Technical Picture Worse Than It Seems – Weekly Market Outlook

The bulls pushed back after last Monday’s meltdown, but it just wasn’t enough to undo the damage… at least not yet. The market did manage to work its way back above a relatively important line in the sand, until the Greek vote results came out. The bad news is, we’re closer to a re-entry into a decided downtrend than we are to a rekindling of the rally.

We’ll look at where we are in relation to the line in the sand below, after a quick run-down of all of last week’s economic news.

Economic Data

We had plenty of economic data to work our way through last week, but none of it was as critical as June’s unemployment data from Thursday.  The unemployment rate fell from 5.5% to 5.3%, though only 223,000 new payrolls were created. Economists were expecting 230,000 new jobs for June.

Although it was progress, the bulk of the reason the unemployment rate fell as much as it did was the contraction in the size of the total labor pool. Nevertheless, we continue to see improvement, with job openings reaching multi-year high levels last month.

Payroll Growth and Unemployment Rate Chart

Source: Thomas Reuters

The only other truly noteworthy data from last week was the Conference Board’s consumer confidence measure. It ticked higher from a 94.6 to 101.4. That’s not a multi-year high, but it does rekindle a broad uptrend.

Consumer Sentiment Chart

Source: Thomas Reuters

Everything else is on the following grid: More

The Weekly Options News Roundup – Holiday Week Edition

The Weekly News Roundup is your weekly recap of CBOE features, options industry news and VIX and volatility-related articles from print, broadcast and online and social media outlets.
Watch VIX and TYVIX as Uncertainty in Europe Grows

Greece’s debt crisis has Jon Najarian keeping an eye on two key volatility indexes. The VIX Index, a measure of the S&P 500 and the TYVIX Index, a measure 10-year Treasury Notes, can both be used to monitor volatility as a potential exit of Greece from the Eurozone looms over the weekend.

“DRJ: Keep a Close Eye on Volatility” –Jon Najarian, Option Monster

“Investors Hedging Against Greece, But There’s No Panic,” –Gertrude Chavez-Dreyfuss, Reuters

“Choose Your Own Fear Adventure” –Tracy Alloway, Bloomberg

More Options, Less Liquidity

Recent research suggests that expanded options products and further fragmentation of the options market could diminish liquidity. With 12 options exchanges in play, and two more on the way, will liquidity be spread too thin?

“More Exchanges Disperse Options Liquidity” –Markets Media

“Complex U.S. Options Market Hampers Liquidity” –The Trade News

VIX Wakes Up From Slumber More

Big Last Week for VIX re: Backwardation, Big Moves & Volume, ETH, Put/Call Ratio, and Bollinger Bands

After the news broke last Sunday (June 28) regarding the closing of banks in Greece, worldwide markets for stocks and oil plunged, and investors sought assets that could rise and serve as diversifiers. The VIX® July futures prices responded by rising from 14.525 on June 26 to 17.375 on the next trading day (June 29).

Below are seven key points about VIX action during this past big week – these points could be of interest to technical analysts who are looking for trading signals, and to portfolio managers who wish to diversify in times of market stress around-the-clock.

  1. BACKWARDATION — For the first time since January, VIX was in backwardation for 3 straight days (see Figure 1 below);
  2. VIX OPTIONS DAILY VOLUME – rose to 946,467 on June 30 (see Figure 2 below);
  3. VIX FUTURES DAILY VOLUME – rose to 417,574 on June 29 (the highest daily total in 2015; see Figure 3);
  4. VIX INDEX ROSE 34.5% ON JUNE 29 — (biggest daily % rise in 2 years) (see Figure 4);
  5. VIX 20-DAY ROLLING PUT/CALL RATIO – fell to 0.31 on June 30, its lowest level since 2008 (see Figure 5);
  6. BOLLINGER BANDS FOR VIX INDEX – dropped below the lower band on June 23 and 24 (first time below lower band in 2015 (see Figure 6));
  7. RECORD VOLUME DURING ETH SESSION – VIX futures volume in the 5 pm (Sunday)-to-2 am CT session was a record 32,617 (estimated) contracts, an all-time record for that 5 pm-to-2 am CT time period. For more on Extended Trading Hours (ETH) for VIX futures and for VIX and SPX options, please visit Source: Bloomberg.


