Happy Birthday to Mick Jagger Who Told Us “Time is on our side”

Today is the 73rd birthday for Rolling Stones front man Sir Michael Philip ‘Mick’ Jagger.  His accomplishments would take up more space that I have available in this posting, but the statement, “one of the most dominant cultural figures of our time” about sums it up.  One of my favorite Rolling Stones songs is “Time Is on My Side” which I believe is a great statement with respect to potential success trading options.  I always think of that song when discussing my belief that individuals need to have time decay on their side when trading options.  Right now we have Wednesday and Friday SPX options, but in less than a month SPX Monday Weeklys (pending regulatory approval) will debut.

The behavior of time decay for at the money options near expiration is nothing new to all levels of option traders.  The chart below shows at the money time decay for an SPX option.  For the quants that need the details I used 12% implied volatility, the days are the number of trading days, the SPX pricing is 2000, and a 2000 strike call as actual option contract.  All of which I think are pretty reasonable assumptions for the current market environment.  Note I highlight the last two days of life for this option on the chart below.

ATM Time Decay

I highlighted the last two days on this chart because, beginning next month, CBOE will list SPX Options that expire on Monday.  We already have Wednesday and Friday expirations in the SPX complex so adding Monday means there will always be two or fewer days remaining until the next SPX expiration.  I think with multiple SPX series expiring each week, all option traders will agree that SPX options now allow traders the opportunity to always have time on their side.

Weekly Market Outlook – Where We Stand As Fed Approaches & Earnings Seasons Is Underway

Despite starting last week out overbought and near all-time highs, the bulls decided by the end of the week they were still buying more.  Friday’s close of 2175.03 was not only 0.6% higher than the prior week’s close, it was a record high close for the S&P 500 (SPX) (SPY). No, it’s not a giant gain, but it’s an impressive one all things considered – however there are plenty of opportunities for profit-taking right now.

The $64,000 question: Can the current rally last? As John Keynes said it, the market can remain irrational longer than you can remain solvent. In other words, it can go further and faster than one might think — and often, the trend is your friend.

On the flipside, while you can hope for the best, it never hurts to prepare for the worst. We’ll look at both the bullish and bearish possibilities below, following a run-down of last week’s and this week’s economic news.

Economic Data

There wasn’t a lot in the lineup last week, though it was a biggie for real estate…especially residential real estate.

The party started on Tuesday, with June’s housing starts and building permits. Both were up, and both up by more than expected. And, one could say the broad uptrend is still intact. That uptrend, however, is slowing down. This could, and should, lead to slowing activity in the foreseeable future.

Housing Starts and Building Permits Chart

MW1

Source: Thomson Reuters

All the same, we rounded out the housing market’s activity with a look at June’s existing home sales. The pace of 5.57 million not only extends a long-term uptrend, but was also a new multi-year high. It’s impressive, even if the starts and permits data says that progress will slow.

New, Existing Home Sales and Inventory Chart

2

Source: Thomson Reuters

We’ll get the new homes sales figure this week, though odds are good it too will continue its steady uptrend. Note that inventory of both new and used homes remain near multi-year lows, perhaps limiting purchase activity (though keeping prices firm).

Last but not least, no chart is necessary, but the FHFA Housing Price Index advanced 0.2% last month, also extending a long-term growth trend.

Everything else is on the following grid:

Economic Calendar

3

Source: Briefing.com

This week will be slightly busier, and further flesh out the real estate picture. Namely, we’ll get new home sales on Tuesday. We saw on the chart above new home sales are trending higher, and are expected to edge a little higher again for June.

This week is also going to be a key one for consumer sentiment… the first such reading from the Conference Board since the Brexit decision. The pros say the consumer confidence score is apt to fall from June’s 98.0 to 96.0. The Michigan Sentiment Index is projected to move from June’s final score of 93.5 to a third and final reading of 91.5. Though down, the pullbacks are not frighteningly harsh.

Consumer Confidence Chart

4

Source: Thomson Reuters

More

Weekend Review – Volatility Indexes and ETPs – 7/18/2016 – 7/22/2016

VIX was the biggest mover among the four S&P 500 related volatility indexes this past week.  VIX dropped more than 5% while VXST lost 0.39% and VXV was down 1.19%.  Longer dated volatility actually rose last week with VXMT gaining 0.28%.  The curve remains very steep which I’m taking as uncertainty abounding with respect to the balance of 2016, especial the fourth quarter of 2016.

