The Weekly Options News Roundup – 8/26/2016

Options Strategy ‘Put’ In Perspective
WSJ.Traders in the S&P 500 Index option pit at CBOE in June.  Photo: Getty Images

Pension funds are increasingly beginning to use the CBOE S&P 500 PutWrite Index (PUT) as an efficient means to garner income while providing a “cushion” from volatility during market downturns. The PUT strategy is designed to sell a sequence of one-month, at-the-money, S&P 500 Index puts and invest cash at one- and three-month Treasury Bill rates.

“In Scramble for Yield, Pension Funds Will Try Almost Anything” – Ben Eisen and Aaron Kuriloff, The Wall Street Journal
http://on.wsj.com/2bJyZNG

For more information on the CBOE S&P 500 PutWrite Index, visit www.cboe.com/PUT.

WHITE PAPER: “An Analysis of Index Option Writing With Monthly and Weekly Rollover”
White Paper Link: http://bit.ly/2cfLjIN 

 VIX FIX: Volatility Making Moves  
Fed Day came and went.  Fed Chair Janet Yellen hinted that a raise in interest rates “has strengthened” in recent months, with a potential hike coming as soon as September.  However, it was further comments later in the day from some of her colleagues about additional future rate hikes that created a strong reaction from the market.   The VIX Index, which had dipped to around 12 in the morning, spiked to near 15 in the afternoon. The next FOMC meeting is September 20-21.  Stay tuned.

“Capstone Bases Bets on Volatility” – Michael Shari, Barron’s
http://bit.ly/2bJCgNc

“How Yield Chasers Could Be Pushing Down Volatility” – Jon Sindreu, Wall Street Journal
http://on.wsj.com/2bZ6rlk

“Volatility Index has one of its Biggest One-Day Gains Since Brexit” – Fred Imbert, CNBC
http://cnb.cx/2bYCcuW

“Buy Volatility Ahead of a Jam-Packed ‘Policy Month,’ Says BAML” – Luke Kawa and Blaise Robinson, Bloomberg News
http://bloom.bg/2bUch5B

“Focus on VIX Futures Shorts Hides the Real Story” – Saqib Iqbal Ahmed, Reuters
http://reut.rs/2bZ4Ufc

“Stocks: Another Sign the Market is Way Too Quiet” – Ben Levisohn, Barron’s
http://on.barrons.com/2blu5sr

“It Really is Very Quiet” – David Keohane, Financial Times
http://on.ft.com/2bUmbUN

“Market’s Tight Range Signal Sharp Move” – Michael Kahn, Barron’s
http://bit.ly/2bAfacQ

“Dow Jones Industrial Average Falls; VIX Stages Biggest Jump Since Brexit” – Josh Selway, Schaeffer’s Investment Research
http://bit.ly/2caoZ3r

“The Market is About to Get a Serious ‘Shock’” – Bob Bryan, Business Insider
http://read.bi/2bE8MmB

“How to Hedge Against a Potential VIX Pop” – Todd Salamone, Schaeffer’s Investment Research
http://bit.ly/2bIZu7C

“VIX Shorts Near Extremes: Time to Protect Your Investments?” – Michael Lebowitz, See It Market.com
http://bit.ly/2bA6AL3

VIDEO
“Market Anticipating More Volatility”
Bob Pisani
CNBC
Air Date: 8/26/16
http://cnb.cx/2blM7Mx

Earnings Next Week – 8/29 – 9/2

Next week we have a small list, but it’s an interesting one as several of the companies reporting have recently had a big move or just regularly experience a lot of volatility around earnings.  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

The Buffett Put Trade – 2Q2016 Update

Each quarter Berkshire Hathaway, like all investment firms, files their holdings with the SEC.  Most people scramble to see what stocks Warren Buffett has been adding to his portfolio.  I usually scramble as well, but I’m looking for something hardly discussed in the dozens of pages that make up Berkshire Hathaway’s 10-Q.  I go looking for an update on what I commonly call The Buffett Put Trade.  Back in April I wrote an explanation of what this trade is all about.  You can check that out here A Buffett Put Trade Refresher