The Week in Russell 2000 Trading – 6/29 – 7/2

During all the market excitement on Monday last week the Russell 2000 dropped 2.6% while the large cap focused Russell 1000 lost 2.1%. The real difference between small cap and large cap stocks occurred after the dust settled from Monday. The Russell 1000 was able to gain 0.9% after to finish the week down 1.2% while the Russell 2000 did a whole lot of nothing and finished the week down 2.5%. This is the first time in a while that large cap stocks have dominated and is a bit surprising since the news focus was all about Greece and the global economy last week.

RUT RUIThe RVX premium to VIX dropped to the lowest level since January of this year. However, as large cap stocks rebounded and small cap stocks did not the RVX / VIX premium moved higher over the balance of the week.

RVX VIXLate Thursday there was an Iron Condor placed using very far out of the money options in both directions. On the put side the RUT Jul 17th 1140 Put was sold for 1.40 and the 1130 Put was purchased for 1.08. To the upside the spread sold the RUT 17th 1320 Call for 0.30 and then completed the trade through purchasing the RUT 1330 Calls at 0.17. Excluding commission this trade results in a net credit of 0.45 and a payoff two weeks later that looks like the diagram below.

RUT PO FixedBased on the Russell 2000 close on Thursday of 1248.26 this trade is safe as long as RUT is not more than 5.7% higher or 9.4% lower, staying in that range will result in all option expiring out of the money and this trader pocking 0.45 per spread. If the unexpected (in the trader’s mind) happens and we get a big rally or an even bigger drop in the equity markets the maximum potential loss is 9.55 per spread.

The Week in VIX – 6/29 – 7/2

VIX rallied over 34% on Monday as the Greece situation worsened and global equity markets sold off. The front month July VIX contract gained just under 20%. As the week progressed we gained insight into June economic activity with an unusual Thursday release of the non-farm payroll report. The stock market moved on quickly and VIX and the July future both finished the week with a 16 handle.  The curve, which moved to backwardation on Monday finished the week in contango, but a much flatter version of contango than we have witnessed as of late.

VIX Curve

On Thursday last week I came across a trade I do not normally see executed in the VIX pit. There was a broken wing butterfly that involved selling the VIX Jul 20 Call at 1.22 and VIX Jul 20 Put at 4.24.   For downside protection the VIX Jul 14 Put was purchased for 0.33 and to the upside the VIX Jul 25 Call was bought at 0.63. All this activity resulted in a credit of 4.50. Those that are quick with numbers will notice that the long put is six points lower than the short option strike while the call is five points higher.


Note the July VIX futures and spot VIX closed with a 16 handle on Thursday. That means the trader behind this particular position is hoping for higher VIX with a specific target of 20.00 at July expiration. Normally we think of any time of butterfly having a neutral price outlook, that’s not the case in this instance.

The Week in Volatility Indexes and ETPs – 6/29 – 7/2

We had the most exciting market action during the holiday shortened week. As everyone knows we can thanks the cradle of civilization Greece for all the hub bub. On Monday the S&P 500 was down over 2% for the first time since October of last year. VIX reacted accordingly by rising over 34% on the day for the biggest one day move in over two years.

Despite the S&P 500 rebounding a bit, the VXST – VIX – VXV – VXMT curve continues to signal some concern. The VXST to VIX premium is pretty interesting considering that on Thursday we got the June employment number behind us and we are in the middle of a long weekend. Typically VXST experiences a big of a head wind going into a long weekend due to the calculation being based on calendar days. I was honestly a bit surprised at the shape of the curve when I started putting this blog together Thursday night.


I often respond to criticism of VXX by stating that, “it does what it is supposed to do when it is supposed to do it.” This past week the long ETPs did what they were designed to do and rallied on Monday in response to a dramatic increase in market volatility.

