Between gold and oil, oil is not getting much love so I’m going to talk about oil volatility. Oil futures (November) appear to be putting in a 90.00 to 95.00 range and the US Oil fund is grinding around as well. If a new price range, that appears to have very little geo political risk priced in, holds expect OVX to languish around in the high teens.
The volatility indexes that are based on the S&P 500 fell back into order as the S&P 500 rebounded to another all-time high. I am not a guru, do not claim to be (actually who does that?), but did note in this space that despite a tough beginning to September the volatility indexes were not showing the market had any fear. Again they seemed to anticipate the stock market continuing higher and got it right.
Friday was the third Friday in September which is standard option expiration date for most option players, but for those of us that watch the CBOE strategy indexes it also means roll date.
First the September SPX settlement came in pretty high, relative to history and the price action yesterday, at 2022.46. This settlement level resulted in a tough day for both BXM and BXY which were respectively short the 1955 and 1995 SPX calls. Both BXM and BXY lost about half a percent yesterday while the S&P 500 was down just 5 basis points.
Your weekly recap of CBOE features, options industry news and VIX and volatility-related articles from print, broadcast and online and social media outlets.
Global Capital magazine held its annual Global Derivatives Awards ceremony in London Thursday evening, handing out several financial industry awards. CBOE is honored to be named “Equities Exchange of the Year,” as Global Capital cited CBOE’s impact on the global industry through product innovation and its continued development of the volatility space.
“CBOE Wins “Equities Exchange of the Year” Award” – CBOE press release
The Zacks Analyst Blog Highlights: CBOE Holdings, CME Group, Intercontinental Exchange, Amazon.com and Facebook – CNBC.com
VIX A-HA Moment
The market is still in a state of low volatility, and yes, VIX can still work well within a portfolio. Insights into how to use the VIX in this market environment remain a hot topic.
“Fed Bringing Stock Turbulence to Traders as VIX Climbs”- Callie Bost and Jeff Kearns, Bloomberg
“Transfixed by the VIX: How the Popular Gauge Works” – Larry Shover, Fox Business
“Short Sellers Fleeing Inverse VIX Fund After 24% Rally” – Joseph Ciolli, Bloomberg
“Why You Probably Don’t Need to Buy VIX Calls Right Now – Adam Warner, Schaeffer’s Investment Research
“There’s No Fear in the Markets: Time to Worry?” – Jenny Cosgrave, CNBC.com
VXTYN Fixed-Income Volatility Products Based on VIX
CBOE Futures Exchange (CFE) plans to launch futures on the CBOE/CBOT 10-year Treasury Note Volatility Index (VXTYN) on November 13.
“A Hedge Against Rate Volatility” – John Hintze, Global Association of Risk Professionals magazine,
Slán go fóill, Dublin
CBOE was pleased to host another successful Risk Management Conference Europe earlier this month in Ireland. See the “Ten Takeaways” from this year’s event and make plans to join us this March for the next CBOE RMC. Yes, Dublin, we sure hope to see you later.
“Ten Takeaways from CBOE RMC Europe” – Russell Rhoads, CBOE Options Hub.com
Early this week, $SPX closed at a new relative low, and many of the
indicators appeared to be turning bearish (for example, $VIX closed
above 14). However, prices have rallied since then, and $SPX made
a marginal new all-time high today — both intraday and closing. Is this
probe upwards more effective than the probe downwards was a few
days ago? It’s hard to say, but a further close at new highs
would solidify an upside breakout.
Volatility as an asset class
Yahoo (YHOO) is recently down 95c to $41.18 on Alibaba (BABA) going public in a 320.1M share IPO priced at $68. BABA is recently trading at $92.64. September weekly call option implied volatility is at 60, October weekly is at 53, October is at 46, November is at 40, January is at 34; compared to its 26-week average of 35.
Online Commerce Company’s option implied volatility is mixed to low on the Alibaba IPO.
Facebook (FB) October call option implied volatility is at 26; compared to its 26-week average of 38.
Baidu (BIDU) October call option implied volatility is at 35; compared to its 26-week average of 36.
Google (GOOG) October call option implied volatility is at 22; compared to its 26-week average of 22.
Amazon.com (AMZN) October call option implied volatility is at 25; compared to its 26-week average of 29.
eBay (EBAY) October call option implied volatility is at 30; compared to its 26-week average of 27.
Actives at CBOE: AAPL KO C TWTR TSLA AMZN BIDU YHOO
Stocks with increasing volume @ CBOE: SDRL CNQR PDLI BUD NI BDX NWSA VMC PFE ESI
CBOE DJIA BuyWrite Index (BXD) at 270.88, compared to its 50-day moving average of 268.84 cboe.com/micro/bxd/
CBOE Volatility Index (VIX) up 2.5% to 12.23. Oct 16. 18 and November 20 calls active on 588K cboe.com/VIX
iPath S&P 500 VIX Short-Term Futures (VXX) up 0.2% to 27.24.
Alibaba. No for Scotland. Triple Witch. AAPL phone. Stocks open higher on Scottish vote and follow through to yesterday’s rally. Lots of investors shut out on BABA IPO. Options on BABA 9/29. Volatility as an asset class:
Yahoo (YHOO) saw profit takers move the shares to unchanged after being up $0.60 in the pre-market, as Alibaba (BABA) 320.1M shares IPO priced at $68. September call option implied volatility is at 105, September weekly is at 77, October is at 56, November is at 44, January is at 36; compared to its 26-week average of 35.
Red Hat (RHT) is down $2.36 to $58.30 after reporting less than expected Q2 results. September call option implied volatility is at 92, October is at 36, December is at 29; compared to its 26-week average of 30.
Oracle (ORCL) is off $1.25 to $40.30 following a Q1 earnings miss and a CEO transition. September call option implied volatility is at 51, October is at 22, December is at 19; compared to its 26-week average of 23.
Options expected to be active @ CBOE: YHOO ORCL RHT TIBX CNCR SAP
CBOE Equity Options volume: 1,228,861 call, 762,798 put, 1,991,659 total
CBOE S&P 500 BuyWrite Index (BXM) at 1108.94 compared to its 10-day moving average of 1107.17 cboe.com/BXM
Where does the trade go from here? I’m Angela Miles, and that is what I am covering today. Option’s plays in hot stocks going into next week’s options expiration.
Let’s get it started with the grand-daddy of them all: Apple. Apple’s iPhone 6 hits store shelves tomorrow. Implied volatility has remained tame with many traders busy selling vol this week. This morning, 81,000 contracts were moving to start the day. As AAPL trades around $102 players are positing call trades at the 101 and 102 strikes. There are also put buyers at the 100 line, but not much to suggest a near-term breakdown in the stock.
Yahoo is moving big this week on Alibaba’s IPO Friday. Yahoo has a 23% stake in BABA. Traders are really going after the 48 calls, with buyers and sellers. Implied vol is pumped up to 83. Put action is light. Retail paper is active in YHOO.
US Steel has been on fire, including a 10 percent jump yesterday. The company is making strategic moves to return to profitability. Puts are in play at the 45 and 46 strikes for next week, which could predict a slight pull back is in store for the stock after a hot run.
As Apple and Alibaba steal the show, options paper is just a bit lighter today in the momentum names…Such as Tesla, which has been active this week. The CEO, Elon Musk is out talking about self-driving cars . Going into next week the 265 and 260 calls are in gear.
Amazon has 325 puts active for next week as the stock trades $325.
Netflix has more calls than puts trading. NFLX trades at $455. The most popular call strike so far is 460 for next Friday’s expiration.
Gilead Sciences is in play on news its selling its Hepatitis C drug at a lower cost in developing nations. The bulls are positioning in the 105 and 106 strikes as shares trend higher this week.
Among other movers…
Whole Foods has 40 strike put contracts on the move into the Weekly’s expiration.
EEM Emerging Market Index was active going into the FOMC announcement. Traders remain active into next week at the 43 and 44 put lines.
Micron Technologies has earnings next Thursday. The most active strike are the 32.5 and 37 calls.
One final mention, options are active for next week’s expiration in SPX, the predominate strike is 1,970 puts, Although the 2005 strike calls are active. Angie Miles
Volatility as an asset class
Yahoo (YHOO) is recently down 54c to $42.05 into the expected IPO of Alibaba (BABA). September call option implied volatility is at 98, September weekly is at 77, October weekly is at 63, October is at 50, November is at 46, January is at 37; compared to its 26-week average of 35.
CBOE & C2 plan to list Alibaba (BABA) options on Monday, September 29.
Technology based financial service company’s option implied volatility is low as shares trend higher
TD Ameritrade (AMTD) is recently up 62c to $34.48. October call option implied volatility is at 17, November and January is 18; compared to its 26-week average of 24.
E-Trade (ETFC) is recently up 64c to $24.51. October call option implied volatility is at 30, January is at 27; compared to its 26-week average of 34.
Interactive Brokers (IBKR) is recently up 57c to $26.50. October call option implied volatility is at 27, December is at 22; compared to its 26-week average of 26.
Charles Schwab (SCHW) is recently up 56c to $30.76. October call option implied volatility is at 24, December is at 23; compared to its 26-week average of 25.
CBOE VIX methodology for Market Vectors Gold Miners Fund (VXGDX) is recently down 1.5% to 27.95, compared to its 50-day moving average of 27.38 as gold trades near a 4-year low.
VIX methodology for Apple (VXAPL) is down 1.6% to 23.28, below its 50-day moving average of 26.31. cboe.com/VXAPL
Actives at CBOE: AAPL PBR C TWTR TSLA AMZN NFLX LVS BIDU YHOO
Stocks with increasing volume @ CBOE: RAD EDMC ORLY DEO PIR UNFI INFA ETP FXP SCOK PWE VHC
CBOE DJIA BuyWrite Index (BXD) up 12c to 270.91, compared to its 50-day moving average of 268.84 cboe.com/micro/bxd/
CBOE Volatility Index (VIX) down 4.9% to 12.03. Oct 18 and 21 calls active on 203K cboe.com/VIX
iPath S&P 500 VIX Short-Term Futures (VXX) down 1.1% to 27.33.
CBOE S&P 500 Short-Term Volatility Index (VXST) is recently down 5.1% to 11.21; compared to its 10-day moving average of 12.62. stks.co/r0CS2
CBOE DJIA Volatility Index (VXD) down 6.5% to 11.01; compared to its 10-day moving average of 12.14.
Weekly Housing numbers bullish, but Housing Starts fell ~14%. European shares higher, election results from Scotland before today’s US close? Philly FED ay 9am CDT. Triple Witch this afternoon and tomorrow. BABA prices after the close today. Volatility as an asset class
Yahoo (YHOO) is up $0.46 to $43.05 in the premarket into the IPO of Alibaba (BABA). September call option implied volatility is at 89, September weekly is at 81, October weekly is at 64, October is at 53, November is at 45, January is at 39; compared to its 26-week average of 34.
Rite Aid (RAD) is down $066 to $5.98 after the drugstore lowered its full-year view. September call option implied volatility is at 147, October is at 71, January is at 46; compared to its 26-week average of 49.
Pier 1 Imports (PIR) is down $1.82 to $13.72 in the premarket after the home-goods retailer lowered its full-year guidance. September call option implied volatility is at 148, October is at 54, December is at 39; compared to its 26-week average of 34.
CBOE Gold Volatility Index (GVZ) closed at 17.14, above its 50-day moving average of 14.57 as gold near 4-year low. cboe.com/GVZ
Options expected to be active @ CBOE: YHOO ORCL RHT RAD PIR SODA
CBOE Interest Rate 5 Year Note (FVX) @ 17.74, above 50-day MA is 16.71 into FOMC decision
FedEX beat estimates by $0.14 this morning, helped by stock repurchase program. Sony announced a $2 Billion loss due to smart phone sales dropping. Eyes (Ayes?) on Scottish vote tomorrow. Some traders thinking early results could be announced while US markets still open. Triple Witch Friday. Janet Yellen makes appearance this aternoon. Volatility as an asset class:
Yahoo (YHOO) is down $0.15 to $42.56 in the premarket into the expected IPO of Alibaba (BABA). September call option implied volatility is at 89, September weekly is at 84, October weekly is at 69, October is at 52, November is at 47, January is at 40; compared to its 26-week average of 34.
CBOE & C2 plans to list Alibaba (BABA) options on Monday, September 29.
Rackspace Hosting (RAX) is down $7.14 to $32.10 after ending a strategic review and deciding to stay independent. September call option implied volatility is at 89, October is at 56, December is at 46; compared to its 26-week average of 46.
U.S. Steel (X) is up $4.59 to $46 volatility after updating Q3 outlook. Overall option implied volatility of 38 is above its 26-week average of 35.
Sony (SNE) is down $2.00 to $18.75 in the premarket volatility after raises its net loss forecast and eliminating its dividend. Overall option implied volatility of 25 is near its 26-week average of 26.
Options expected to be active @ CBOE: YHOO ADBE X RAX SNE DD FDX GIS AUXL ENDP LEN RHT ORCL
Monday’s loss may not have been a big one, but it certainly wasn’t an encouraging step in the right direction following last week’s dip, with a Fed meeting still on tap this week. Yet, it’s not like the market has fallen over the edge of a cliff – there’s still a way the bulls could figure a way around an overdue and much-needed pullback.
We’ll look at those opportunities in a moment. First we need to paint with the broad brush strokes of economic information.
While there was a steady flow of economic data all last week, not much of it was market-moving. The only item of any real interest was August’s retail sales growth, which were good… as expected. Overall retail sales were up 0.6% for the month (from July’s levels), and retail sales not counting automobiles was up 0.3% between July and August.
This week is already a little busier than last week too, in terms of economic numbers. It’s going to be harder hitting stuff too, beginning with last month’s industrial production and capacity utilization. The data fell on for both. Capacity utilization fell from 79.2% to 78.8%, while industrial production fell 0.1%. Any step backwards is a step in the wrong direction, but this information is hardly cause for alarm just yet. The bigger trends in both cases are still pointed upward, and this is definitely long-term data.