The short version is that between 2004 and 2008 Berkshire Hathaway entered into a few dozen over the counter option trades.  They sold at the money puts on four broad based equity market indexes: the S&P 500, FTSE 100, Euro Stoxx 50, and Nikkei 225.  These trades resulted in Berkshire taking in a total of $4.5 billion in premiums.  The chart below shows the monthly performance for each of these indexes since Berkshire began entering into these trades in through the end of the second quarter of 2016.

Buffett Price Charts

Source: Bloomberg 

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BigTrends.com Weekly Market Outlook – Tug Of War Continues

For the second week in a row, stocks were content to simply drift sideways…. the result of opposing factors simultaneously weighing on investors’ mind. From one direction stocks are being buoyed by low interest rates that could linger for a while, while from the other direction the market’s high valuations may be keeping a lid on things. The bulls are technically winning the war, but it’s a marginal victory and the tide could turn quite easily.

We’ll weigh the odds in a moment. Let’s first take a closer look at last week’s and this week’s economic announcements, which will set the tone for whatever the market’s got in store.

Economic Data

We got a fair amount of economic news last week, but only three items were of real interest.

The first of those three was Tuesday’s consumer inflation update, rounding out the prior week’s producer price inflation report. Like the PPI figure, the CPI figure was even more tepid than expected, rolling in flat versus forecasts for 0.2% growth. Core CPI was only up 0.1%, versus expectations for 0.2% growth. The annualized versions of the data below indicate a stable if not slumping inflationary environment, meaning the Fed still has time and room to wait on a rate hike.

Inflation Chart

1

Source: Thomson Reuters

Housing starts were up just a bit, and building permits slowed. Both remain on broad uptrends though.

Housing Starts and Building Permits Chart

2

Source: Thomson Reuters

Finally, last week’s biggest news was the report on July’s capacity utilization and industrial productivity. Both were up, and by more than expected. This is a much-needed reversal of the capacity utilization downtrend, and a nice rekindling of what had become stagnant productivity.  The correlation between these two data sets and the stock market (and market earnings) is strong, even if only for the long haul.

Industrial Productivity, Capacity Utilization Chart
3

Source: Thomson Reuters

Everything else is on the following grid:

Economic Calendar

4

Source: Briefing.com More

Buying a Breakout, Selling Breakdowns

When a stock makes a big breakout or breakdown on some very heavy turnover, it catches the market’s attention. We often feel regret and that we are late to the party, and that if we decide to jump on board then the stock will reverse course. That is the psychological negative of not understanding momentum, for it is at these moments that the best opportunity for gain often lie ahead.

Stocks move over time, often long periods of time – yet our minds constantly think in the moment. This is a divergence that is often costly and closes our minds to great chances to make gains. We look for participation from institutions to support stock prices, for without that sponsorship and liquidity there is little chance for stocks to rise.

Likewise, when a stock gets belted and big money is fleeing, these are often great times to jump on board and ride the stock lower. Distribution is not an event, it happens over time.

Let’s take a look at an example. Sanchez Energy, a small-sized natural gas name broke out recently on very heavy turnover. The one day move on Aug 8 was the biggest in months, at one point up over 33% on the session. It backed away from the highs, nearly tagging the early June highs around 9 bucks. The stock surged so much during that day in such a short period of time it was nearly impossible to catch up to it. The next day saw no follow-through, BUT volume was substantially weaker – indicating strong hands were still holding, and the low from the big surge was not tagged.

The following days saw the stock moving sideways to higher, and this past week has the stock lifting above that intraday high and into levels not seen since April. The stock continues to be strong is not giving back any ground at all.