VIX Index Table

Late Thursday a ratio spread was executed in the UVYX space that will result in a profit as long as UVYX does not rally over 43% between now and July 10th. With UVYX at 42.32 there was a buyer of 300 UVXY Jul 10th 55 Calls at 1.90 who also sold 600 UVYX Jul 10th 60 Calls at 1.39 each for a net credit of 0.88 per spread. The payout diagram below shows how things will turn out base on this spread being held through the close this coming Friday.


UVXY finished the day at 42.59 and the break-even price for this trade is up at 65.88. That’s a 43.6% move to break-even. As long as UVXY finishes the week at 55 or lower the result will be the 0.88 per spread credit taken in when the spread was established turning into a profit.

VXX Block Trade from Monday

Monday of this week was one of the more exciting days we have had in 2015. That’s probably an understatement since VIX futures volume was the highest it has been this year. When the S&P 500 is down and volatility is up there are traders always looking to take the other side of the move. Either through selling volatility or through getting long the stock market. The iPath S&P 500 Short Term Futures ETN (VXX) market is one instrument that can move quickly to the upside when the S&P 500 is under pressure. The daily chart shows the VXX move on Monday which was 17.6% higher than where it closed four days earlier.

VXX Chart

Taking the other side of a big move is commonly referred to as a fade trade.   This type of trade involves taking the other side of momentum in the market which can be dangerous if the correct risk controls are not put in place.   A vertical spread, whether bullish or bearish, is a common way of fading a big move since the maximum potential loss from the trade is defined when the spread is initiated. When VXX is up tremendously like it was on Monday I go searching for short dated bear call spreads in the VXX option market.

With less than an hour left in the day Monday, and the stock market actually making new lows, there was a seller of 5,000 Bear Call Spreads. Specifically the VXX Jul 2nd 21 Calls were sold at 0.61 and the VXX Jul 2nd 26 Calls were purchased for 0.09 and a net credit of 0.52.


Note in the payoff diagram above that the 21.00 prices level is about 3.5% higher than were VXX was trading when the spread was initiated. As long as VXX was not over 21.00 at expiration this trade results in a profit of 0.52. The maximum potential loss of 4.48 for this trade occurs at 26.00 or higher. However, to reach this price level VXX needed to climb another 28% in three days.

Monday’s 34% VIX Spike and What to Expect Going Forward

One of the top posts of 2013 was All-Time VIX Spike #11 (and a treasure trove of VIX spike data), in which I sliced and diced the twenty largest one-day VIX spikes in the history of the VIX. Nineteen of those spikes were in excess of 30% and with all-time #5 arriving later in 2013 and all-time #15 and #16 following in 2014, I was compelled to comment that despite the seemingly low VIX and concerns about complacency, 2014 Had Third Highest Number of 20% VIX Spikes.

Fast forward to the present and for all the talk of a low VIX, some forget that the second day of 2015 had a 28.1% VIX spike and then today, we saw a 34.5% VIX spike, the eleventh largest in the history of the VIX and enough to trigger an update to the table of largest one-day VIX spikes below.

History of 30pct VIX Spikes 062915

[source(s): CBOE, VIX and More]

Note that based on the data for the 23 VIX spikes in excess of 30%, the SPX has a tendency to outperform its long-term average over the course of the 1, 3 and 5-day periods following the VIX spike. Also worth noting that that 10 and 20 days following the VIX spike, the SPX has a tendency not only to underperform, but decline. Further, while the huge decline following 9/29/2008 VIX spike tends to dwarf the other data points, even when you remove the 9/29/2008 VIX spike it turns out that the SPX still loses money in the 10 and 20-day period following a VIX spike. When the analysis is extended out 50 trading days, the SPX is back to being profitable, but performing below its long-term average. On the other hand, when the analysis includes 100 days following the VIX spike, the SPX is back to outperforming its long-term average.

With the caveat that this is a limited data set, it is still worth flagging the pattern in which following a 30% one-day VIX spike, there appears to generally be a tradable oversold condition in stocks that lasts approximately one week, followed by a period of another month or so in which the markets typically has difficulty coming to terms with the threat to stocks. One quarter later, however, all fears are generally in the rear view mirror and stocks are likely to have tacked on significant gains.