Industrial Production and Capacity Utilization Chart
Source: U.S. Federal Reserve
There’s still plenty in store for the week though, like a big dose of inflation data. We’ll hear last month’s producer price inflation rates on Tuesday (flat, as expected), and on Wednesday we’ll get the consumer inflation data for August. A month ago both figures suggested inflation was pretty well tamed, and the improvement in the value of the U.S. dollar has only kept inflation at bay. As of July, the consumer inflation rate was 2.0%, and the producer inflation rate was 1.7%. It’s unlikely either was up for August.
We’re also starting a wave of housing and real estate data near the end of the week, with Thursday’s housing starts and building permits figures for August. The expectations are basically for figures comparable to July’s. However they come out, the overall undertow is a positive one.
Stock Market Index Analysis
Let’s start with Monday’s most alarming red flag… the NASDAQ Composite’s (COMP) (QQQ) breakdown below 4539. Through last week, that floor had held up. On Monday though, it failed, allowing the NASDAQ to move under a key support level. That pullback to a close of 4518.90 also pulled the composite under the 20-day moving average line for the first time in over a month, after it acted like it was going to find support there at the end of last week.
NASDAQ Composite & VXN – Daily Chart
All charts created with TradeStation
There’s still a glimmer of hope for the NASDAQ – the selling seems have stopped at the lower 20-day Bollinger band. It’s not like the bulls have pushed up and off of the lower Bollinger band yet, however. It’s still in prime position to break under it.
When we zoom out to a weekly chart, the NASDAQ still looks like it’s in trouble. Ever since the composite broke under a major long-term support line (dashed) in April, it’s been unable to get back in that bullish groove. In fact, the pace of the broad advance has clearly slowed ever since that April stumble. Being realistic, in this particular timeframe we can’t really count on stocks finding a firm floor until the NASDAQ falls back to the 200-day moving average line (green), currently at 4278, but rising.
NASDAQ Comp & VXN - Weekly Chart
Throw in the fact that the Nasdaq Volatility Index (VXN) is still just starting to rise and hasn’t even come close to bumping into its key ceiling around 23.50, and it’s tough not to think we’re possibly headed for a relatively significant correction.
Nothing really changes when we turn the focus on the S&P 500 (SPX) (SPY). The large cap index was already deteriorating via last week’s move under a floor at 1986 and a move below the 20-day moving average line at 1994. Monday’s lower low and lower close only pulled the index a little further away from a rebound. You can also see the CBOE Volatility Index (VIX) (VXX) is in a firm uptrend here, even if the S&P 500′s pullback isn’t yet quite as firm.
S&P 500 & VIX – Daily Chart
Taking a step back and looking at a weekly chart of the S&P 500, however, tells us that while a pullback may still be in the cards, there’s a decent chance the dip here could be well contained.
Looking closely at the chart, you’ll see the index has frequently found a floor at straight-line support (dashed) going all the way back to late-2012. It’s also found support at the 100-day moving average line (gray) since early 2013. Care to guess which two lines have converged at 1954? Yes, the long-term support line AND the 100-day average line. We have to assume the bulls will at least make a pretty good stand there, if pressed.
S&P 500 & VIX – Weekly Chart
It’s also in this weekly timeframe we can see the VIX hasn’t even come close to a toppy level, though it is on the move.
So what’s the call here? From a technical perspective, the scales tip in favor of bearishness, but just barely. And, regardless of what gain or loss the market makes over the next month or so, choppiness is almost sure to be in the menu. Don’t get lured in too much on any bullish pops. September and early October are generally weak periods for stocks, and the August rally has set up a near-perfect calendar-based lull. Although we won’t get there in a straight line, we are looking for the NASDAQ to test its 200-day line now that the bears have some momentum. If you want to know precisely where the bottom is though, odds are good the VXN and the VIX will mark them better than the indices for themselves. Look for the volatility indices to retest bigger-picture ceilings as clues that a bottom has been hit. Trade Well, PH BigTrends.com
Settlement Reminder: Today, Tuesday September 16th is the last trading day for September in the following: VX, VM, VXEM, OV, VN, VXEW, VXST and GV futures and options.
These contracts settle tomorrow, Wednesday morning, September 17th.
We will post the settlement values when they are released tomorrow morning.
There was so much I had trouble narrowing the list down to 10, but here goes -
Change in VIX Calculation
The change that is scheduled to go into effect on October 6th in the VIX calculation is an improvement on measuring 30 day expectations of volatility in the market. In reality this is not a change in the calculation, but a change to the inputs or option series that will be used to determine VIX. The two closest expiration series to the 30 day time frame will be used to determine the consistent 30 day measure that is VIX. There are still two option series being used, but with SPX options expiring each Friday the nearest expiring series that is closest to 30 days and the first expiring series just after the 30 day time frame will be combined to calculate what we see quoted as VIX. It has been emphasized several times, but it is worth repeating that this will have no impact on VIX futures, VIX options, or the VIX settlement process.
The Carry Trade is Alive and Well
Despite VIX being so low, relative to historical levels, there are still plenty of traders willing to take advantage of the premium in VIX futures relative to the index. Carry trades were discussed in more than one session, although with a note of caution. Probably my favorite quote related to the current environment was that traders are still picking up nickels in front of a steamroller. However, the nickels are getting small and the steamroller is getting bigger.
The dollar cost of a VIX hedge can be very low
A term I hear thrown around, but do not use much myself is “VIX Tourist”. This can be someone that watches VIX, but doesn’t really understand the intricacies of trading VIX options or futures. Something that VIX Tourists are apt to say is that anyone hedging tail risk using VIX options has paid up over the last three years and seen no benefits. At CBOE’s RMC conference there are no VIX Tourists in attendance and you do not hear comments such as this. It is very possible to get long VIX exposure with no capital outlay, however there is risk to the trade.
One of my favorite trades to get long exposure to volatility involves selling an out of the money VIX put and buying an out of the money VIX call spread. Both will share an expiration date. Through selling two options and buying one this trade is often executable at a low price or may even be put on for a small credit. At RMC one speaker demonstrated this trade where a 12 strike put was sold for 0.30 and a 17 – 23 call spread was purchased for 0.30. The result of this spread is a transaction executed at no cost. The risk to the trade is if VIX is below 12. It was noted that VIX futures have settled under 12 only four times since 2008, although it has become more likely in the current market environment. The upside is six points with VIX settlement above 23.00.
VIX in the teens can be rich
Another misstatement that plagues VIX is that it is low, or more specifically too low. VIX is the market’s expectation of realized volatility over the next thirty days. To be honest, if someone is certain that VIX is too low that means they have knowledge of what is going to happen in the equity markets over the next 30 days. We don’t know if VIX was too low or too high until 30 days have passed. Again, if someone states that VIX is too low or too high with certainty they are in possession of some very valuable information. ‘Knowing’ that VIX is mispriced should be kept to oneself and the individual with this information should place trades based on what they know.
Combining RUT and SPX options is a great way to spread long versus small cap stocks
One of the strategies demonstrated for taking advantage of a relative view of large cap versus small cap stocks involved combining options on the Russell 2000 (RUT) and S&P 500 (SPX) into a single strategy or position. In 2013 RUT outperformed SPX by almost 10%. This year the tables have been turned with SPX beating RUT by almost 10%. Bullish SPX spreads in 2014 combined with bearish spreads in RUT were demonstrated as an effective way to benefit from the different performance of large cap versus small cap stocks.
European demand for US Option trading is growing
One of the sessions at CBOE RMC featured a study discussing different trends in the US option market. Something that really stood out for me was the growing use of the US option market by all levels of European traders. Apparently brokerage platforms in Europe have opened up to giving retail traders enhanced access to the US markets. The result is increased interest and trading volume coming from that part of the world into the US option markets.
VIX is a global risk measure
VIX is considered a global measure of risk. We often say this at CBOE, but being in Europe and hearing this from the European derivatives community just reinforces this belief. A trading idea that was floated by one presenter involved being long volatility in a region where there may be higher volatility while being short VIX at the same time. The idea is to take advantage of the carry in VIX options or futures while having a long position in a derivative based on a volatility index that would react more to a regional volatility event.
VIX is about market risk, not just tail risk
We often think of a long VIX option or futures trade to be a position that will benefit from some sort of ‘tail event’ or black swan. Historically VIX rises when the S&P 500 falls, but VIX also moves higher in front of potential market moving events. If an important economic event happens to result in the S&P 500 dropping around one percent, that would not be considered a tail event, but would benefit traders that are long VIX options or futures.
VXTYN futures may be a game changer
I mentioned VIX as a global risk indicator. The interest rate market could be considered more of a global market than the stocks represented in the S&P 500. US debt is held by investors around the globe and macroeconomic events tend to have more of an impact on interest rates than stocks. VXTYN futures, due out in early November, will give investors and traders focused on interest rates a new tool to hedge their exposure to volatility.
March 4 – 6, 2015 should be circled on your calendar
The next version of CBOE’s Risk Management Conference is scheduled from March 4 – 6 in Carlsbad, CA. I have been lucky enough to attend four RMC conferences and each one seems to top the previous edition. I can’t wait to head to southern California in early March to spend three more days immersed in discussions centered on option and volatility trading. More info on the next Risk Management conference can be found at www.cboe.com/rmc
For more extensive daily recaps from this year’s CBOE RMC Europe conference can be found at -
Producer Prices were flat in August, as expected. Markets up fractionally in first half-hour of trading. YHOO off $0.45 as most aware they own ~22% of BABA shares. Volatility as an asset class:
Currency option implied volatility increases into Scotland voting for independence
CurrencyShares British Pound Sterling Trust (FXB) overall option implied volatility of 12 is above its 26-week average of 8.
CurrencyShares Australian Dollar Trust (FXA) overall option implied volatility of 9 is above its 26-week average.
CurrencyShares Swiss Franc Trust (FXF) overall option implied volatility of 8 is at its 26-week average.
CurrencyShares Canadian Dollar Trust (FXC) overall option implied volatility of 11 is above its 26-week average of 8.
CurrencyShares Japanese Yen Trust (FXY) overall option implied volatility of 6 is below its 26-week average of 8.
Euro Currency Trust (FXE) overall option implied volatility of 8 is at its 26-week average of 8.
Wisdom Tree Dreyfus Chinese Yuan Fund (CYB) overall option implied volatility of 10 is at its 26-week average.
Options expected to be active @ CBOE: YHOO TSLA HUM ADBE FDX ORCL
I often find myself repeating this message but the more I do, the more it seems to sink in. The noise is getting louder out there and it could be quite harmful. Why is that? Because the future is so uncertain, and when we have the media, pundits, experts, analysts all claiming they can predict the next move – well, I just have to turn down the volume. The markets will ALWAYS tell us the next move. These reminders are always important but more so at this very moment, because so much is coming that could seemingly derail this market. I won’t ever try and predict or anticipate what will happen with markets, I’ll leave that to the market timers who are like broken clocks (they are right twice a day).
But where most are struggling is length of this bull market and not being hit hard when it ends. Again, another market timing call. The devastating financial crisis is still fresh in everyone’s head and if you had the courage to add down there in 2009 or just stayed with your trades you are probably far better off or at worst near even. Yet, with all of the reasons/excuses surrounding this massive 5+ year bull run there is nobody who wants to be left holding the bag if/when the market takes a nosedive. Remember 2007? We hit all time highs at a time of great vulnerability, but very few saw the warning signs. Fixes and corrections were made to the banking/lending system to seriously challenge whether that sort of crisis would repeat, but you never really know. A story for another day.
So, currently we have a market that exceeded some extreme levels in price action, ‘hung around’ for a bit and after a fantastic August and is correcting in price and time. That’s not a bad situation and likely gives some a chance to get set up for a big end of year run (see chart below). Heck, if you didn’t know it the SPX 500 is still up solid for 2014. With the talk of all the ‘events’ upcoming – the Fed meeting, Alibaba IPO and this or that, we have an economy that is growing modestly with little inflation, productivity is strong, consumer sales are starting to flicker some life and banks have started to lead again. Housing is still a drag on the economy. But after a tremendous month, isn’t the market entitled to a rest? Does a down week or month mean we ‘stick a fork in it’? Of course that’s not the case.
As for sentiment, worries still abound on the geopolitical crises across the globe, but unless you are using that as a selling excuse, there is not much to be done (which is interesting, because every time the market had come down of late following some news overseas it quickly rebounded – that seems to have changed now, when news hits the market doesn’t blink). After reaching some pretty negative extremes a month ago the sentiment has become much more sanguine. The market structure is still healthy though a bit wobbly after a few distribution days. We’ll have to see how things shake out the rest of the month but for now players are showing some caution – and when that ‘wall of worry’ is up there is no better condition to go higher. Bob Lang, Senior Market Strategist option trading newsletter Explosive Options.
Volatility as an asset class
Yahoo (YHOO) is recently up 11c to $42.99 into the Alibaba (BABA) offering. September call option implied volatility is at 56, October weekly is at 55, October is at 50, November is at 44, January is at 37; compared to its 26-week average of 34.
