Analyzing Equity Market Sector Risk and the Election

So, what do Mexico and the Biotech industry have in common?  They both seem to be braced for excess volatility following the US Presidential election.  Before jumping into all that I’ll explain the table that sums all this up.

A couple of days ago I posted a blog showing that SPX option implied volatility jumped about 2 points when comparing at the money options.   Our friends at CBOE LiveVol calculates ATM implied volatility for all option markets.  Using that information and a little leg work I put together a table comparing IV on Weeklys that expire just before and just after election for various sector ETFs.  At the last second I threw the iShares MSCI Mexico Capped ETF (EWW) into the mix since it has been a topic in this election cycle.  Since November 18th is a standard expiration date I recorded those numbers as well.  Finally, to get a comparison of options expiring before and after the election I calculated the premium (or discount in one case).



Election Week SPX Expirations on Monday, Wednesday and Friday, with Higher Implied Volatility for SPX Puts on Nov. 9

In the October 22 Striking Price column in Barron’s, Steve Sears wrote –“keep an eye on the CBOE Volatility Index, or VIX. Already, some investors are preparing for significant volatility around the Nov. 8 election. Investors recently bought about 6,000 VIX Nov. 30 calls and about 9,000 Nov. 17 calls.”


The table below shows samplings of implied volatility estimates for S&P 500 2100 options with select expiration dates. The Monday, Wednesday and Friday expirations of the November 8 election week highlighted in blue font. According to the table, note that the market is pricing in higher implied volatility just after the election. Earlier today I also checked the SPX “Term Structure” function at Bloomberg for more implied volatility estimates at other strike prices, and it appeared that the implied volatility estimates often were about 2 or 3 points higher for many SPX O-T-M put options expiring on November 9 (versus the SPX O-T-M put options expiring on November 7).   See also an October 24 CBOE Blog for more analysis on this point. The many SPX index option expirations provide investors the ability to implement more targeted buying, selling and spreading strategies.



The table below shows the most recent quotes for VIX futures at around 1:30 p.m. CT on October 25. The VIX Index has tended to be mean-reverting, and the VIX futures that expire in 2017 have higher prices.



Visit the Product Specific Strategies section of the CBOE website to learn more about how index options can help you manage your investment portfolio.

Probing the Buy Side of VOD

One pattern that I notice all the time when using Fibonacci ratios, is that many moves tend to terminate at extensions of prior swings.  I’m starting to get interested in VOD due to this pattern.  Not only are we seeing some key extensions on this chart which are illustrated with the “green lines”, but we are also seeing a nice overlap with many other Fibonacci price relationships.  There are two zones that stand out in particular and the first one is being tested right here and now at the 26.85-27.50 area.  The second zone is 25.59-95.  I am currently stalking this stock for buy “triggers” that tell me it’s worth placing a bet against this support.  At a minimum I’m looking for a corrective rally to unfold from one of these key support decisions. So far I have seen a 30-minute buy trigger against this last low.  I can either define my risk below the recent low or below the first price cluster at the 26.85-27.50 area.  I will back off the buy side  until further notice if BOTH of these key support zones are violated.  


“Election Certainty” Not Showing Up In SPX Options Market

So we keep hearing that the market is unconcerned with respect to the upcoming election or stated another way the stock market is discounting a victory by Hillary Clinton.  I am always skeptical when being told that the market thinks one thing or another without some sort of numbers to back up the statement.  With respect to the market discounting a pending event as being a non-event I always turn to volatility.  Specifically, implied volatility.

If stock market participants are discounting the election results being a non-event then there should be minimal difference between the implied volatility of options expiring just before and just after the election.  With Monday and Wednesday expiring options we have just that.  In fact, we have SPX options expiring on eleven days in November.

I got in contact with our partners at CBOE LiveVol and I got the implied volatility for at the money options for each listed expiration date.  This means I have access to a consistent IV measure for each SPX expiration and with those numbers I created the chart below.


