “looks like it is time for a rest and people appear to be sitting on gains” from the recent run up. “This (sitting on the sidelines) is pretty normal,” according to Michael.
It is above its 50 day moving average of 1745.72 and the 200 day moving average of 1652.95.
The Chart of the Day is Home Depot (HD) – At the time of this broadcast, HD was at 78.49 down 0.89 from yesterday. “The major trend is still to the upside, although dominating this chart is this trading range.” It had a “major breakout failure” at a resistance level near 81, recovered a couple days later, only to fail again near 81. More
I have a trade setup I’m stalking in Salesforce (CRM, $51.54, off $0.02).
The Fibonacci price cluster of support comes in at the $50.52 – $51.14 area. So far price is holding above this key zone. I’m also seeing a couple of time cycles that are due right here right now that would also support a possible upside reversal in this stock.
So what are we waiting for??? I’m waiting for a trigger. I want to see a price pattern reversal that tells me it’s worth placing a bet against this key zone. If we do see a buy trigger, the potential target on the upside comes in at $60.38 and the risk is defined either below the low end of the price cluster (below 50.52), or below the low made prior to the buy trigger fires off. For more information on “triggers”, please refer to:
A strategy? How about a time-diagonal spread! Buy the Jan (regular Jan, 1/18/14 expiration) 52.50 strike call for $1.90 and sell a Jan (Extended Weekly, expiring 1/3/14) 57 strike call for $0.37. Selling the shorter-dated out of the money call reduces the debit by ~20%, and leaves us long a call outright for the first two full weeks of January.
Volatility as an asset class
Krispy Kreme (KKD) is down $3.29 to $21.26 in the premarket after reporting in-line earnings but giving a less than expected long-term profit outlook, with the doughnut seller saying it expects international franchise same-store sales to continue to be negative. December call option implied volatility is at 65, January is at 51, February is at 45; compared to its 26-week average of 43.
Yum! Brands (YUM) is off $1.83 to $75.87 after saying it sees November same-store sales at its China Division stores increasing 1%. Overall option implied volatility of 28 is above its 26-week average of 24.
NCR Corp. (NCR) is higher by $0.80 to $34.99, the manufacturer of automatic teller machines (and cash registers) agreed to pay $1.6B for Digital Insight Corp. Overall option implied volatility of 31 is near its 26-week average of 29.
CBOE Nasdaq-100 Volatility Index (VXN) closed at 14.81, below its 50-day moving average of 15.39. www.cboe.com/VXN