VIX methodology for IBM (VXIBM) up 6.9% to 20.07, above its 50-day moving average of 17.27. cboe.com/VXIBM
VIX methodology for Goldman Sachs (VXGS) up 6.8% to 20.06, above its 50-day moving average of 19.03. cboe.com/VXGS
VIX methodology for Apple (VXAPL) down 3.9% to 24.60, below its 50-day moving average of 26.67. cboe.com/VXAPL
VIX methodology for Amazon (VXAZN) up 12.4% to at 30.72, above its 50-day moving average of 29.26. cboe.com/VXAZN
VIX methodology for Google (VXGOG) up 7.3% to 25.87, above its 50-day moving average of 21.40. cboe.com/VXGOG
Actives at CBOE: AAPL TWTR TSLA BAC AMZN AA GILD NFLX C YHOO
Stocks with increasing volume @ CBOE: AVNR GPRO WLB WAC
CBOE DJIA BuyWrite Index (BXD) down 5c to 270.35, compared to its 50-day moving average of 268.70 cboe.com/micro/bxd/
CBOE Volatility Index (VIX) up 70c to 14.01. VIX September 14, 15, 16, 17, 18 and October 20 calls are active on 375K contracts @ CBOE cboe.com/VIX
iPath S&P 500 VIX Short-Term Futures (VXX) up 2.6% to 29.35
CBOE S&P 500 Short-Term Volatility Index (VXST) is recently up 16.2% to 15.43; compared to its 10-day moving average of 12.21. stks.co/r0CS2
CBOE DJIA Volatility Index (VXD) up 5.5% to 13.33; compared to its 10-day moving average of 12.21.
CBOE Nasdaq-100 Volatility Index (VXN) up 12.1% to 16.44; compared to its 50-day moving average of 14.04.
S&P 100 Options (OEX) recently is recently down 86c to 882.20 after China’s factory output grew at its weakest pace in nearly six-years
Empire State bounced back as expected, following a sharp drop in the previous month. Industrial Production fell 0.1% in August (+0.3% expected). Oil down, Gold a little higher; 10-year dips below 2.59%. Triple Witch, Scottish vote and Alibaba (BABA) should be on the watch list this week. How ’bout those (Chicago) Bears! Volatility as an asset class:
Terex (TEX) is down $2.70 to $32 in the premarket after the aerial work platforms equipment company lowered Q3 guidance to 55c-65c, compared to consensus 79c. Overall option implied volatility of 31 is below its 26-week average of 33.
AngloGold (AU) is up $0.58 to $14.03 after the gold producer decided not to proceed with restructuring and capital raise. Overall option implied volatility of 36 is below its 26-week average of 39 according to Track Data, suggesting decreasing price movement.
Anheuser-Busch InBev (BUD) is up $3.19 to $114.12 in the premarket on reports that SABMiller (SBMRY) has approached Heineken (HINKY) about an offer for the brewer to help defend itself against a possible takeover attempt by Anheuser-Busch. Overall option implied volatility of 18 is near its 26-week average of 19.
Options expected to be active @ CBOE: YHOO BUD AAPL CTSH DHR CREE TEX AU
CBOE volume Sept 12; 1,352,531 calls, 785,721 puts, 2,138,252 total CBOE.com
The S&P 500 was down just over 1% last week and VIX reacted with a rise in to the 13’s. You can also say that VIX rose 10%, but I think that overstates the reaction to the market selling off a little. It feels like we have rebounded so many times when the S&P 500 moves down a couple of percent that traders have tired of preparing for the continued sell off that never comes. VIX finishing the week at 13.31 when a 1% drop tells me that we really have reached complacency among market participants.
I did find the September VIX future at a 0.74 premium to the index kind of interesting. This shows more concern than the spot index, especially when you consider that there are only two trading days remaining until VIX settlement this coming Wednesday on the open. Expect VIX and the September contract to begin to converge over the next couple of days. As far as whether the index rises of the future drops, that one is a pretty tough call.
The emerging market sector had what may be kindly referred to as an awful week last week. The iShares Emerging Markets ETF (43.79) losing over 4% can be interpreted as a bad week and that is how VXEEM took the price action rising over 20% in reaction to the drop in emerging market stocks.
The price of oil came under pressure last week with the US Oil Fund ETF (USO – 34.37) losing about 1.5%. OVX can rise when the price of oil breaks what appears to be resistance or support, in this case OVX rose based on a breakdown in oil prices.
Gold also broke what appeared to be pretty strong support at 120.00 for the Gold ETF (GLD – 118.38). The next stop is a couple of points lower in the 116 range which is the lowest we have seen GLD in years. With GLD breaking out of the 120.00 – 130.00 range that has dominated most of 2014 GVZ reacted with a pretty dramatic move to the upside.
After a couple of weeks on the road for CBOE I’m back home and playing some catch up. Before getting to earnings, there were a few changes to the list of securities with Weeklys available. First, the additions to the list over the past couple of weeks –
A few names also dropped off the list –
Now on to the fun stuff…
There were only four stocks with short dated options reporting next week, but a couple are definitely worth keeping an eye on. Note the average moves for Rite Aid Corporation (RAD – 6.55) and NQ Mobile Inc. (NQ – 6.06) below.
All four of the volatility indexes that use SPX options as inputs rose last week. VXST rose, off an admittedly low base, by almost 30% while VIX was up 10%. Longer dated volatility was higher as well. The relationship between VXST and VIX, which I wrote about more extensively in the previous blog, tends to make me ponder the mind of the market. Basically VXST at a discount to VIX, even slightly, can be read that the equity market should rebound as it has done over the past two plus years. Even with PPI and the FOMC this next week and the dreaded months of September and October not behind us volatility indicates no fear in the markets.
I rarely review the previous week’s volatility trading data and wonder what is going on in trader’s minds. Looking at VXST this past week I have an idea of what they are thinking, I just find it confusing to read headlines with respect to what I see in the numbers. VXST rose last week, that’s expected with the S&P 500 down 1%. However, VXST finished out the week at a slight discount to VIX. I can understand traders being conditioned to the S&P 500 always (at least for a couple of years) rebounding from small drops. But VXST didn’t even follow the pattern of running up more than VIX, just to come down when the S&P 500 rebound. I sort of get that, but when I look to next week’s economic calendar I truly am surprised that VXST closed a little lower than VIX on Friday.
The curve also perplexes me at bit. A Friday headline regarding the stock market read “Red Across the Board on FOMC Meeting Jitters”. The volatility markets don’t necessarily show that being the cause of weakness in stocks. Look at the curve below and take note that the VXST future expiring on Sep 17th is at a premium to the Sep 24th future. The Sep 17th contract expires just before the FOMC announcement Wednesday afternoon. If the market were really nervously focused on the outcome (and market reaction to the announcement) that Sep 24th contract would be at a premium to the contract that will be off the board as the Fed speaks.
The S&P 500 gave back more than the Nasdaq-100 and Russell 2000 last week. Although using the phrase “gave back” with respect to the RUT can be a misstatement since the small cap index is basically flat for 2014. RVX was up, as would be expected with RUT down, but not as much as the other two broad based volatility indexes quoted at CBOE.
One of the benefits of using covered calls or cash secured put positions in lieu of purely owning an underlying market or stock can be lower volatility. BXM, BXY, and PUT displayed that this week with the S&P 500 dropping over 1% and each of the strategy oriented indexes moving lower, but not to the extent of the drop in the overall stock market.
For the year, PUT overtook the total return for the S&P 500 last week. PUT was down 0.05% while the S&P 500 total return index was down 1.05%. Both BXM and BXY gained ground on the S&P 500 as well. This coming week is expiration week for standard option contracts. That means those of you tracking these three strategy indexes would roll your positions mid-morning on Friday to October SPX calls and puts.
Your weekly recap of CBOE features, options industry news and VIX and volatility-related articles from print, broadcast and online and social media outlets.
Financial Movers and Shakers
Each year Crain’s selects and highlights movers and shakers in the Chicago business sector. Once again, CBOE’s CEO Ed Tilly and Chairman of the Board William Brodsky are recognized for their commitment to the success of finance in Chicago.
“Who’s Who In Chicago Business” – Crain’s Chicago Business
VXTYN’s A Coming
First announced at CBOE’s Risk Management Conference in Europe last week, futures contracts on the CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (VXTYN) will launch November 13, 2014. Patterned after the VIX, these contracts offer a new dimension in the trading of volatility.
“CBOE To Launch Fixed-Income Volatility Futures” – Markets Media
VIX Tricks of the Trade
Usage of the CBOE Volatility Index (VIX) as mentioned in previous roundups has evolved. The VIX constantly measures expected volatility requiring traders to think ahead. From VIX Futures to Options there are a few tricks of the trade.
“A Few Tricks for Trading VIX” – Steve Sosnick, Barron’s
Open Says Me
Alibaba has been one of the most anticipated and talked about IPO’s of 2014. Reports have stated that shares in Alibaba will begin exchanging hands Friday, September 19, 2014. If you trade them, options will come. Here is a look at the requirements as well as timeline for options on Alibaba to begin trading on exchanges.
Alibaba – Premiering Soon at CBOE, Marty Kearney, CBOE Options Hub
With volumes down in the traditional stock market, Weekly’s, short-term options created by the CBOE in 2005 has seen a surge in contracts traded. Up about 72 percent from a year ago, Weekly contracts continue to be a big draw for investors.
“S&P 500 Short-Term Contracts See Trading Volume Jump” – Callie Bost, Bloomberg
The Best of Both Worlds
Floor trading is not only good for markets, but a fundamentally import aspect of the trading culture. Many exchanges, including CBOE, have maintained their trading floor presence alongside electronic trading because the human touch matters.
“Researcher Argues for Preserving Floor Trading” – Bradley Hope, Wall Street Journal
The Standard & Poors 500 Index ($SPX) has made repeated new all-time highs — both intraday and closing — over the past three weeks. This action has, of course, resulted in a “bullish” $SPX chart. The bears have made several attempts to sell the market intraday, but each time it seems to quickly regain strength especially late in the day.
Equity-only put-call ratios have remained bullish, as well. Market breadth has been week. As a result, both breadth oscillators registered sell signals on Monday and Tuesday of this week. These sell signals are still in force.
Volatility indices have bounced around at relatively low levels. That is bullish, in general. From the VIX chart, though, one can see that $VIX is beginning to display an uptrend. A confirmed uptrend would be a bearish sign for stocks.
In summary, we remain bullish as long as $SPX does not break down below support and as long as $VIX does not rally above 13.50.
August Retail Sales up 0.6%, X-Autos higher by 0.3%. X-Autos matched July, and the lowest reading in 7 months. Eyes on Europe. An article on anticipated Alibaba (BABA) options listing in this space yesterday, scroll back and check it out. Markets flat to lower at opening bell. Volatility as an asset class:
Ulta Salon (ULTA) is up $16.77 to $114.25 in the premarket on Q2 earnings rising 35% and increasing fiscal-year guidance. September call option implied volatility is at 79, October is at 42, December is at 35; compared to its 26-week average of 37.
Conversant (CNVR) is up $8.42 to $35.13 on the digital marketer being acquired by Alliance Data (ADS) for $2.3B. Overall option implied volatility of 25 is below its 26-week average of 34.
Hertz Global (HTZ) is up $1.15 to $28.90 in the premarket after reaching an agreement-in-principle with Carl Icahn to add three representatives to its board. Overall option implied volatility of 37 is near its 26-week average of 36.
Options expected to be active @ CBOE: YHOO ULTA HTZ CNVR ADS MCP
CBOE SKEW INDEX (SKEW) at 132.79, compared to its 50-day MA of 133.21. 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.
We don’t have to wait “One Thousand and One Nights” for the Alibaba IPO. We have seen several reports about Alibaba (BABA is the expected stock symbol) being priced on Thursday September 18th and shares trading Friday, September 19th. When all is finalized we will be back to confirm everything, but this is a good time to review the listing process for options at CBOE and other exchanges.
Assuming BABA has it’s IPO and tentatively begins trading shares of stock on Friday, September 19th, and assuming all goes well with the IPO, the process begins.
The exchanges and Options Clearing Corp (OCC) have a few items to verify before listing options. For example, the number of shares in float, the amount of stock traded (should reach that easily with the IPO), and a few other minor requirements.
On the 6th business day of stock trading (this would include Friday the 19th so the 6th business day would be Friday September 26th), if all the requirements are met, the CBOE (and other exchanges wishing to list options on BABA) would be expected to petition the OCC to add BABA options. The OCC would determine which Cycle (Jan-April, Feb-May or March-June), which strike prices would be listed and give approval to list options the following business day, Monday September 29th. This approval and listing procedure has been around for many years and has worked pretty smoothly.
Will there be BABA Weekly’s or LEAPS® options available? Maybe not right away, but if investors are looking for those products they could be added pretty quickly. Will there be 1-point strikes or 2.50 point strikes? I’m not sure, we will probably know by (a guess) September 17th.
So let’s see if the BABA IPO is priced September 18th as expected and how the first day of stock trading goes Friday the 19th. If it goes well, we anticipate Monday September 29th would probably be the first day to trade BABA options.
Volatility as an asset class
Restoration Hardware (RH) is recently down $3.67 to $78.42 after the high end home retailer reported less than expected Q2 revenue. September call option implied volatility is at 39, October is at 34, November is at 35; compared to its 26-week average of 48.
Five Below (FIVE) is recently down 22c to $42.13 after the discount retailer reported Q2 profit more than doubled. September call option implied volatility is at 39, October is at 35, November is at 34, February is at 35; compared to its 26-week average of 44.
Teucrium Corn Fund (CORN) is recently down 48c to $24 as corn trades at four-year low after the USDA raises U.S. corn yield forecast to record. Overall option implied volatility of 27 is near its 26-week average of 26.
VIX methodology for Apple (VXAPL) up 2.5% 25.77, below its 10-day moving average of 27.95. CBOE.com/VXAPL
VIX methodology for iShares MSCI Brazil Index Fund (VXEWZ) up 0.8% to 32.74, 50-day moving average of 26.29.