Not that I needed to, but I highlighted the pre-election and post-election expirations in November on this chart.  It goes without saying that SPX options that expire after November 8th are at a premium to SPX options that expire before election day.  In fact, I was surprised that the volatility doesn’t drop more after the election results are expected to be known.

More Weekly Market Outlook – Lower Highs

The bulls and the bears both took their shots at knocking the market off of the fence it’s currently perched on. Neither team could get the job done. Stocks pretty much ended last week where they started it, but more than that they ended the week still trapped between a rock and a hard place.

We’ll look at the range bound stagnation after painting the bigger picture with the broad brush strokes of last week’s and this week’s economic news.

Economic Data

A pretty good dose of economic data last week, especially for real estate. We got housing starts and building permits on Wednesday, and then existing home sales on Thursday (which will be rounded out by new home sales this week).

Before any of that was posted though, on Monday we heard September’s capacity utilization and industrial productivity data from the Fed. It was….ok. Production was up 0.1%, quelling August’s 0.5% lull. And, capacity utilization grew a bit, from 75.3% to 75.4%.  This data has stabilized, and may even be on the mend. We’d like to see more improvement though to expect corporate earnings growth.

Capacity Utilization and Industrial Productivity Chart


Source: Thomson Reuters

As for housing starts and permits, starts took a big plunge, falling to the lowest seasonally-adjusted pace since March of 2015. Hopefully that’s just a fluke, though we can’t gauge the economy on hope. Fortunately, permits edged a little higher, and they’ve remained firm for the past few months. Unfortunately, we need something a little stronger here.

Housing Starts and Building Permits Chart


Source: Thomson Reuters

Everything else is on the following grid:

Economic Calendar




The Time to Listen to Market Prophets? Not EVER!

With so much uncertainty in the world most investors/traders get anxious and worried over losing money and start listening to market sages and so-called prophets.  That is typical and quite natural, yet when the underwear starts getting tight and we begin to sweat because the markets are misbehaving, well we tend to reach for whatever (or, whomever) makes the most sense.  To top the list of uncertainties include the upcoming election, which many are starting to believe is to be a Hillary Clinton win, and Fed policy (a December rate hike?) which is subject to change by the day.

The fact nobody really knows what the final outcome will be creates a level of discomfort so deep into the long term bull market rally.

When the unknowns are out there we often sidle up to those who seem to know, offering some perspective based on historical events or just experience.  Wouldn’t it be nice to follow the lead of someone who has been through the wars more often?  Yet, I have trouble trusting the information as I do not know the motivation – is someone offering advice just for publicity purposes?  Are they talking their book?

I heard someone out there recently claiming to be ‘the prophet’, which I thought quite amusing.  We hear all kinds of predictions regularly about markets but rarely do those ever come to pass.  There are no market prophets, those claiming to have knowledge to see the future with clarity are just snake oil salesmen.  Yet, we tend to listen to such gibberish when we don’t know ourselves, looking for the right answer – bad source.  If anything, we should run away as fast as possible.  The market will always tell the truth.

The business media trots out some ‘stars’ often to try and give some market perspective, but this tends to be self-serving and complicates matters for the viewer.  Recently we heard veiled warnings about a pending ‘doom and gloom’ scenario that was going to threaten markets – some even suggesting to ‘get out of the market’.  This was based on little evidence but opinion-based.  Are you kidding me?

We should always listen and pay attention to the market signals and NOT those claiming to ‘know it all’ with some great certainty.  If the market shows signs of cracking, we’ll see it – we just don’t need to be told over and over again by the boy who cried wolf.  Like a broken clock is right twice a day, these slayers will eventually be right – but how much opportunity was lost if you followed them?  Plenty!

Admiral SPO Puts his Mark on Microsoft

Maury, Maury, Maury!

Admiral SPO Puts his Mark on Microsoft.

Knowing Maury’s thirst for shekels and his motto of “the best things in life are FREE” the Admiral launched a timely pre-earnings trade, a call time back spread.