This type of pattern supports the idea of both short-term and longer-term mean reversion, but calls into question the role of mean reversion in the 10-20 days following a VIX spike, perhaps has fundamental factors begin to win out over a technically oversold condition in stocks.

Now that we have a template, let’s see how well it works for the current market environment.


Bullish EEM Trade from Monday

As CBOE expands the number of markets available for trading to include foreign indexes we are going to do the same in this space every Tuesday through taking a look at derivatives based on the MSCI family of indexes.  With the weakness in global markets on Monday I decided to search around for a trade in EEM ETF options that may be trying to take the other side of low equity prices.

The daily chart below shows that EEM was down about 2.4% which was a bit more than the drop in the S&P 500 (2.09%) on Monday.  This is typical when there is weakness across the board in global equity markets as emerging market stocks are in considered risker investments when compared to developed markets.

EEM Chart

At least one trader seems to think the drop in EEM is going to be short lived and that emerging market stocks will rebound.  With about an hour left in the trading day on Monday someone sold the EEM Jul 17th 40.00 Puts at 0.92 and purchased EEM Jul 17th 38.50 Puts at 0.12 for a net credit of 0.80.  The payoff diagram below shows the profit and loss profile for this trade at expiration along with the closing price for EEM from Monday.


EEM over 40.00 at expiration would result in a profit equal to the 0.80 credit received.  On the other end of the spectrum, if EEM is below 38.50 at expiration the loss will be 0.70 as the short put will be worth 1.50 more than the long put.

Buying on dips is sometimes referred to as “catching a falling knife”.  This phrase implies that when a trader tries to catch a falling knife they may lose a finger.   Yesterday afternoon, with the S&P 500 and Dow Jones Industrial Averages closing near the lows of the day, buying the dip can be profitable, but also a fairly difficult trade when you are going against a trend.  This bull put spread is a good example of how options may be used to buy a dip, but keep all your digits if the trade does not go your way.

Ignore the Noise Coming From Greece and All Else

I often talk about the need to focus on markets and the price action, ignoring the noise from the crowd.  Doing will often help you sidestep dangerous advice designed to twist your mind.  We can consider all the excuses or reasons for selling – there are a million of ’em – but at the end of the day it is the market action, the effect and not the cause that will be our guide.  The first step is understanding the technical condition, sentiment and indicators.  These will always point the way.

Lately, the rhetoric surrounding the Greek situation has risen to unprecedented levels.  Each press conference, statement and word is over-analyzed and put into some context.  That, by the way is probably a wooden box for Greece.  Something is going to happen here over the next few days.  Whatever the decision between Greece, IMF, ECB and the Eurozone – what matters to me is how the market is doing, period.  Taking an objective view is the best way for me to make the proper decisions without emotion or bias.  It is when I insert my opinion or belief before my actions in trading markets is where I get into the most trouble.  The market is sanguine about it and not too concerned, and at this stage of the game that should not be a problem.

The fact remains, there is NOTHING we can do as market participants to sway the verdict in one direction or the other.  We can buy protection in case of a disastrous outcome, but those bets are not counted on to pay us off.  I suspect the Eurozone has been preparing for a fateful ending with Greece for some time, So it doesn’t seem to be an event they are too concerned about. More

Today in VIX, SPX, and RUT – 6/29/2015

A lot went on today as the Greece thing seemed to come to a head. Below are some highlights with respect to the CBOE Volatility Index, the S&P 500, and the Russell 2000 with respect to the reaction of global markets to the news out of Greece.

Spot VIX rose just over 34% and the front month July futures contract was up almost 20%. Volume in VIX futures appears to have topped 400,000 for the first time this year. July and August settled within a tick of each other which is a positive for the long ETPs since they won’t experience any grind lower due to the common contango situation.

VIX Futures

The VXST – VIX – VXV – VXMT curve went from slightly inverted to very inverted today. VXST rose 45% to 22.56 which is the highest closing price for that index since mid-January when it topped 23.00. VIX at 18.85 is the highest level since early February.