Actives at CBOE: AAPL TWTR TSLA OREX BAC AMZN RSH NFLX C FB
Stocks with increasing volume @ CBOE: FEYE GPRO ADSK ORCL S JCP BBRY
CBOE DJIA BuyWrite Index (BXD) up 1c to 270.43, compared to its 50-day moving average of 268.63 cboe.com/micro/bxd/
CBOE Volatility Index (VIX) up 15c to 13.03. VIX September 13, 16 and October 18, 20, 25 calls are active on 218K contracts @ CBOE cboe.com/VIX
iPath S&P 500 VIX Short-Term Futures (VXX) up 0.9% to 28.31
Weekly Claims rose to 315 K, second week in a row above 300 K, highest number in three months and above same number last year. Prety good option day yesterday, as ~17 mm contracts trade. 650K SPX, 560K VIX contracts and 154 K VIX futures trade hands. Presidents’ speech didn’t impress some traders, Chinese economic numbers and European uncertainty (Ukraine, Scotland) overhang market on 9.11. Volatility as an asset class:
Twitter (TWTR) is down 0.71 to $52.20 in the premarket after announcing its intention to offer $650M aggregate principal amount of convertible unsecured senior notes due 2019 and $650M aggregate principal amount of convertible unsecured senior notes due 2021 in a private placement transaction. September weekly call option implied volatility is at 47, September is at 39, October is at 40, November is at 50; compared to its 26-week average of 53.
JDS Uniphase (JDSU) is up $1.80 to $13.85 after announcing that it will separate into two publicly traded companies. Overall option implied volatility of 35 is near its 26-week average of 36.
Lululemon Athletica (LULU) is up $5.24 to $43.70 in the premarket on better than expected Q2 results and guidance. September weekly call option implied volatility is at 109, September is at 66, October is at 50, January is at 38; compared to its 26-week average of 38.
Options expected to be active @ CBOE: TWTR GPRO RH JDSU FIVE LULU ULTA AKS YHOO ULTA KR MW
CBOE SKEW INDEX (SKEW) at 130.53, compared to its 50-day MA of 133.34. 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.
Apple options have dominated the US single stocks landscape for several years now, with current average daily volume near a million contracts and AAPL option trades making up nearly 12% of the total US single-stock volume. While options are listed on 3670 other stocks, most professionals will tell you that AAPL options are by-far the most liquid contracts available, with narrow bid-offer spreads and large size creating a near frictionless market for traders.
Apple option volume had been increasing recently, as shares finally surpassed the $100 post-split level and anticipation of the iPhone 6 event started to build. A volume record of 2.3 million contracts was set on September 3rd but the real fireworks were yesterday as shares swung 6% on headlines came out of the Cupertino event.
Nearly 3 million Apple options were traded on the day, blasting through the prior non-dividend record of 2.3M set just last week. Flow was brisk before the event started, with one block standing out as a trader paid 23c for 10K upside short-dated calls.
Prior to 1pm ET we saw about 895K contracts trade, with calls leading puts 2:1 and 44% of the volume in weeklys expiring 9/12. Heading into the presentation shares were trading near $100 the 9/12 100 straddle was quoted $4.17. Short-term weeklys into events and earnings are a reasonable proxy for the expected share move to come.
As dozens of headlines began to hit (particularly those about ‘Apple Pay’), shares rallied to a new all-time high over $103 by 2pm ET. Option volume during that hour was 741K contracts, but when Tim Cook moved onto the iWatch sentiment quickly changed, with shares selling off nearly 6.5% over the next hour to a low near $96. Option volume peaked during this time- with 1 million contracts (the entire ‘normal’ daily volume for AAPL) trading between 2pm and 3:15ET. By the end of the day AAPL had regained some ground and closed at 97.99- and the 100 straddle was at $2.81. Calls led puts 2:1 and short term weeklys dominated the scene, making up 53% of the total. 101, 102 and 103 strike calls expiring 9/12 were most active, with well over 100K of each contract changing hands. Net open interest growth was only 448K contracts which indicates a great deal of day-trading was going on.
Implied volatility in Apple options saw notable movement as well. VXAPL, the VIX for Apple options, opened the session north of 30 and then fell to low of 24.53, or 18.5%, as the event unfolded, before rebounding to 27.25 into the closing bell. The index is down another 1.23 points, or 4.5%, to 26 this morning and smack-dab in the middle of the 52-week range (37.26 from 10/28 and 17.96 on 5/13) as uncertainty for shares persists now that the highly-anticipated iPhone 6 has passed.
Kudos to the 12 options exchanges who handled the surge in flow without a hiccup too!
Volatility as an asset class
Bank of America (BAC) is recently up 8c to $16.22 on seeing reducing branches to 5,000 by end of year. September and October call option implied volatility is at 19, December is at 20; compared to its 26-week average of 23.
eBay (EBAY) is recently down $1.62 to $51.11 in the premarket after being downgraded to Neutral from Overweight at Piper Jaffray on Apple’s (AAPL) new payment system is likely to disrupt the mobile payments market. September and October call option implied volatility is at 25, November is at 23, January is at 22; compared to its 26-week average of 26.
Twitter (TWTR) is recently up $1.79 to $52.40 on UBS upgrade to Buy from Neutral after its advertising channel checks indicated the company is seeing positive momentum with objective-based campaigns. September weekly call option implied volatility is at 47, September is at 39, October is at 40, November is at 50; compared to its 26-week average of 53.
VIX methodology for Apple (VXAPL) down 6.3% 25.53, below its 10-day moving average of 27.97. CBOE.com/VXAPL
VIX methodology for iShares MSCI Brazil Index Fund (VXEWZ) up 0.6% to 32.38, 50-day moving average of 26.12.
Actives at CBOE: AAPL TSLA TWTR YHOO PBR BAC FB AMZN C KO MRK GILD MCD PBR
Stocks with increasing volume @ CBOE: HTZ MTG GTAT AU PANW VNET GPOT MOBL POT
CBOE DJIA BuyWrite Index (BXD) up 14c to 270.24, compared to its 50-day moving average of 268.58 cboe.com/micro/bxd/
CBOE Volatility Index (VIX) down 1c to 13.49. VIX September 14, 15 and 18 calls are active on 387K contracts @ CBOE cboe.com/VIX
iPath S&P 500 VIX Short-Term Futures (VXX) up 0.1% to 28.25
Wet Chicago and soft opening. Crude down, metals up, dollar mixed. Traders watching yield creep higher. Volatility as an asset class:
Apple (AAPL) is up $0.06 on 22 million shares in the first 45 minutes, a day after the much-anticipated product launch event. September weekly call option implied volatility is at 36, compared to a level of 59 before the open on September 8, September is at 28, October is at 26, December is at 25, January is at 24; compared to its 26-week average of 25.
VIX methodology for Apple (VXAPL) is at 27.25, compared to its 10-day moving average of 26.85. CBOE.com/VXAPL
Krispy Kreme (KKD) is off $0.67 on Q2 profit increasing 22% on sales growth. September volatility elevated into Q2 and guidance. September call option implied volatility is at 76, October is at 49, January is at 40; compared to its 26-week average of 44.
Palo Alto (PANW) is up $6.24 to $95.52 after the maker of hardware and software for computer-network security forecast revenue for the current quarter higher than analyst expectations. September weekly call option implied volatility is at 93, September is at 56, October is at 46, December is at 41; compared to its 26-week average of 46.
Options expected to be active @ CBOE: PANW KKD TWTR MBLY EBAY AAPL
CBOE SKEW INDEX (SKEW) at 136.88, compared to its 50-day MA of 133.45. 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.
Volatility as an asset class
Apple (AAPL) is recently up $1.22 to $99.64 into its much-anticipated product launch event. September weekly call option implied volatility is at 56, September is at 35, October is at 31, December is at 25, January is at 24; compared to its 26-week average of 25.
VIX methodology for Apple (VXAPL) is down 3.6% to 29.22, above its 10-day moving average of 28.07 into a company sponsored September 9th event. CBOE.com/VXAPL
Yahoo (YHOO) is recently down 72c to $41.08 on the second day of the Alibaba roadshow. Yahoo September weekly call option implied volatility is at 42, September is at 54, October is at 56, November is at 46, January is at 39; compared to its 26-week average of 34.
McDonald’s (MCD) is recently down 85c to $91.64 after reporting its comparable sales were down 3.7% worldwide in August and that its China supplier issue will negatively impact its Q3 EPS by 15c-20c. September call option implied volatility is at 13, October is at 12, November and January is at 13; compared to its 26-week average of 14.
Actives at CBOE: AAPL TSLA TWTR YHOO PBR BAC FB AMZN GILD C
Stocks with increasing volume @ CBOE: LNG VNET GTAT EMC WMB UAL MU
CBOE DJIA BuyWrite Index (BXD) down 8c to 270.30, compared to its 50-day moving average of 268.52 cboe.com/micro/bxd/
CBOE Volatility Index (VIX) up 37c to 13.03. VIX September 13, 14 and 15 calls are active on 257K contracts @ CBOE cboe.com/VIX
iPath S&P 500 VIX Short-Term Futures (VXX) up 1.1% to 27.81
There is no group that is more disjointed and lacking trend than retail. Just when you think the group is going to fully tank, a Home Depot or Tiffany comes along and shows stellar numbers. And when it appears consumer spending may be turning around, we see Abercrombie & Fitch or Guess lay an egg. Retail is tough, but not impossible. There have been all sorts of excuses about the rapid drops in consumer spending, yet we see auto sales peaking, Home Depot talking about big ticket items selling at a brisk pace and Signet Jewelers selling very high end merchandise over this last quarter.
I grant you that positive results are lumpy – Williams-Sonoma followed up a stellar quarter in May with a wretched one in August, bringing the stock back down to Earth. How will it effect a name like Restoration Hardware, who reports this week and is coming off a stunning report in June? For some of these retailers it’s a ‘crap shoot’ but for others there are some important trends taking hold.
Trying to game any stock around earnings is difficult but when talking retail it is nearly impossible to get it right consistently. Just when you think a blowup will occur the company delivers a blowout quarter and squashes your dreams of a big payday to the downside. There is a high correlation between spending and economic/job growth, yet even wealth creation has trickle down effects on the economy, especially retail. Further, those not ‘effected’ much by a downturn are likely to continue purchasing goods regardless. Where am I going here? It appears high-end retail/products is where the action will be over the holidays and into early 2015. Many of the trends in this group are positive and showing growth momentum which can be sustained by stronger buying power and price raises that stick.
Automakers continue to roll and sell vehicles. Karmax and Autonation have been talking about pent up demand for months and are posting record numbers lately. China is another area going unnoticed. Still a strong economy, the consumer’s appetite for high end goods is insatiable and many of our retailers will satisfy that need.
Some of the names in the high-end segment include products from Apple, GoPro, Deckers, Ralph Lauren, Nike, Tiffany, Steven Madden and Vanity Fair. These products for the most part boast strong and growing margins that may not be vulnerable during a marked-down holiday period. In other words, customers will buy products regardless of any discounts – that is sustainability. Other names that should hold up well include Costco, Home Depot, Nordstrom and Macys. One retailer than nobody seems to give credit for making a profits is Amazon. Certainly the numbers do not lie, but they have such a large reach and are going to be key driver to online holiday shopping. As Amazon goes, so goes the holiday season.
It is no coincidence the charts of most of these names are in good shape are flashing buy signals.
To sum up, retail is one of the more difficult groups to play – especially with a worried or fickle consumer. However, this holiday season we are likely to see the biggest, best and brightest start to shine. Don’t miss your opportunity.
Overseas markets seeing contagion fears on Scottish independence vote. Spanish bonds higher, SPX off 7 points, VIX up 0.30 in first 20 minutes. MCD with huge drop in same-store-sales in Asia off $0.50. Volatility as an asset class
Apple (AAPL) up $1 in first half hour of trade to $99.36 into today’s press event. September weekly call option implied volatility is at 59, September is at 35, October is at 28, November is at 26, December is at 26, January is at 24; compared to its 26-week average of 25.
VIX methodology for Apple (VXAPL) is at 30.30, above its 10-day moving average of 27.66. CBOE.com/VXAPL
Annie’s (BNNY) is up $12.54 to $46.05 on the natural and organic packaged food company being acquired by General Mills (GIS) for $820M. Overall option implied volatility of 38 is below its 26-week average of 42.
Titan Machinery (TITN) is down $1.41 to 11.75 after cuts FY15 adjusted EPS view to 30c-60c from 70c-$1.00. September call option implied volatility is at 62, October is at 46, December is at 42; compared to its 26-week average of 37.
Options expected to be active @ CBOE: HDS HD BNNY GIS DKS CVX YHOO AAPL
CBOE SKEW INDEX (SKEW) at 132.91, compared to its 50-day MA of 133.49. 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.
The bulls appear to be in charge, judging from Friday’s bullish kick… bullishness that formed despite a lethargic week and despite the fact that stocks are still overbought from August’s big runup. Yet, being bearish or bullish at this point isn’t just a matter of taking the market’s current temperature.
The upside and downside for stocks is hashed out below, after a quick look at last week’s and this week’s major economic news.
Although there was a pretty steady stream of economic news last week, none of it was as interesting and important as Friday’s employment report. And, while the market responded favorably to that news, it wasn’t necessarily for a “good reason”. The jobs update was on the weak side of the spectrum, and assuming the Federal Reserve is going to nip any problems in the bud, investors gambled on a more dovish environment for the foreseeable future. Right or wrong, it’s what happened.
In any case, the basic gist of employment news was, a few more people are working, fewer are unemployed, and it was enough progress for the Department of Labor to say 142,000 (net) jobs were created last month. Those numbers slightly overstate the official stated increase in the number of employed individuals and the stated number of unemployed individuals… enough to whittle the unemployment rate down from 6.2% to 6.1%. The problem is, the pros were expecting the addition of 223,000 new payrolls.
While the news showed progress, it’s inadequate progress. That’s why investors presumed the Fed was going to stop any bleeding before it started in earnest. And, that’s why investors were willing to renew their buying effort to close out the week on Friday, regardless of the fact that stocks are overbought here. As for the actual employment trends, they are on the chart below:
All the rest of last week’s big data is on the following grid:
Volatility as an asset class
Apple (AAPL) is recently down 28c to $98.72 into a company sponsored September 9 press event. September weekly call option implied volatility is at 53, September is at 35, October is at 31, December is at 25, January is at 24; compared to its 26-week average of 25.