Maury, known for his Pavlovian behavior jumped in!  On Thursday, October 20th, the day Microsoft earnings were scheduled to come out after the bell, one day prior to OCT options expiration

Admiral sent out the mother of all Maury trades at 2:56 PM CT:

Sell 3 MSFT OCT21 57 Calls and Buy 5 NOV18 57.50 Calls.


MSFT was trading at $57.15 when the trade was sent out and Maury immediately established the trade for $3.44 and awaited the earnings news. Sure enough, Nadella/MSFT CEO delivered a great 3rd quarter results and the stock rallied.

Next day, on October 21, Admiral sent out the order to sell and close the spread at 8:54 CT. Maury, with finger on sell button ready launched his exit at the opening collecting $5.25 for a 53% profit.


Relishing his conquest, Maury with that confident swagger, went whistling to the pub. You’d  think he would offer to buy Admiral a pint, but Maury will always be Maury!

The Weekly Options News Roundup – 10/23/2016

The Weekly News Roundup is your weekly recap of CBOE features, options industry news and VIX Index and volatility-related articles from print, broadcast, online and social media outlets.

A Second VESTment Launches
On Monday, October 18, CBOE Vest announced the launch of the CBOE Vest Defined Distribution Strategy Fund (VDDIX).  VDDIX, the second mutual fund to be launched by CBOE Vest, seeks to generate consistent periodic distributions while preserving capital over the long term.

For more information, see the Press Release  or visit

“Vest Launches Options-Based S&P Mutual Fund” – Daniel O’Leary, EQ Derivatives

“CBOE Vest Launches Second Mutual Fund Focused on Defined Distribution” – Teresa Rivas, Barron’s

Why Own, When You Can Rent? 
For investors with more of a long-term outlook on the market, LEAPS, which are long-term options that expire in years, rather than weeks or months, can be an attractive alternative to buying and selling stock.

“How to Invest in LEAPS” – Jeff Brown, U.S. News and World Report

“Long-Term Options Such as LEAPS Can Lower Risk” – Ellen Chang,

VIX FIX: Volatility’s Vote of Confidence
Markets are ending the week with little fanfare, continuing to operate in a narrow trading range, leaving many investors unsure of future direction.  Despite the uncertainty of  the Presidential election and a potential December rate hike from the Fed, markets have remained calm and the CBOE Volatility Index (VIX Index)  declined  to the13 level after a brief spike to16.  Some market observers, however, are  leery of the quiet market, and feel that it’s only a matter of time before  volatility pops.

“Own VIX Skew into U.S. Election: Vol Manager” – Daniel O’Leary, EQ Derivatives

“The VIX: Not So Fearsome After All?” – Teresa Rivas, Barron’s

“Investors Exit Election Calendars, But Scale of Clinton Win Could Inject Volatility” – Daniel O’Leary, EQ Derivatives

“Scenes From “The New Asset Class: Investing in the VIX” – Value Walk

“Brexit’ Holds Promise for Vol-Hungry Traders – Terry Flanagan, Markets Media

“CBOE VIX: Volatility Up 35% Since Labor Day” – Sam Bourgi, Economic


Weekend Review – Volatility Indexes and ETPs – 10/17 – 10/21

In a bear market we refer to market bounces as ‘relief rallies’.  The drop in volatility last week may be attributed to some sort of relief, whether with respect to expectations around the coming election or that a good part of earnings season has passed without any catastrophic results.  Whatever the reason the curve moved lower as the S&P moved up slightly and the shape is a little less steep.



Weekend Review – VIX Futures and Options – 10/17 – 10/21

VIX worked lower as we all survived, endured, or got through the final debate on this Presidential election.  The stock market moving up a little probably helped the cause as well.  November took over as the front month contract and finished the week at 15.575 or a spread of just over 2.20 when compared to the spot index.  This is actually a pretty narrow spread relative to how steep the VIX curve has been over the past few months.



Earnings Week of 10/24 – 10/28

This week is by far the busiest of earnings season with over 100 companies with  Weeklys available for trading reporting results.   As always the data below is based on the last three years of earnings results unless the ticker is in italics.  The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings.  Finally, double check the earnings dates as not all were confirmed.