So, is it too late? As a momentum trader, I would have to say no it is not. And while you may have to hold your nose buying after such a strong price move, let’s remember we don’t care where a stock has been, rather we care where it is going. If buyers are still engaged (remember, institutions move slowly into stocks, not all at once) and demand is strong, then we should see prices continue. The best stocks don’t often give you a chance to get in, Sanchez Energy has barely given you that, but keep an eye on the next modest pullback – it may be your opportunity to catch it before it runs again.
BL

Weekend Review – VIX Futures and Options – 8/15 – 8/19

VIX dropped a little as the equity market did a whole lot of nothing last week.  We retired the August contract on the open Wednesday morning and September took over as the front month.  With time to go to expiration (this is actually a five-week cycle) everyone seemed to notice the steep contango again.  What is interesting below is the behavior of the curve beyond October.  November and beyond gained a little ground despite all the contracts moving up in the pecking order of expirations.

VIX Curve Table

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Weekend Review – Russell 2000 Options and Volatility – 8/15 – 8/19

Sometimes I over personify the financial markets and when I saw that the Russell 2000 (RUT) easily extended the lead over the Russell 1000 (RUI) this week an Olympic themed situation popped into my head.  I saw the Russell 2000 as Usain Bolt giving a thumbs up as it easily moved farther ahead of the Russell 1000.  For the week RUT gained 0.60% while RUI was actually down by 0.01% which places the 2016 lead for RUT at just over 2% (8.88% vs. 6.86%).

RUT RUI Performance

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The Weekly Options News Roundup – 8/19/2016

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.

Markets Get Social Powers
CBOE has partnered with Social Market Analytics (SMA) in the development of a suite of indexes that harness predictive signals from Twitter traffic to generate different “S-Factors” that gauge investor stock sentiment.  On Monday, the CBOE-SMA Large Cap Index (SMLC Index), the first in the series, was launched. The SMLC Index tracks the performance of a hypothetical strategy, which on a daily basis buys an equally weighted portfolio of 25 stocks with higher SMA S-Scores.

“Tweet Trades: CBOE Launches Benchmark Index Based On Social Media Sentiment” – Phil Rosenthal, Chicago Tribune
http://trib.in/2aRK0yk

“CBOE, SMA Launch Social Media Sentiment Indexes” – Joanne Faulkner, Waters Technology
http://bit.ly/2aRKULl

“CBOE Releases Its First Social Media-Based Sentiment Benchmark” – Aziz Abdel-Qader, Finance Magnates
http://bit.ly/2bko6Ey

“CBOE Launches First In Series of Social Media-Based Strategy Benchmark Indexes” – Mike Fox, Leap Rate
http://bit.ly/2aXFqA4

“New CBOE Indices to Focus On Social Media Metrics” – James Langton, Investment Executive
http://bit.ly/2bCL0rr

CFE Receives Singapore’s Seal of Approval
The CBOE Futures Exchange (CFE) recently received approval from the Monetary Authority of Singapore (MAS) designating it as a Registered Market Operator in the country.  This provides investors in that region with more direct access to VIX futures products as hedging tools in portfolios.

“CBOE Gets MAS Nod for VIX Futures” – Julie Aelbrecht, FOW
http://bit.ly/2bleepA

“CBOE Futures Exchange Granted Registered Market Operator Approval In Singapore” – HedgeWeek
http://bit.ly/2bvEhLh

“CBOE Futures Exchange Officially Approved In Singapore” – Mike Fox, LeapRate
http://bit.ly/2aZrEf2

VIX FIX: Volatility No Go  
CNBCBlogMarkets are ending the week lower as rumors circle that a September interest rate hike may now be on the table.  Markets have remained within a narrow trading range for most of the month, and as earning season comes to an end, all eyes are on the Fed.  The VIX mirrors this subdued market sentiment, as it failed to breach the 15 level this  month.  As the Fed meeting approaches and the U.S. presidential elections draw close, volatility could awake from its slumber.