VIX methodology for Apple (VXAPL) is up 28c to 30.73, above its 10-day moving average of 27.70 into a company sponsored September 9th event. CBOE.com/VXAPL
Yahoo (YHOO) is recently up $1.30 to $40.89 on the start of the Alibaba roadshow. Yahoo September weekly call option implied volatility is at 43, September is at 57, October is at 52, November is at 42, January is at 37; compared to its 26-week average of 34.
Rackspace Hosting (RAX) is recently up $2.02 to $39.24 on CenturyLink (CTL) is looking to acquire the open cloud company says Bloomberg, citing sources. September call option implied is at of 67, October is at 48, December is at 41; compared to its 26-week average of 46.
Actives at CBOE: AAPL TSLA TWTR YHOO ABX PBR BAC FB AMZN MSFT
Stocks with increasing volume @ CBOE: ABX VALE PCLN SNDK SBH RBS NAVI LUK PPP TITN SONS YNDX HRB
CBOE DJIA BuyWrite Index (BXD) down 6c to 270.46, compared to its 50-day moving average of 268.45 cboe.com/micro/bxd/
CBOE Volatility Index (VIX) up 59c to 12.68. VIX September 17 and 18 calls are active on 109K contracts @ CBOE cboe.com/VIX
iPath S&P 500 VIX Short-Term Futures (VXX) up 0.3% to 27.55
Polling in Scotland showed the independence supporters leading for the first time, a week before the election. Profit taking, unrest in Ukraine, confusing export numbers out of China and UK uncertainty have sent bulls to the corral. CBOE Risk Management Conference Europe getting nice comments, a recap will be published in this space soon. Volatility as an asset class
Campbell Soup (CPB) is down $1.22 to $42.92 after the soup maker lowered its 2015 expectations. September call option implied volatility is at 21, October is at 19, January is at 17; compared to its 26-week average of 19.
Hertz Global (HTZ) is up $0.66 to $29.12 after announcing Mark Frissora is stepping down as Chairman and CEO. Overall option implied volatility of 35 is near its 26-week average of 36.
Multimedia Games (MGAM) is higher by $8.05 to $35.83 on Global Cash Access (GCA) purchasing for $36.50 per share, for an aggregate purchase price of approximately $1.2B in cash. Overall option implied volatility of 41 is near its 26-week average of 42.
VIX methodology for Apple (VXAPL) is higher this morning by $0.70 at 31.14, above its 10-day moving average of 27.07 into a company sponsored September 9th event. CBOE.com/VXAPL
Options expected to be active @ CBOE: BP GTAT AAPL YHOO FEYE PANW LULU FXB HTZ MGAM CPB BP RIO GE
CBOE SKEW INDEX (SKEW) at 137.49, compared to its 50-day MA of 133.49. 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.
CBOE S&P 500 BuyWrite Index (BXM) is off 0.22 at 1107.38 compared to its 10-day moving average of 1105.33 cboe.com/BXM
CBOE DJIA BuyWrite Index (BXD) lower by 0.12 at 270.38 compared to its 50-day moving average of 268.37 cboe.com/micro/bxd/
CBOE Nasdaq-100 Volatility Index (VXN) is up 0.30 to 13.54; compared to its 50-day moving average of 13.71.
A general takeaway from the CBOE RMC Europe conference last week is that the stock market seems ready for some sort of correction. You would not get that sense by looking at VIX and seeing a 12 (or lower) closing handle for every day over the past three weeks. However, looking at things in context, none of those closing levels have been below 11.00. We saw several 10’s back in June and July. Of course the S&P 500 is just over 1% higher than when we saw the last closing 10. I’m not saying VIX is high, but just pointing out that it is higher than it was when the S&P 500 made some of those other all-time highs this year.
The Russell 2000 continues to lag the Nasdaq-100 and S&P 500 in 2014. RUT was down slightly on the week while NDX and SPX were both higher. For the year RUT is up just over 0.5% while the other two broad based indexes with tradable volatility markets are up 13.86% and 8.62% respectively. The result has been RVX at a premium for most of 2014 relative to VXN and VIX. That premium is at the low end relative to VIX this week which may indicate a change in attitude about domestic stocks or US risk versus global risk.
VXST moved up a little on Monday, as it always does after a long weekend and worked higher into Friday’s employment report on Friday. Note that on Friday, with the S&P 500 under a little pressure, VXST actually opened lower. We are still getting a feel for how VXST acts around big economic numbers and it seems to display some of the behavior that we normally associate with individual stock implied volatility around an earnings event.
The curve flattened a bit with the employment report and a three day weekend behind us. Checking in on the VXST option market there are several lines with open interest of 1000 or more expiring next week. The VXST Sep 10th 15, 18, and 20 Calls all seem to be generating some noise.
Oil futures finished the week closer to 90.00 than 100.00. This continues to perplex me as the demand for energy seems to continue to increase while the supply side of the equation has the potential to be impacted by a gamut of potential issues. OVX moved up on the week, mostly in the early part of the week, based on a move lower in oil futures.
This past week I was lucky enough to get to participate in CBOE’s Risk Management Conference just outside of Dublin, Ireland. There was one session where the presenter asked for members of the audience to raise their hands if they feel the emerging market sector is a safe place to get equity exposure these days. A good number of attendees raised their hands and he noted how interesting it is, with EEM up 10% this year, that people feel safe about the emerging market sector when no one was recommending putting money into emerging market stocks at the beginning of 2014. VXEEM, at pretty low levels, reflects this same positive outlook for EEM.
If people like EEM which is up 10% they must love EWZ (Brazil) which is up over 21% in 2014. However, Brazil is in its own little world, at least for the next few weeks, while we wait for national elections in early October. Hence the relative high level of VXEWZ which should come back down once the election result seems certain.
The most interesting thing showing up on the charts below should stand out to even the most casual volatility market. To use one of my mother’s favorite phrases (imagine the southern Alabama twang), “That VXEWZ curve just ain’t right”. No, it is not, however, it does tell a little story, and not the kind that contain a few white lies for illustration purposes. The drop from October (the first future to expire after the elections) to November can be taken as the market expecting quick resolution once the Brazilian election is over. Now whether the results will be positive of negative for Brazilian stock is another story.
The S&P 500 pulled out a gain for the week through shaking off what was called a bad employment report this past Friday. VXST and VIX rose as well for the week while the longer dated volatility indexes were down slightly. We have to attribute some of the VXST and VIX gains to rebounding from the three day weekend.
The long ETNs continue to suffer from no real sustainable move to the upside in VIX. VXX was down only 2.35% on the week, but it has given up over 35% for 2014. The short volatility ETPs (XIV and SVXY) both gained just over 2.3% and are both up about 29% for the year.
We go through periods where good news is good news for the stock market. Then there are periods where bad news is good for the market (like economy looks bad so the Fed will help). However, I rarely recall a period where all news was good news. Even war drums all over the place, but apparently that’s our current market environment.
PUT beat the S&P 500 Total Return by a tad this past week while BXM and BXY trailed slightly. For those of us that pay attention to these strategy indexes we are well aware that underperformance comes about during bull market periods. With the S&P 500 return up 10% this year the performance of all three strategy indexes is just as would be expected. They are holding their own and over the course of a couple of weeks can easily close the performance gap for 2014.
The final day of the 2014 edition of CBOE RMC Europe began with an excellent keynote presentation from Pete Clarke the Global Head of Equity Derivatives Strategy at UBS. He spoke on Global Equity Derivatives Trading Themes – Dislocations and Opportunities for a Diverse Investor Base. He discussed several trading themes but did end with a warning that there are still nickels to be picked up but investors and traders should be cautious as the steamroller seems to be getting bigger.
Yoshiki Obayshi, Founder of Applied Academics and Angel Serrat, Partner and Chief Strategist, Capula Investment Management teamed up for a widely anticipated presentation on Friday morning where they discussed Cross Asset Volatility Strategies for Tail Hedging and Alpha Generation. The day before it was announced that CBOE would commence trading on VXTYN futures in November and this area was touched on during their presentation along with other relative trading strategies and how to go about implementing those ideas.
Pin Chung from R+V International Business Services Limited and Rachid Lassoued from Bloomberg were co-presenters in a session that was found useful to insurance companies and other variable annuity market participants. In Management of Asian and Cliquet Option Exposures for Insurance Companies they covered the design of equity-linked insurance products and how to handle risk through hedging with both listed and OTC options.
One of the final presentations of this year’s conference covered Structured Products and Their Impact on Markets: What You Need to Know. Equity Derivatives Specialist Delphine Leblond-Limpalaer from Societe Generale and Peter Murphy Founder of PM Murphy Limited discussed the structured product market, the different market participants, and their thoughts on how this market is evolving.
I personally found the last presentation of the conference one of the most educational. Danile Danon from Assenagon Asset Management and Tim Edwards from S&P Dow Jones Indexes offered up a presentation on Correlation and Dispersion, What They Mean and How to Trade Them. During their presentation they clearly showed the impact of dispersion on market participant performance along with discussing examples of how trading strategies are implemented.
This was my fourth RMC since joined the Chicago Board Options Exchange. I know I am biased, working at CBOE and all, but I continue to feel lucky that part of my job allows me to be exposed to so many quality market practitioners two times a year. I am already looking forward to March 4 – 6 when the US version of RMC returns to Carlsbad, CA.
Earlier today in Dublin, Ireland. Yoshiki Obayashi, Founder and Managing Director, Applied Academics, delivered a presentation at the CBOE Risk Management Conference Europe in Ireland on the subject of the CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (VXTYN) and interest rate volatility.
The VXTYN Index measures the expected volatility of the price of 10-year Treasury Note futures. Futures on 10-year Treasury Notes are the most actively traded of all U.S. futures on U.S. Treasuries. VXTYN provides a measure of expected volatility specific to the fixed income market. This is important because the volatilities of equities and Treasuries have often followed distinct paths. The index is calculated from CBOT’s options on 10-year Treasury futures using the same methodology as VIX®. VXTYN represents the variability of percentage changes in the price, as opposed to the yield of 10-year Treasury notes. Price and yield volatility are related to each other through duration, and yield volatility is typically higher than bond price volatility. As noted in a recent CBOE Blog, the VXTYN Index rose by more than 55% in the months of Sept. 2008 and May 2013.
Futures trading on the VXTYN is scheduled to begin in November.
Here are some of the key points made by Yoshiki Obayashi in his presentation –
- The correlation between VXTYN and diversified bond portfolios kicks up when concerns about interest rate volatility become heightened.
- The correlation between VXTYN and diversified bond portfolios have been significantly elevated since April 2013, indicating persistent investor anxiety about the future interest rates movements.
- The dynamics between VXTYN and returns on portfolios of specific fixed income assets, such as mortgages, muni bonds, and TIPS all differ from one another.
- On sharp drawdowns in bond portfolios, VXTYN tends to experience outsized movements, thereby smoothing bond portfolio returns hedged by VXTYN.
- The volatility term structure of Treasury options differs from that of S&P options, and suggests that the roll-down of VXTYN futures may not be as severe as that of VIX futures.
-CBOE’s VXTYN and SRVX indexes are not ad hoc weighted averages of model-dependent ATM volatilities, but are grounded in a rigorous theory of fixed income variance pricing.
For more information, including charts, data, and new research papers, please visit the VXTYN webpage at www.cboe.com/VXTYN.
Informative presentations on “Structured Products & Their Impact on Markets: What You Need to Know” at the CBOE Risk Management Conference Europe on Sept. 5th in Ireland by –
(1) Ms. Delphine Leblond-Limpalaër, Equity Derivatives Specialist, Société Générale, and
(2) Mr. Peter Murphy, Founder, P. M. Murphy Ltd.
Topics covered by the speakers included –
- Structured products around the world: who and what
- How the market is evolving: drivers and outlook
- A significant impact of the traditional vol/skew relation
-The other major parameters: Repo and dividends
Many structured products have optionality features, and in past years there have been structured products that tracked the returns of CBOE indexes such as the CBOE S&P 500 BuyWrite Index (BXM) and the CBOE S&P 500 PutWrite Index (PUT).
PRESENTATION BY PETER MURPHY
Mr. Murphy said his firm provides (1) Investment advice and portfolio construction mainly for high-net-worth clients on a fee-only basis; (2) Distribution of investments (structured products and funds) to other advisers, stockbrokers and others; and (3) Sub-advisory mandates to funds (for example, a multi-asset fund looking to run a structured product strategy within the fund). Mr. Murphy said his clients want strong returns but most clients are not aware of investment concepts such as gamma and theta.
He said that the most common structured products include –
(1) Autocallable bonds = 65-70% of market (estimate for UK market) (a) Classic autocall based off an index or indices; (b) Defensive autocall (index or indices), (c) The above but the underlying is a stock basket.
(2) Reverse convertible. Coupon of (say) 6% annually as long as the underlying index is above say 80% of its starting level.
(3) Hybrid of those two: Autocallable above 100%, coupon payable above 80% and a European protection barrier above 60%
(4) Not so common but very interesting: Twin win on an index, i.e., straddle
All of the above have conditional capital protection, usually between 50-70% of strike and can be American but most often European barrier.
Mr. Murphy said that in the future it is possible that we will see — More institutional use of structured products; Wider variety of underlyings; Better quality product (when interest rates go up!); and Possible alternatives to using a zero coupon bond as the capital protection.
PRESENTATION BY DELPHINE LEBLOND-LIMPALAER
In her presentation on structured products, Delphine Leblond-Limpalaër noted that –
- Variable annuities are popular in the USA, while autocallables and capital guaranteed products are popular in Europe.
- Differences across regions are driven by product, liquidity, balance of flows.
- Asia is all about volatility and skew.
- Europe focuses on dividends and repo.
OPPORTUNITIES: in all cases the slope is key. There are a lot of opportunities for those who know the flow.
Your weekly recap of CBOE features, options industry news and VIX and volatility-related articles from print, broadcast and online and social media outlets.