Bullish Trade for National Pasta Day

In honor of National Pasta Day, I went searching for a trade that is bullish on a restaurant that serves its share of Italian food.  One Friday, I guess in anticipation of a surge in the consumption of food at Olive Garden, someone put on a bull call spread using options on Darden Restaurants (DRI).  When the stock was trading at 62.62 someone came in a purchased the DRI Nov 18th 62.50 Calls for 1.53 and sold the DRI Nov 18th 65.00 Calls for 0.55 and a net cost of 0.98.  A payoff at November expiration shows up below.


Note that the break even for this trade is at 63.48, a little higher than where DRI was trading when this trade was executed.  If the stock is at 65.00 or higher on the close on November 18th then the net profit comes to 1.52. Weekly Market Outlook – Damage Control

The bulls tried and tried, but it was a lost cause last week. Stocks never recovered from last Tuesday’s stumble, and the bulls squandered their best chance to get back on a bullish track on Friday. All the major indices closed below key technical levels on Friday when the bullish effort that day petered out.

Near-term the market still isn’t completely past the point of no return, but it’s close, and it’s pointed in that direction.  However, while the tide may be pointed in a bearish direction, as we’ve learned several times this year, we can assume nothing. There’s still a chance stocks could come out of this funk mostly unscathed.

We’ll explore the standoff below. First, let’s run down last week’s and this week’s major economic news. There’s quite a bit for both weeks that has and will move the market.

Economic Data

There’s little doubt as to last week’s economic highlight – the release of the minutes from the most recent FOMC meeting. Unfortunately, it didn’t tell us much more than we already knew about the health of the economy. That is, we’re not quite in need of a rate hike yet, but we may need one soon… the same song and dance we’ve heard for a while now.

The other biggie last week was September’s retail sales. They were strong, reversal Augusts’ dip. Retail spending grew 0.6% overall, and were up 0.5% when removing automobiles from the equation. Both were in line with expectations. More important, last month’s year-over-year comparisons have been and continue to be positive, rolling in between 2% and 3% growth (depending on which segment of retail sales you’re looking at).

Retail Sales Year-Over-Year Growth Chart


Source: Thomson Reuters

Finally, though it won’t be until this week when we get the bulk of the most recent round of inflation data, we got a glimpse of it last week with the producer price inflation report. It was up, with or without food and energy…. up 0.3% overall, and up 0.2% on a core basis. Moreover, on an annualized basis, the benefit of cheap oil has finally run its course. Year-over-year inflation (a more meaningful figure) for producers even factoring in food and energy costs swing to a positive pace of 0.7% last month… the strongest pace since late 2014.

Inflation (Annualized) Chart


Source: Thomson Reuters

September’s consumer inflation data will be out this week. It too has been moving higher for a while now. Indeed, it’s starting to reach levels that will force the Fed’s hand.

Everything else is on following the grid:

Economic Calendar



Admiral SPO Delivers a Perfect Maury Trade

In August, Admiral SPO delivered a great BIDU trade.  Most HA Options Members were very grateful for such a brilliant gift from our fearless leader. As usual, Maury was exception to the norm, whose greed was only fueled by the talent at his disposal. He immediately began nagging for another over the top winner. Since Maury is not to be ignored, Admiral SPO obliged with another trade.

On September 8, Admiral SPO sent out a QCOM Straddle: Buy the OCT 21 Expiry 62.50 Calls and 62.50 Puts.  QCOM was trading at 62.59 when the order went out, with a target of 60 on the low end and 65 on the high side. We bought into the trade for $3.12.

By September 29, the stock was trading at 66.95. Maury was beside himself with joy when we sold out his position that day for $6 at a 92% profit.  And, we still owned the 62.50 Put for FREE!


On October 13, QCOM traded as low as $64.30.  Suffice it to say, Maury is holding his breath for another slam lower in the market. If in fact markets do drift lower, you can be sure Fari’s greedy friend will be stalking the Admiral SPO for another Maury trade.