“Some Traders Betting Wall Street’s ‘Fear Gauge’ Will Double In a Month” – Akane Otani, Wall Street Journal
http://on.wsj.com/2bAmTGz

“Call Buyers See a Market Plunge In September” – Steven M. Sears, Barron’s
http://bit.ly/2bEsLQY

“Investors Grab a Ride On the Fear Gauge” – Dan McCrum, Financial Times
http://on.ft.com/2bEwVbL

“The Curious Incident of Volatility In Three Months’ Time” – Jon Sindreu, Wall Street Journal
http://on.wsj.com/2bicpf7

“Don’t Fear the Eerie Calm In U.S. Stocks” – Nir Kaissar, Bloomberg
http://bloom.bg/2bq8yhg

“Indicator of The Week: Does a Low VIX Mean It’s Time to Buy Options?” – Rocky White, Schaeffer’s Investment Research
http://bit.ly/2bw0Rn1

“VIX, Volatility ETFs Reveal an Overly Complacent Market” – Max Chen, ETF Trends
http://bit.ly/2bqaqXl

“Why Investors Are Ignoring Warnings About Stocks” – Adam Shell, USA Today
http://usat.ly/2b9tPLF

“Does the Record-Setting Stock Rally Have Legs?” – John Kimelman, Barron’s
http://bit.ly/2bCELDK

VIDEO
“Dean Curnutt Makes the Case For an Even Lower VIX”
Bloomberg Surveillance
Air Date: August 16, 2016
http://bloom.bg/2bv1OMX

VIDEO
“Still Seeing Continuation of Sector Trends”
Bob Pisani
CNBC’s Closing Bell
Air Date: Tuesday, August 16, 2016
http://cnb.cx/2bdKxc6

Successful Launch for New SPX Monday-Expiring Weeklys Options

On August 15 CBOE launched trading of the new S&P 500® Index (SPX) Monday-expiring Weeklys options. Daily trading volume for the new SPX Monday Weeklys in the first two days was 4,334 on August 15, and 10,829 on August 16. Institutional investors have told me that the SPX Monday Weeklys could have potential to be very helpful to them in managing their over-the-weekend risk. SPX Weeklys are one of CBOE’s fastest-growing products, with volume in 2015 setting a 10th consecutive annual record. With the introduction of SPX Monday Weeklys, CBOE now offers SPX options with Monday, Wednesday and Friday expirations.

SKEW CHART AND 16 SPX EXPIRATIONS IN NEXT 6 WEEKS

The LiveVol skew chart below shows the estimated implied volatilities for S&P 500 options at various strike prices and many expirations.
MM1

The left side of the chart above shows the following 15 expirations for the S&P 500 options through the end of September (in addition SPXW options expiring on Tues. Sep. 6 will be listed next week)

1                 Fri. Aug. 12 – SPXW
2                 Wed. Aug. 17 – SPXW
3                 Fri. Aug. 19 – SPX
4                 Mon. Aug. 22 – SPXW
5                 Wed. Aug. 24 – SPXW
6                 Fri. Aug. 26 – SPXW
7                 Mon. Aug. 29 – SPXW
8                 Wed. Aug. 31 – SPXW
9                 Fri. Sep. 2 – SPXW
10               Tues. Sep. 6 – SPXW *
11               Wed. Sep. 7 – SPXW
12               Fri. Sep. 9 – SPXW
13               Wed. Sep. 14 – SPXW
14               Fri. Sep. 16 – SPX
15               Fri. Sep. 23 – SPXW
16               Fri. Sep. 30 – SPXW  

On Aug. 19, CBOE plans to list SPXW options expiring on Tues. Sep. 6 (the day after the Labor Day holiday).

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 contracts.
MM2

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 are being followed.