More Interest In Volatility
CBOE continues its legacy of innovation with its latest addition to their volatility suite. On November 13th, the CBOE/CBOT 10-year U.S. Treasury Note Volatility Index will begin trading under the symbol VXTYN.
“CBOE CEO Edward Tilly on Growing the Volatility Space” – CBOE Options Hub
“CBOE Plans Trading on Government-Debt Volatility Index” – Saumya Vaishampayan, WSJ
A New Reflection
The use of “weeklys” in the options market has continuously grown since their introduction, representing almost 33% of volume in the SPX. This is why “weeklys” will now be included in calculations for the VIX capturing a better snapshot of expected volatility.
“CBOE Adds Weekly Options To The VIX Mix” – Saumya Vaishampayan, WSJ
Your Daily Fix of VIX
This is for all the Vixoholics.
“Stocks in Summer Slumber as VIX Tumbles Most Since 2012” – Callie Bost, Bloomberg
“Does Back To School Mean Back To Volatility?”- JJ Kinahan, Forbes
Band of Brothers
In the past there have been instances in which erroneous trades have roiled markets caused by fat fingers or software malfunctions. For that reason, all 12 U.S. options exchanges have banded together to create rules that will protect investors when unintended trades take place.
“U.S. options exchanges craft rules to fend off turmoil” – John McCrank, Reuters
“Options Exchanges Unite for Erroneous Trade Rules” – John D’Antona Jr., Traders Magazine
I’m not sure if there are any new names on the Weeklys list as I wrote this a couple of weeks before you are reading it. CBOE is holding the annual European version of our Risk Management Conference so my access to the data needed to produce this blog is a bit limited. If you want to check the current list of Weeklys check out www.cboe.com/weeklys
The combination of a holiday week and where we are on the calendar resulted in a pretty light earnings calendar for next week. Here are the two stocks with short dated options available reporting next week -
Volatility as an asset class
TASER (TASR) is recently up 62c to $18.17 after New York City Police Department Commissioner William Bratton yesterday announced that the department would begin testing two types of body cameras that will allow police officers to record audio and video during their interactions with the public. The two devices that will be used during the pilot program are the Axon Flex, made by TASER (TASR) and the LE3 made by Vievu, the department stated. September call option implied volatility is at 49, October is at 50, December is at 49; compared its 26-week average of 50.
Avago (AVGO) is recently up $1.32 to $87.41 after Citigroup wrote that the dollar value of the company’s content in each iPhone is likely to double in the upcoming version of the device, compared with the current version. Overall option implied volatility of 27 is below its 26-week average of 31.
Gilead Sciences (GILD) is recently down $3.90 to $103 following reports about the company nearing a deal to offer its Sovaldi hepatitis C drug at a lower cost in poorer countries. September call option implied volatility is at 41, October and November is at 40; compared to its 26-week average of 33.
Actives at CBOE: AAPL TSLA NFLX HPQ AMZN X C TWTR HPQ GILD
Stocks with increasing volume @ CBOE: VALE MCP KORS WAG GM PCLN
CBOE DJIA BuyWrite Index (BXD) up 15c to 270.21, compared to its 50-day moving average of 268.37 cboe.com/micro/bxd/
CBOE Volatility Index (VIX) down 18c to 12.46. VIX September 15 and 17 calls are active on 202K contracts @ CBOE cboe.com/VIX
iPath S&P 500 VIX Short-Term Futures (VXX) down 1.1% to 27.68
Mr. Angel Serrat, Partner and Chief Investment Strategist of Capula Investment Management, delivered a presentation on Tail Hedging at the CBOE Risk Management Conference Europe on Sept. 5th in Ireland.
CHANGES FOR INDEXES DURING 2008 FINANCIAL CRISIS
One of the reasons for increased interest in tail hedging in recent years is the fact that, during the drawdown period from Oct. 31, 2007 through Feb. 28, 2009 several major “traditional” traditional indexes experienced big drops of worse than 50% (in total returns with reinvested dividends), while the CLL Index dropped 35.4% and the S&P 500 VIX Mid-term Futures Index rose 131.7% –
-61.6% MSCI Emerging Markets Index
-56.7% MSCI EAFE Index
-53.4% S&P GSCI Index
-52.0% Russell 2000 Index
-50.9% S&P 500 Index
-35.4% CBOE S&P 500 95-110 Collar Index (CLL)
131.7% S&P 500 VIX Mid-term Futures Index
After the 2008 drawdown, many investors became more concerned about higher correlations among certain asset classes during periods of market stress.
MR. SERRAT’S PRESENTATION
Mr. Serrat noted that there are a many possible strategies that one could consider for tail risk hedging. An investor could deleverage the portfolio to lessen tail risk. Mr. Serrat is exploring the use of VIX options to use in tail hedging. He presented a table in which he compared the Sharpe Ratio, standard deviation and correlations for the S&P 500 versus four tail hedge strategies: (1) dynamic tail risk strategy, (2) VIX (short maturity), (3) VIX (long maturity), and rolling of 3-month SPX puts. He noted that it can be difficult for a systematic hedging strategy (that consistently uses one hedging instrument in the same way) to add value over the long term, but he suggested that a dynamic strategy that uses a variety of hedging instruments and adjusts to market conditions does have the potential to add value with a higher Sharpe Ratio and lower standard deviation than the S&P 500 Index.
To learn more about hedging strategies, please visit www.cboe.com/Strategies
The bullish news is that $SPX has made a new all-time intraday high
for the last three days in a row. The not-so-bullish news is that $SPX
has failed to close at a new all-time on any of those days. This is the
action of a tired market.
The $SPX chart (Figure 1) remains bullish unless $SPX closes below
1985 — the upper horizontal line.
Equity-only put-call ratios remain on buy signals, however, despite the recent action.
Market breadth has been weakening of late. In fact, both
breadth indicators are on the verge of sell signals at this time. Any
further negative breadth will generate sell signals.
In summary, the indicators are becoming more mixed. But if $SPX
breaks down and $VIX breaks out, the situation will quickly change to bearish.
August Non-Farm Payroll fell to 142K, far below the 200K + estimates. The Unemployment Rate dropped from 6.2% to 6.1%. The gain of 142K jobs was the smallest rise in 2014. Stock Futures were off before the report but rallied back to unchanged, as some traders think this may give pause to the FED on increasing rates soon. CBOE Risk Management Conference Europe wraps up this afternoon. Volatility as an asset class:
BP (BP) is up $0.39 to $45.28 in the premarket after Citigroup raised its rating on the oil conglomerate to Buy from Neutral, saying the sell-off yesterday after a judge found the company grossly negligent for the Macondo spill presents a buying opportunity. September option implied volatility is at 21, October is at 18, November is at 17; compared to its 26-week average of 15.
Ciena (CIEN) is up $0.42 to $18.93 after the telecom equipment maker was upgraded by Goldman Sachs to Buy citing valuation, following the company’s Q3 results. Goldman has $26 price target for the shares. September call option implied volatility is at 35, October is at 37, January is at 38; compared to its 26-week average of 43.
Gap (GPS) is down $3.08 to $43.51 in the premarket following disappointing August comps. Overall option implied volatility of 23 is below its 26-week average of 26.
VIX methodology for Apple (VXAPL) is at 30.79, above its 10-day moving average of 26.46 into a company sponsored September 9th event. CBOE.com/VXAPL
CBOE Interest Rate 5 Year Note (FVX) at 17.14, compared to 10-day moving average of 16.59, 50-day MA of 16.57 into August job report.
Options expected to be active @ CBOE: KORS TUMI TASR GPS LOCO BP AAPL TSLA GLD BLOX COO
One of the final sessions of the day teamed up Daniel Danon, Senior Vice President, Portfolio Management and Structuring at Assenagon Asset Management and Tim Edwards, Director of Index Investment Strategy at S&P Dow Jones Indices. Their presentation was titled Correlation and Dispersion: What They Mean and How to Trading Them.
Tim Edwards began the presentation stating that many correlation traders are actually acting a dispersion traders. He notes that dispersion is a measure of the spread of performances among components of an index or portfolio. He showed a chart depicting dispersion of returns for the components of the S&P 500. Like volatility dispersion is a range bound and mean reverting measure. Both dispersion and volatility are highly correlated, but do have some differences. For instance in August 2011 there was low dispersion but high volatility in the markets.
While discussing dispersion he brings up the phrase “stock pickers market”. This is generally thought of as market components having low correlation. The feeling is this is not the correct way to think of a stock picker’s market. Return available from security selection is more naturally associated with dispersion. He followed on this thought by showing that “good” managers outperform when dispersion is high. Also, he points out that dispersion is directly connected to the degree of diversification achieved by a portfolio.
Dan Danon took over from Tim and showed some examples of how to go about trading dispersion. He states that the standard dispersion strategy involves trading index volatility versus the volatility of its components. He cites the Volatility Pair Index (VPI) which is a measure of implied volatility over 150 stocks worldwide minus the average implied volatility over 5 main stock indexes worldwide. An interesting historical example that Danon noted was based on the fiscal cliff situation at the end of 2013. He said that traders were focused on market volatility and bid up VIX while individual stock volatility was not impacted by this potential pending event. This created an opportunity to short index volatility and buy individual stock volatility.
Three methods of investing in dispersion were mentioned – using individual options, variance swaps, or volatility swaps. His firm is using options to implement their outlook. He notes that he is able to easily actively manage their position due to listed options being liquid and the pricing transparent. The next step beyond a basic dispersion trade which may also be thought of as a pair trade is to what he calls a selective dispersion trade. This method involves more active management and again lends itself to using listed options to implement the strategy.
A good resource to learn a little more about dispersion trading can be found at –
The speakers for this session were Pin Chung Chief Financial Officer and Chief Investment Officer, R+V International Business Services Limited and Dr. Rachid Lassoued, Head of Financial Engineering from Bloomberg. The session title was Management of Asian and Cliquet Option Exposures for Insurance Companies.
Dr. Chung began the session by reviewing Asian and Cliquet options. In general an Asian Option is an exotic option contract with a path dependent payoff. This means the payoff of the option depends on the average price of the underlying over a predetermined period of time. This average price can be either arithmetic or geometric. The option may also be an average price or average strike price option. The time period that the price is calculated may be over the whole life of the option, aver the last few days before expiration, or even over a select number of days agreed upon at inception of the trade. The strike may be fixed or floating and the majority of Asian options are European style with some also being American style.
Asian options may be useful when approaching foreign exchange markets when it is less risky to deal with an average over a period of time than a foreign exchange rate on a single date. An Asian option may also be useful if there is concern regarding price manipulation on a certain date or when a market is thinly traded.
Dr. Lassoued follow up discussing the state of the variable annuity industry noting that some firms have exited the market. Ability to create diverse payout profiles to meeting client’s needs and customize risk reward profiles through adapted structuring. Firms need solutions that allow them the create products that will generate a locked-in profit with no sensitivity to market moves. A core challenge is that traditional long dated hedges are not dynamic enough and may be costly. There is also basis risk associated with long dated hedges.
CBOE is now offering FLEX Index Options that have Asian and Cliquet style settlement. Historically insurance companies have had to trade in the over-the-counter (OTC) market to get the exposure that is offered through these exotic options. The introduction of Asian and Cliquet FLEX index options provides insurers an alternative to the OTC markets. These alternatives offer benefits like enhanced price discovery, transparency, and centralized clearing.
More information on the FLEX Index Options – www.cboe.com/flex
Pete Clarke was the keynote speaker for the final day at the CBOE Risk Management Conference in Europe today. Clarke is the Global Head of Equity Derivatives Strategy at UBS and his talk was appropriately titled Global Equity Derivatives Trading Themes.
As part of his opening comments he said that risk may be greatest when everyone is completely happy about their performance and the market environment. He noted that when VIX is low it also turns out that volatility is most rich (to use his word) versus realized volatility. He notes that traders may sit around waiting for the next volatility event while being prepared to take advantage of it. He cites how Warren Buffett approaches purchasing stocks where he may be patient for a long period of time, but ready to buy when the price is right.
Just three years ago VIX futures hit the 30’s and now we have VIX futures traders willing to sell in the low teens. In addition to VIX being low, a large number of US stocks have individual volatility at historically low levels. Clarke mentioned that skew can be impacted by low current volatility. He emphasized this point by saying that when considering the angle of skew you should take into account the premium of an option.
Buying at the money calls has better risk adjusted returns versus buy and hold. It allows you the ability to benefit from the upside, but you miss the drawdowns. Clarke invokes Buffett again by saying effectively you are being patient since your downside is limited when buying call options and if you are not applying all your capital to the call purchases you have the ability to be patient.
He noted that there is a high level of interest in Europe to spread trade US versus European volatility or VIX versus VSTOXX. This sort of trading has been made much easier since CBOE extended VIX futures trading hours to coincide with European market hours.
Something I found particularly interesting was a demonstration of the cost of owning puts on the S&P 500. He showed consistently buying puts and that when volatility is very low or volatility is very high the costs are greater than when volatility is in the middle third of historical levels.
Clarke finished up his presentation by noting that clients are still looking to make money through carry trades. In this environment look to some convexity through long VIX calls. His analogy for the current environment is that we all know selling premium is like picking up nickels in front of a steamroller. The nickels are getting smaller and the steam roller is getting bigger.
Day 2 is a wrap in Ireland and the presentations covered a wide spectrum of information.
The day began with CBOE CEO Ed Tilly making welcoming remarks as well as discussing new initiatives at CBOE that include expansion of SPX and VIX option trading hours as well as the introduction of futures trading on the CBOE/CBOT 10-year Treasury Note Volatility Index (VXTYN).
David Hauner, Head of EEMEA Cross-Asset Strategy and Economics at Bank of America Merrill Lynch follow the introductory remarks from Ed Tilly with an in depth discussion of the emerging markets space.