VXST - VIX - VXV - VXMTThe table below sums up the day with the S&P 500 down over 2%, which places this index slightly in the red for 2015.  Something else worth highlighting is the VIX of VIX which rose to 117.00, a clear indication that demand for VIX options rose in line with the rise in the index today.  In the ETP space VXX came into the day about 65% weighted in July VIX futures and 35% in August contracts which resulted in a 17% gain in the fund. As expected on a single day basis TVIX and UVXY were both up twice that much for a whopping rise of about 34%.


As mentioned before, VIX rose 4.83 points to 18.85. The CBOE Russell 2000 Volatility Index gained 4.32 to finish the day at 20.50. Those who visit this space often know that I focus on the RVX / VIX premium as an indication of risk perceptions of small cap versus large cap risk. RVX finished the day at a premium of 8.75% to VIX, down dramatically from Friday when the premium was over 15%. This is the first single digit premium reading for this relationship since January 15th.

RVX VIX It was an exciting day all around and the heightened levels of volatility indicate the market expects a little more volatility before this chapter of the Grexit story is complete.

Five Volatility Indexes Rose More Than 30% Today, As Worldwide Stocks and Oil Prices Fell on News Out of Greece

In the past couple of days, news out of Greece regarding capital capital controls and bank closings had a worldwide negative impact on stock and oil prices, while five of CBOE’s volatility indexes rose more than 30%, and volume in VIX futures soared to an estimated 415,000 contracts. After news about the closures of Greek banks broke over the weekend, VIX futures volume in the 5 pm (Sunday) to 2 am CT session was a record 32,617 (estimated) contracts, an all-time record for that time period.

Investors look to volatility indexes as intraday, up-to-date gauges of investor sentiment, and also use long positions in VIX futures and in VIX call options and SPX put options to manage portfolio volatility.


Two of the 29 volatility indexes below rose more than 40% today.

% Change            Last Price             Ticker                    Index
45.6%                    22.56                     VXST                      CBOE Short-Term Volatility Index
40.8%                    117                         VVIX                      CBOE VIX of VIX Index
34.5%                    18.85                     VIX                         CBOE Volatility Index®
32.1%                    18.69                     VXD                       CBOE DJIA Volatility Index
30.7%                    21.69                     VXEFA                   CBOE EFA ETF Volatility Index
29.9%                    19.05                     VXO                       CBOE S&P 100 Volatility Index
29.2%                    19.81                     VXN                       CBOE NASDAQ Volatility Index
26.7%                    20.5                        RVX                        CBOE Russell 2000 Volatility Index
21.1%                    18.72                     VXV                       CBOE 3-Month Volatility Index
19.0%                    25.01                     VXGS                     CBOE Equity VIX® on Goldman Sachs
18.5%                    26.77                     VXAPL                   CBOE Equity VIX® on Apple
17.7%                    20                           VXXLE                   CBOE Energy Sector ETF Volatility Index
17.3%                    21.96                     VXIBM                  CBOE Equity VIX® on IBM
17.0%                    22.16                     VXEEM                 CBOE Emerging Markets ETF Volatility Index
16.1%                    32.3                        VXAZN                  CBOE Equity VIX® on Amazon
16.0%                    33.64                     OVX                       CBOE Crude Oil ETF Volatility Index
14.1%                    7.27                        TYVIX                    CBOE/CBOT 10-year U.S. Treasury Note Volatility Index
13.2%                    19.08                     VXMT                    CBOE Mid-Term Volatility Index
12.7%                    24.82                     VXGOG                                CBOE Equity VIX® on Google
10.0%                    9.54                        JYVIX                     CBOE/CME FX Yen Volatility IndexSM
9.8%                      32.25                     VXFXI                    CBOE China ETF Volatility Index
9.7%                      14.5                        GVZ                       CBOE Gold ETF Volatility Index
9.7%                      14.31                     EVZ                        CBOE EuroCurrency ETF Volatility Index
7.1%                      14.06                     EUVIX                   CBOE/CME FX Euro Volatility IndexSM
6.6%                      24.38                     VXSLV                   CBOE Silver ETF Volatility Index
5.5%                      30.83                     VXEWZ                 CBOE Brazil ETF Volatility Index
3.6%                      30.05                     VXGDX                 CBOE Gold Miners ETF Volatility Index
0.7%                      90.05                     SRVIX                    CBOE Interest Rate Swap Volatility Index
-0.2%                     8.29                        BPVIX                    CBOE/CME FX British Pound Volatility Index