Ticker Symbol — SPX Monday-expiring Weeklys series are 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.
  • MORE INFORMATION

    For an overview of SPX Monday Weeklys options contract specifications and other operational details

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

BigTrends.com Weekly Market Outlook – On The Fence Amid Presidential Cycle

Though the market finished on a bullish foot two Friday’s ago, that tone didn’t help stocks one iota last week. When all was said and done, the S&P 500 (SPX) (SPY) pretty much ended last week where it started it, and still on the fence as it’s been for the better part of the past several weeks. Just for the record though, the uptrend is still the bulls’ to lose. The bears just haven’t been able to land any real damaging blows.

We’ll examine the market’s odds and undertow below, after running down last week’s and this week’s economic reports.

Economic Data

Last week’s economic-news dance card wasn’t terribly busy, and the data we got was relatively well mixed… some bullish, some bearish.

On the bullish side of the table, the job openings tally for June (‘Jolts’) rekindled a march toward multi-year highs by virtue of its reading of 5.624 million openings, suggesting employment opportunities are robust if workers want them. It’s a direct indication of economic strength, jibing with July’s solid employment data from Department of Commerce released two weeks ago.

Jolts Chart
M1

Source: Thomson Reuters

Though it’s not the whole picture yet, producer price inflation was flat to negative last month — otherwise known as deflation — implying supply is in excess of demand again. The overall PPI rate was down 0.4% versus expectations for no change, while core PPI (ex-food and energy) was down 0.3% compared to expectations for a 0.2% rise. Though the coming week’s consumer inflation rate may give the Fed and investors something to think about, most likely the CPI data will follow the PPI data’s lead.

Annualized Inflation Trend Chart
M2

Source: Thomson Reuters

The puts a modest headwind in place for the Federal Reserve’s rate hike plans, which were accelerated only a week ago following a strong July jobs report. Still, on an annualized basis it’s worth noting consumer inflation is broadly moving higher, and the Fed may need to move anyway if the CPI data diverges from last week’s PPI dip.

Finally, don’t read too much into the reported slide in retail sales for July. Retail spending was down 0.3% not counting cars, and flat with automobiles in the picture. But, July’s retail spending is always weaker than June’s…. the comparison being made. Even more noteworthy is the fact that spending at gasoline stations is the key cause for any weakness gasoline is historically cheap. On a year-over-year basis, consumer spending is up despite weak gas station sales.

Retail Spending Chart
m3

Source: Thomson Reuters

Everything else is on the following grid:

Economic Calendar
m4 More

Rate of Change Can Predict Future Momentum

The rate of change is defined as the speed for which a variable changes in a specified period of time. We look for a change in trend or just an inflection point key in on the rate of change to help determine where momentum may take place and perhaps estimate the trajectory. While it is often difficult to predict a top or bottom with any consistency, from a mathematical perspective we can use the rate of change to identify probable turning points. It is at these moments where significant gains can be had by riding the momentum.

In evaluating stocks, we can use the price rate of change to identify shifts in trajectory and trend. As we see from the chart, the price rate of change often is a leading indicator that tells us the move is about to happen, so get on board quickly. Riding the rate of change to a powerful trend can be quite profitable, but certainly needs to be supplemented with other indicators lining up. For instance, we would like to see volume trends and oscillators moving in alignment with the rate of change, a simple confirmation of the signal. The more indicators that align with the rate of change the more confidence we have in the signal.
BL

We can use the rate of change to evaluate other metrics, including earnings. For the last several quarters the US economy has been in an ‘earnings recession’, with weaker earnings quarter after quarter. There are numerous reasons for this: lower energy prices, a stronger dollar and weak global demand. This has marked reductions in GDP over the past few years. But this current quarter of earnings may have been the trough, as we see the rate of change declining from previous times.

It is certainly a welcomed change. Markets may have already priced in more profit downside, so the worst may indeed be over. Further, if company earnings start to expand then we could see multiple expansion, which could eventually show up in higher GDP down the road. This could be a gamechanger.

To be sure, there are many different ways to analyze data, but certainly the rate of change offers us good insight as to when a trend change is about to occur. Pay attention to this and other indicators.