Following a discussion of emerging markets there was a talk about different volatility environments. Gerry Fowler, Head of Equity & Derivative Strategy, Global Equities & Commodity Derivatives at BNP Paribas.
The first presentation after lunch was a panel discussion led by a good friend of CBOE Robert McGlinchey who is the Director and Co-founder of EQDerivatives. The panel discussion covered trends in institutional options and volatility product usage.
The afternoon sessions began with simultaneous presentations on different topics. In one room there was a talk covering Asset Allocation Rebalancing Using Short Options –
While next door there was a very interesting discussion about the behavior of volatility of volatility –
The final sessions of the day were a review and preview of recently launched and soon to be launch products at CBOE that was led by Bill Speth and Dominic Salvino –
Shelly Natenberg was joined by Natasha Jhunjhunwala is a presentation titled The Volatility Surface: Skew and Term Structure –
Tomorrow the day finishes with five more sessions, we’ll be on the job
In one of the final sessions of Day Two, Sheldon Natenberg, Co-Director of Education, Chicago Trading Company, and Natasha Jhunjhunwala, Director, Equity Derivatives Product Management, Credit Suisse, presented on “The Volatility Surface: Skew and Term Structure.” Natenberg is the author of “Option Volatility and Pricing,” one of the most widely read books by option traders around the world. Jhunjhunwala said she was honored to be sharing the stage with a “derivatives legend.” Despite being the last session of the day, the room was jam-packed.
Natenberg’s first slide said: “Traders have long noted that implied volatilities vary across both expiration date (the term structure of volatility) and the exercise price (the skew). When taken together, the term structure and volatility skew form a volatility surface.”
- most underlying contracts have a typical/average volatility which they tend to revert to over long periods of time
- term structure is important for risk management
- volatility tends to be mean reverting
- short-term implied volatilities almost always change more quickly than long-term implied volatilities
- long-term implied volatilities tend to remain close to the mean volatility
- term structure of volatility has important implications for implied volatility products such as VIX
- volatility skew: the tendency of options with the same expiration date, but with different exercise prices to trade at different implied volatilities
He then listed some assumptions on which traditional theoretical pricing models are built:
- price changes are normally distributed
- volatility is constant over the life of the option
- trading is continuous, with no gaps in price of the underlying contract
- volatility is independent of direction in which underlying contract moves
In demonstrating some trading examples, Natenberg said “in order to model risk, a trader will want to consider how market conditions will affect the location of the skew and the shape of the skew.” It was noted that volatility skews are often described in terms of their tilt (skew) and their curvature (kurtosis). Some trading examples of each were shown.
Jhunjhunwala talked about different ways to look at skew and how traders can read the information within the volatility surface. Key points included:
- different measures of skew represent very different information sets
- both skew and term structure offer forward looking information about the volatility surface
- skew and term structure are typically highly correlated, excepting for some anomalies, such as Japan 2013
In talking about using skew as an indicator of market risk, she noted that it has, historically, signaled periods of high risk. The Credit Suisse Fear Barometer is an alternative measure of skew. She said a high level of the CSFB indicates an increased demand for put protection and a decreasing value accorded to call options. The CSFB is typically higher as the market rises and is lower on market lows.
She discussed trading the volatility surface:
- Long Skew: implemented through delta hedged options offers attractive features for hedging tail risk
- Short Skew: may be implemented through exotic variance swaps and offers a carry trade slightly different than typical short volatility trades
- Term Structure: can be seen as a market with its own unique properties
Highlights from Day Three of CBOE RMC Europe coming tomorrow…
In recent years we at CBOE have heard many inquiries on the subjects of managing interest rate risk and interest rate volatility. CBOE Holdings offers successful futures and options on the popular CBOE Volatility Index® (VIX®) that reflects expected stock market volatility; we have been asked if futures and options on an interest-rate volatility index also could be launched.
Today, CBOE Futures Exchange (CFE®) announced that it plans to launch futures trading on the CBOE/CBOT 10-year U.S. Treasury Note Volatility IndexSM (VXTYNSM) beginning on November 13, pending regulatory review. The announcement was made by CBOE CEO Edward Tilly at the CBOE Risk Management Conference Europe, currently taking place in Dublin. In the press release, Tilly notes that “Interest rate derivatives represent the largest asset class, by far, in the over-the-counter market, outweighing the equity derivatives market by many multiples. We are pleased to tap into this space by introducing a CBOE Volatility Index futures product that offers customers a way to hedge pure interest rate volatility risk based on U.S. government debt with a single product for the first time.”
MORE RISK FOR TREASURY INSTRUMENTS WITH DECLINE IN INTEREST RATES
As shown in the chart below, the month-end interest rates on the 10-year U.S. Treasury Notes dropped from 15.84% in Sept. 1981 to 2.35% in Aug. 2014.
While this drop in interest rates facilitated some attractive risk-adjusted returns for many fixed-income investments during this 33-year time period, many experts are concerned about the potential for weak returns and more risk for Treasury instruments.
In a March 2012 op-ed piece in the Wall Street Journal, Burton Malkiel of Princeton University wrote – “ … Bonds are the worst asset class for investors. Usually thought of as the safest of investments, they are anything but safe today. At a yield of 2.25%, the 10-year U.S. Treasury note is a sure loser. … Investors with long memories should recall that over the entire period from the 1940s until 1980, bonds were a horrible place to be. Given the likely trends, U.S. Treasurys and high quality bonds are likely to be extremely poor investments and are very risky. … “
The CBOE/CBOT 10-Year U.S. Treasury Note Volatility Index (VXTYNM) is the first exchange-traded volatility benchmark for U.S. Treasuries. Similar to the CBOE Volatility Index (VIX), VXTYN measures expected percentage changes in its underlying over a one-month period. The underlying CBOT futures on 10-year Treasury Notes are the most actively traded U.S. Treasury futures, and their volatility is aligned with the volatility of a variety of fixed income assets, such as spot Treasuries, interest rate swaps, mortgage-backed securities, and corporate bonds. VXTYN is calculated every 15 seconds from 7:00 am to 3:15 pm Central time and is disseminated to data vendors under the ticker VXTYN.
Potential users of futures of VXTYN could include mortgage-backed securities investors and other large credit managers seeking to hedge against adverse interest rate movements; large bond funds that are naturally long interest rate volatility and are seeking a yield-enhancing mechanism; and hedge funds, volatility arbitrage firms and global macro participants seeking to express their views on forthcoming monetary policy events or to capture mispricing anomalies between cross-asset volatility (e.g., fixed income versus equity volatility).
PRESENTATIONS AT RMC EUROPE
At a 75-minute session on Friday Sept. 5 at the CBOE Risk Management Conference Europe in Ireland, presentations on Cross-asset Volatility Strategies for Tail Hedging and Alpha Generation (indexes to be covered will include the VXTYN) will be delivered by Yoshiki Obayashi, Founder, Applied Academics, and by Angel Serrat, Partner and Chief Strategist, Capula Investment Management. www.cboermc.com.
For more information on futures on VXTYN and the VXTYN Index, please visit www.cboe.com/VXTYN.
Dr. Christoph Gort, Partner, SIGLO Capital Advisors and Pav Sethi, Chief Investment Officer, CEO, Gladius Investment Group, teamed up for the “Asset Allocation Rebalancing Using Short Options” session on Thursday afternoon. In the presentation, they highlighted results from an empirical study on the use of SPX options to implement allocation shifts with market moves. Interestingly, the genesis for the study was a conversation between SIGLO and CBOE at last year’s CBOE Risk Management Conference Europe in Portugal. SIGLO’s recently published study found that while not a new concept, rebalancing with options can be very efficient. With the recommended strategy, an investor would define a Strategic Asset Allocation (SAA) point, with an upper and lower boundary, and aim for constant proportion exposure. As Dr. Gort stated, “with a rebalancing strategy, you’re effectively making an implicit correlation bet.”
Smart rebalancing using options:
- allows to capture more of the option premium
- adds value if markets exhibit price reversals
- implies counter-cyclical behavior and constant proportion SAAs
Rebalancing using options:
- systematizes the rebalancing
- improves discipline in the process
- lowers emotionally charged discussions
- is pretty simple to implement
It was discussed that asset allocation can be used as a key determinant of long-term portfolio performance. And rebalancing in general, reduces risk and enhances risk-adjusted returns. Two different approaches to rebalancing were presented. In physical rebalancing, an investor is buying and selling physical assets directly (sell equities, buy bonds). In options-based rebalancing, an investor accomplishes the buying and selling of physicals assets, but with the added benefit of collecting upfront cash premiums (selling options with strike prices that correspond to rebalancing triggers).
The complete study by SIGLO Capital Advisors can be viewed at:
Apple leads the way in my report on Weekly’s. The highly anticipated new product launch is next Tuesday.
Today, I’m covering weeklys set to expire this Friday and next Friday, September 12th.
It’s been a wild week for Apple (AAPL) traders. The stock is now trading below $100. Some people say it’s profit taking ahead of next week’s product launch, others say Samsung’s big reveal this week of its new products worries investors. Either way, its creating super-sized action in the options paper this week. Traders love to play the wide range moves in the stock and the fast changes in premium prices as the stock becomes the most volatile it’s been in a while. Today in Apple weekly options there’s a decent sized bulk buy in the 98 puts. But, call buyers are emerging at the 99 and 100 strikes. In traditional options (9/19) there are traders buying 105 calls. One popular play in AAPL is being long premium. Implied volatility for this week’s expiration is 44 and 43 for next week.
Also starting to move in the weekly options Home Depot. The home improvement retailer is dealing with a possible massive data breach.
As HD trades near $90 the 91 strike has a few call buyers and there are put traders in the 88 line. October traditional’s the 89 calls & puts are active.
That leads me to a security firm trading in the weeklys: Fireye. There’s just a smattering of
32 calls contracts. I think it’s just worth mentioning weeklys are available in FEYE, which has captured attention in the past.
Netflx is on a high this week. The stock is trading now at $480 and calls are active at 485.
As a side note, there are 500 and 510 traditional calls getting action.
Tesla, according to the Wall Street Journal is going to name Nevada as the location of its giant battery gigafactory. As that stock trades at $282, call positions are building at 285, 290 and 300. Puts are also in motion at 270, 272 and 277. Some traders seem to be setting up for TSLA to be a mover.
Gopro is exciting this week. The stock is trading around $55 as some analysts believe the 3-week rally maybe calming. That has traders in this week’s weekly options coming for 51, 53 and 55 puts. Some of that may be a put spread.
And, in SPX the 2,000 strike is generating interest by traders in the calls and puts.
Onto the list of stocks added to the weeklys: American Eagle Outfitters, Yamana Gold, Himax Technologies (in the digital camera business) Halcon Resources Corporation (independent energy company), Ciena, Kandi Technologies, Opko Health, Radio Shack, Banco Santander, Sandridge Energy and Weyerheuser.
Deleted names include: Actavis, Intuitive Surgical, Intermune and Pharmacyclics.
That’s a wrap for now. Thank you for watching and feel free to find me on Twitter: @Angie Miles
Volatility as an asset class
SolarCity (SCTY) is recently up $4 to $71.12 after announcing plans to open 20 new operations centers in seven states. September 12 weekly call option implied volatility is at 44, September is at 45, October is at 46, January is at 49; compared to its 26-week average of 60.
BP (BP) is recently down $2.79 to $44.93 following the company was found grossly negligent by a judge. September 5 weekly put option implied volatility is at 48, September is at 20, October is at 21, November is at 20; compared to its 26-week average of 15.
Proshares UltraShort Barc 20 Year Treasury (TBT) is recently up $1.11 to $56.57 into the August jobs report and after David Tepper of Appaloosa said: “beginning of the end” of the bond market bubble has occurred as thanks to the ECB decision to cut rates, he said on Bloomberg TV. September 12 weekly call option implied volatility is at 26, September is at 25, October is at 23, December is at 21; compared to its 26-week average of 22.
Actives at CBOE: AAPL TSLA PBR BIDU X C TWTR
Stocks with increasing volume @ CBOE: BP VMW SCTY X GE MBLY VALE DDD CODE PH
CBOE DJIA BuyWrite Index (BXD) up 23c to 270.30, compared to its 50-day moving average of 268.31 cboe.com/micro/bxd/
CBOE Volatility Index (VIX) down 30c to 12.06. VIX September 16 and 17 calls are active on 288K contracts @ CBOE cboe.com/VIX
iPath S&P 500 VIX Short-Term Futures (VXX) down 1.7% to 27.47
CBOE S&P 500 Short-Term Volatility Index (VXST) is recently up 5.8% to 10.92; compared to its 10-day moving average of 10.38. stks.co/r0CS2
CBOE DJIA Volatility Index (VXD) up 0.4% to 10.87; compared to its 10-day moving average of 10.38.
CBOE Nasdaq-100 Volatility Index (VXN) down 1.2% to 13.40; compared to its 50-day moving average of 13.69.
S&P 100 Options (OEX) recently is recently up 2.50 to 890 as the European Central Bank lowered its benchmark rate to .05% from .15%.
Dominic Salvino from Group One and Bill Speth of CBOE covered a variety of topics this afternoon at CBOE RMC Europe. The presentation titled Contract Design & Trading of VIX and Other Listed Volatility Derivatives covered CBOE Short-Term Volatility Index (VXST), S&P 500 Variance Futures, the change to the VIX calculation that was announced today, the VIX settlement process, and the soon to trade CBOE/CBOT 10-year US Treasury Note Volatility Index Futures (VXTYN).
Dominic gave a review of VXST price action over the last six months. He notes VXST is different in that short dated volatility is more reactive to the market that longer dated volatility. VXST would be more reactive to an individual event such as an announcement from the Fed or ECB. As we have learned over the past few months VXST tends to have lower lows and higher highs than VIX. When VXST is higher than VIX it is a form of backwardation which we use to only measure with VIX futures relative to the index.