Today VIX futures had strong volume of an estimated 415,000 contracts, as the near-term July futures rose 19.6%. Below are today’s percentage changes and estimated volumes for VIX futures at various expirations.

% Change            Symbol                 Expiration                            Volume
19.6%                    VIX/N5                   22-Jul-2015                         217,445
12.5%                    VIX/Q5                     19-Aug-2015                       117,410
9.3%                      VIX/U5                     16-Sep-2015                       35,826
7.2%                      VIX/V5                  21-Oct-2015                        21,827
5.9%                      VIX/X5                  18-Nov-2015                      12,751
4.9%                      VIX/Z5                  16-Dec-2015                       6,312
4.4%                      VIX/F6                  20-Jan-2016                        3,325
4.2%                      VIX/G6                  17-Feb-2016                       643
3.8%                      VIX/H6                  16-Mar-2016                      6


Stock indexes in Spain, Italy, France and Germany all declined by more than 3.5% today.
% Change            Index
-1.95%                  DJIA
-1.97%                  UK: FTSE 100
-2.00%                  MSCI Emerging Markets Index
-2.09%                  S&P 500
-2.58%                  Russell 2000
-2.61%                  Hong Kong: Hang Seng
-2.88%                  Japan: Nikkei 225
-3.34%                  China: Shanghai Composite
-3.56%                  Germany: DAX
-3.74%                  France: CAC 40
-4.56%                  Spain: IBEX 35
-5.17%                  Italy: FTSE MIB


Please visit to learn more about dozens of volatility indexes, and to learn about strategies that can help you better manage portfolio volatility.

Russell 2000 (RVX) Volatility on the Rise

After posting new highs last week (1296.00 on 6/23), the Russell 2000 has slipped in four consecutive days closing Friday at 1279.79 (-1.25%).  With this morning’s markets reacting sharply lower on the news of Greece closing its banks temporarily, a closer look at the CBOE Russell 2000 Volatility Index is warranted.  Traded on the CBOE, the CBOE Russell 2000 Volatility Index options can offer an effective hedge.  As highlighted in the chart below, the CBOE Russell 2000 Volatility climbed 1.58 or (+9.76%) in the last 4 trading days providing a hedge to the recent decline in the Russell 2000 Index.

111 rvx

Chart Risks – Weekly Market Outlook

Last week’s strong start for the market faded rather quickly once it became clear Greece wasn’t simply going to be offered a bailout package just because it wanted one. In fact, by the time all was said and done, stocks actually lost ground last week, not to mention ended the week in near-bearish mode.  News out of Greece will likely cause some continued market swings, in both directions, until it is more officially resolved.

News out of Greece will likely cause some continued market swings, in both directions, until it is more officially resolved.

Of course, when we take a step back, none of this comes as a surprise. Although the bulls are still putting up a fight, some are clearly – now visibly – getting tired of propping the market after months and months of gains.

We’ll take that bigger-picture look at stocks right after we dissect last week’s and this week’s biggest economic news.

Economic Data

It wasn’t an especially busy week last week in terms of economic news, but it was a big week (and a bullish week) for real estate. Home sales – new and existing – soared to new multi-year high levels. Existing home sales reached an annualized pace of 5.35 million, while new homes sold at a clip of 546,000.

New and Existing Home Sales Chart
Source: Thomas Reuters

Home prices continue to move upward as well.

Also note that Q1’s GDP growth estimate was scaled back from a -0.7% to only -0.2%. It’s still a step backwards, though the nation’s economy isn’t as far underwater as it was first thought to be.

Everything else is on the following grid: More