Re-launch of S&P 500 Variance Futures
Bill Speth took over and discussed the status of S&P 500 Variance (VA) futures. These contracts replicate the pay-off profile of an OTC variance swap using a daily-margined future contract. VA futures use the RIVET methodology which was developed by DRW Innovations which aligns the economics between OTC variance swaps and a listed variance future. This allows for direct comparison of pricing and size with OTC contracts. Bill cited several advantages of VA futures relative to OTC swaps such as
VIX Calculation Change
Bill expanded on the change announced this morning with respect to the VIX calculation. Highlights of this change are that it allows for a more precise measurement of 30-day volatility interpolation between 23 and 37 day SPX options. It was emphasized that this is not a change to the VIX formula, just a change to the SPX option series that are used to calculate “cash” or “spot” VIX index values. This is not a change to the pricing of VIX futures and options. The final settlement value for VIX futures and options will continue to use the same VIX formula and the opening prices of standard (third Friday expiration) SPX options series.
VIX Settlement Process
As there is often a lot of confusion around the VIX settlement process Bill spent some time reviewing how VIX settlement is determined along with SPX option trading on VIX settlement dates. On settlement date a special opening quotation of VIX using the opening prices of constitutent SPX options series which are determined through a special auction process. This process is open to customers and broker-dealers. Any strategy orders must be submitted by 8:15 am Chicago time. Even if an option has an opening price, it needs to have a bid price after the opening trade match to be used in the SOQ calculations.
CBOE/CBOT 10-year US Treasury Note Volatility Index Futures
Dominic spent a few minutes talking about VXTYN futures which will be launched on November 13 (pending regulatory approval). VXTYN futures will have a $5000 multiplier with a tick size of 0.01 ($50). The settlement process will be 30 days prior to the expiration of constituent options on the 10-year T-Note futures. This settlement will be based on the closing prices at 2:00 pm in the afternoon which is a slight difference relative to VIX option and futures settlement.
Abhinandan Deb from Bank of America Merrill Lynch and Jean-Gabriel Prince from BlackRock split duties discussing the Volatility of Volatility.
Deb led things off noting that we need to care about the volatility of volatility as we continue to see robust growth in volatility related option trading volumes and open interest. He showed several examples of how VIX price changes are skewed to the upside which demonstrates the distribution of volatility. He also showed how VIX futures react relative to changes in VIX and how the time left to expiration for a VIX future impacts how the contract reacts relative to the index. Stated differently shorter dated VIX futures have more beta relative to VIX than longer dated VIX futures.
Prince followed up on Deb’s comments by highlighting tail risk hedging with VIX options and generating carry with VXX options. He first points out that VIX is a risk, not just a tail risk measure. For tail risk he cites the SPX 90% – 110% one month option skew or VIX at the money implied volatility as better tail risk measures. In addition he notes that volatility tends to rise as markets fall which may increase the magnitude of gains or losses. He then cites several reasons to consider VIX options for a tail hedge including high liquidity, that they are exchange traded, VIX gives exposure to volatility through delta by also through volatility of volatility, VIX options offer non-linear exposure to VIX futures, and capital efficiency where $1 vega of VIX exposure tends to hedge against $100 of equity exposure.
Today at the CBOE RMC Europe conference Robert McGlinchey, Director and Co-founder of EQDerivatives led a lively panel discussion on Trends in Institutional Options and Volatility Product Usage.
Robert introduced the panelists which represent US and European institutions as well as a variety of types of firms –
Jean-Francois Bacmann, Portfolio Manager and Head of Volatility Strategies, Man AHL
Stephen Crewe, Portfolio Manager, Fulcrum Asset Management
Jack Hansen, Chief Investment Officer, Parametric Clifton Group
Andrew Rozanov, Former Managing Director, Permal Investment Management
The first question was about each panelist’s experience with volatility –
Jack Hansen cited the consistent performance of BXY and PUT as evidence that volatility selling strategies work over time. Stephen Crewe said his firm looks to selling 25 – 30 delta calls to take in premium. He also mentioned that his firm recently looked to the option market to develop a strategy based on a macro view that small cap stocks would underperform large cap stocks. The specific trade combined SPX and RUT options. Jean-Francois Bacmann stated that his firm will often look to the option market to opportunistically implement tail risk protection. Andrew Rozanov finished out this question noting that all equity investors will claim to be concerned about volatility, but they rarely have volatility managers or specialists working for them.
The next question addressed gaining alpha through the volatility markets.
Crewe noted an earlier speaker today commented on VSTOXX being cheap relative to VIX and that there may be opportunities in spreading cheap and expensive volatility markets. Bacmann continued with this theme and stated that regional volatility versus VIX often makes sense because some regional issues may not impact VIX, but global issues would impact volatility across the globe. In an answer to a later question, but along this theme, it was pointed out that selling volatility has worked even in a low volatility environment. For instance, at the beginning of June VIX was close to 11 but the realized volatility for the S&P 500 ended up being around 5 or 6 during that month. Hansen added that selling 5% OTM puts versus buying 5% OTM calls to hedge against a move to the upside was an idea he had seen implemented. This trade steep skew and low interest rates make this an attractive trade.
ECB cut rates again, 0.15% to 0.05% and the Deposit Rate went from -0.10% to 0.20%. Cookie jar and mattress sales expected to rise. US Dollar moved higher against Euro. ADP private payroll for August showed a gain of 204K jobs, below consensus and the lowest number in six months. Day 2 of CBOERMC in Dublin is currently in session – highlights here during the day. Volatility as an asset class:
TIBCO Software (TIBX) is up $1.47 to $22.51 in the premarket after announcing that it is reviewing strategic alternatives. Overall option implied volatility of 38 is near its 26-week average of 37.
PVH (PVH) is higher by $9.69 to $126.81 after the clothing company reported Q2 margins increased and sees growth in Tommy Hilfiger. September call option implied volatility is at 59, October is at 29, December is at 25; compared to its 26-week average of 26.
Yum! Brands (YUM) is down $2.13 to $69.35 in the premarket after updating Q3 China division Same Store Sales guidance. Overall option implied volatility of 18 is below its 26-week average of 23 according to Track Data, suggesting decreasing price movement.
VIX methodology for Apple (VXAPL) is at 31.71, above its 10-day moving average of 25.84 into a company sponsored September 9th event. CBOE.com/VXAPL
CBOE Interest Rate 5 Year Note (FVX) at 16.89, compared to 50-day moving average of 16.51, 50-day MA of 16.56 into Friday’s August job report.
Options expected to be active @ CBOE: YUM TIBX BOLT PVH CIEN JOY MBLY
I was excited to see the Gerry Fowler presenting again at CBOE RMC Europe as I thoroughly enjoyed his presentation in 2013. Fowler is Head of Equity & Derivative Strategy, Global Equities & Commodity Derivatives BNP Paribas and this year delivered a presentation entitled Volatility Regimes and an Analysis of Where We Were, Where We Are, and Where We Are Going at the CBOE RMC Europe conference today. This most definitely could be considered one of the more timely presentations at this year’s conference.
He cites the credit cycle as being a major driver for different volatility regimes. A common theme among central banks is an attempt to target slower, less extreme credit cycles, which could have an impact on market volatility. He believes slow growth may continue until 2017 which could be interpreted as the US currently being close to the mid-point of the current cycle.
He covered how the four different stages of the credit cycle impacts credit, equity, and equity volatility markets. Focusing on equity volatility -
During de-leveraging volatility moves lower, the volatility of volatility rises, and skew rises as well. In co-recovery volatility, volatility of volatility, and skew all move lower together. During the re-leveraging stage volatility remains flat, volatility of volatility moves higher, and skew remains flat. Finally during a debt crisis volatility, volatility of volatility, and skew all move up in sync. He noted that the US is in the re-leveraging stage while the European markets are at the end of the co-recovery stage.
Some time was spent on the fundamentals of the US stock market. I knew that US companies had been aggressively buying back shares, but was surprised to hear the impact on earnings. Since 2010 revenues are up 20% for S&P 500 companies while earnings have risen 60% of the same time period.
Something else that I was very interested to learn was the relationship between low operational and financial leverage for companies and market volatility. When low leverage is being implemented earnings estimates tend to be more accurate and there are fewer earnings surprises. This reduction in earnings surprises lowers market volatility as well. It is an accepted fact that the stock market reflects market fundamentals over time, it is interesting to see the fundamentals show up in market volatility as well.
He finished up discussion how investors are rewarding companies that have low profit volatility. Stocks that have had low profit volatility have outperformed companies that show more volatility with respect to results. He went on to note that investor confidence has increased with respect to low volatility strategies so more leverage is being applied to these strategies.
Finally, during his talk Fowler cited two interesting articles which may be worth a read –
A Comprehensive Look at Financial Volatility Prediction by Economic Variables by Charlotte Christiansen, Maik Schmeling and Andreas Schrimpf –
Investment Risk and Performance – Risk Factors as Building Blocks for Portfolio Diversification: The Chemistry of Asset Allocation by Eugene L. Podkaminer, CFA –
The keynote speaker for today’s CBOE RMC Europe conference was David Hauner who is the Head of EEMEA Cross-Asset Strategy and Economics at Bank of America Merrill Lynch. His presentation was titled Emerging Markets: Attractive Investment of Global Systemic Risk? I found this particularly interesting as I closely monitor the CBOE Emerging Markets ETF Volatility Index (VXEEM) as well as the CBOE Brazil ETF Volatility Index (VXEWZ) as part of my duties for CBOE.
Hauner began showing a survey indicating that a sell-off in US treasuries is the biggest perceived risk for emerging market stocks.
He touched on volatility saying that VIX normally does not pick up until after interest rates start to rise, based on his interest rate outlook he believes VIX will stay low until well into 2015.
The weak Euro has helped fund the emerging markets while the USD has not been a contributor to emerging market performance. A breakdown of the Euro – emerging market carry trade could be negative for emerging markets.
Emerging Market GDP growth is running at 5% and BofA Merrill Lynch model expects the same levels to continue – this translates to half of global GDP growth coming from emerging markets. He sees 5% growth becoming the new normal. The expectation is that Chinese GDP growth will trend down to 6% from a current growth rate of around 7.5%. What he sees is China managing down growth while trying to avoid any sort of hard landing. The government is managing this through periods of mini-stimulus to cushion the fall. On a trading basis he suggests fading optimism as well as fading pessimism in China – the Chinese market has been and will continue to be a range trade.
Regionally, he sees economic improvement in central and eastern Europe (Czech Republic, Poland, and Hungary) while South America is on the other end of the spectrum (Argentina, Venezuela, Peru, and Brazil). Also, foreign holding of Latin American and Asian debt has consistently trended higher over the last three years. EEMEA debt holdings topped out in the summer in June 2013 and has been trending slightly lower.
BofA Merrill Lynch monitors emerging market inflows and outflows. The level of this indicator recently gave a sell signal which backs up Hauner’s near term outlook. He follows up by saying that for the long term a correction will offer a good buying opportunity.
Sentiment is positive for China and Indonesia but pretty much negative for all other areas of the emerging market sector. He believes Chinese weakness could impact the whole emerging market sector. Currently he would overweight exposure in China, South Africa, Taiwan, and Indonesia. Finally he would underweight Poland, Philippines, Mexico, and Malaysia.
He finished up with brief comments on investing in Russia. He stated we are at a point where a positive breakthrough in the Ukrainian situation needs to be seen before buying Russia. He cautions against trying to buy in anticipation of any agreement as the situation continues to be very chaotic.
Day Two of CBOE RMC Europe kicked off with a welcome from CBOE CEO Edward Tilly. He said the agenda for RMC reminds him that “we are really at the beginning of the evolving VIX story” and highlighted several new CBOE initiatives designed to continue to grow the volatility space.
Tilly noted that “though, by definition, a measure of U.S. market volatility, VIX has become the de facto measure for market volatility worldwide. The global reach of VIX can be seen by the early and very favorable response to our Extended Trading Hours initiative in VIX futures.”
Late in 2013, CBOE introduced expanded trading hours for VIX futures, adding 5 hours and 45 minutes to the trading day. In June, trading hours for VIX futures were further expanded to nearly 24 hours, which accommodates Asian market hours and a growing worldwide user base. Tilly said that presently, nearly 10 percent of all VIX futures trading takes place outside of regular U.S. trading hours and on days when global events trigger higher volatility, it can be as high as 20 percent.
Tilly noted that CBOE is prepping to launch extended trading hours for SPX and VIX options later this year, pending regulatory review and completion of necessary systems enhancements. The new session will run from 2:00 a.m. to 8:15 a.m., Chicago time.
Tilly then made the first of two announcements – CBOE Futures Exchange (CFE) will launch futures on the CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (VXTYN), the first volatility index based on U.S. government debt, on November 13. He noted that VXTYN futures “can enable customers to better manage interest-rate risk.”
Turning to the continued growth in CBOE’s S&P 500 Index (SPX) options complex, Tilly highlighted the remarkable growth in SPX Weeklys, which now average over 250,000 contracts per day – one-third of all SPX options traded. This set the stage for the morning’s second announcement – on October 6, CBOE will begin to include SPX Weeklys option series in the CBOE Volatility Index calculation. Tilly said the inclusion of SPX Weeklys “will allow VIX ‘spot values’ to be calculated with the S&P 500 Index option series that most precisely match the 30-day target timeframe for expected volatility that the VIX Index is intended to represent. The robust market in our SPX Weeklys product enables that change and makes it a meaningful one.” This enhancement does not impact the tradable VIX products or the final settlement values.
The press releases for both announcements will be available here later today.
Tilly concluded his remarks by saying that CBOE truly values the setting at the Risk Management Conference. “By working closely with customers like you, in forums like this one, we can continue to create products and services that add value to your trading experience and expertise. Over the years, we’ve received great feedback and suggestions from RMC participants on ways to improve products and services.” We’d expect this year to be no different.
RMC is in full swing. See www.cboermceurope.com for more highlights.