VXST VIX VXV VXMT Curve

More

Weekend Review – VIX Futures and Options – 7/18/2016 – 7/22/2016

Last week VIX broke the 12 level, which surprised some market participants who felt 2016 was going to be a roller coaster ride that kept VIX at elevated levels.  I have already spent time on the Wall of Shame as I count as someone who felt VIX was spend more time around 20 than it has in several years this year.

Do note on the term structure chart below that the shape of the curve is steep.  Those of us grasping at straws with respect to elevated volatility see that as a glimmer of hope for higher VIX sooner rather than later.  Also, check out the October contracts which was up a bit last week despite the 5% drop in VIX.

VIX Curve Table

More

Weekend Review – Russell 2000 Index and Options – 7/18/2016 – 7/22/2016

Last week the performance for the Russell 1000 (RUI) and Russell 2000 (RUT) was as close as I’ve seen it since I’ve been doing these blogs.  RUI gained 0.67% and RUT was higher by 0.65% for what we will say is within the margin of error (I’m stealing from the political polls).  For the year RUT is maintaining a small lead on RUI up 6.78% versus 6.40%.  This is the second week in a row with RUT in the lead which is pretty impressive considering back in February RUT trailed RUI by about 8%.

RUT RUI

More

The Weekly Options News Roundup – 7/22/2016

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.

Live With Livevol
CBOE hosted the “Professional Traders Summit” this week, featuring options industry Catherineprofessionals discussing various trading strategies. During the event, CBOE’s Catherine Clay, Vice President, Business Development, provided a live demo of Livevol X, a next-generation execution platform that integrates advanced trading capabilities and complex risk analytics.  For more information on CBOE Livevol options analytics and data tools, visit www.livevol.com.

VIX FIX
As summer temperatures heat up, stocks are sizzling with the Dow in record-setting territory and volatility evaporating with the CBOE Volatility Index (VIX) breaking a two-year low, closing at 11.77 on Wednesday.  Skeptics of the market rally remain cool, however, leery of an inevitable correction in the near future.

“The VIX is at its Lowest Point in a Year – But Don’t Get Complacent Just Yet” – Akane Otani, Wall Street Journal
http://on.wsj.com/29Y0i6Q

“The VIX is Crazy Low; Time to Run for Cover?” – Chris Dieterich, Barron’s
http://on.barrons.com/29YBNE2

“Bull and Bear Take on the Low VIX” – Jamie Chisholm, Financial Times
http://on.ft.com/29UQUP1

“Dormant VIX Belies Options Bonanza for Bets on Earnings Swings” – Joseph Ciolli and Bailey Lipschultz, Bloomberg
http://bloom.bg/2afAOTf

“Why is Everyone so Vexed About the VIX?” –  Helene Meisler, The Street
http://bit.ly/29W4A1d

“VIX Falling, Volatility Falling, Understanding Froth, Where We Are” – Jack Steiman, Investing.com
http://bit.ly/29VnlPD

VIDEO
“No Fear: Here’s Why the VIX has Cratered”
CNBC
Air Date: 7/18/16
2:50 p.m.
http://cnb.cx/2aga6Lv

 

Earnings Next Week – 7/25 – 7/29

Next week is the heaviest earnings week with respect to stocks with Weeklys that I can recall.  As always the data below is based on the last three years of earnings results unless the ticker is in italics.  The columns show the biggest rally, biggest drop, average move, and what the stock did last quarter in reaction to earnings.

Earnings

The Clean-Plate Club

Little did I know how soon I’d be back to report on the status of the last line of my most recent post – specifically my declared hope/dream to be rid of the SVXY that became like a pebble in my shoe.

Yesterday (July 20th), when VIX scraped low in the elevens and SPX scaled a steep hill, I starting thinking about and fearing a future that might not include SVXY prices more attractive than those I was seeing point-blank.  Biting the bullet and sweating through the pain, I sold all shares of SVXY and then bought back all shares of TVIX, enjoying for the second the sensation of a clean plate, a fresh slate, and freedom from a position I had not been happy with since taking it on more than a month ago.

Then I turned attention to the fragment still left after cleaning up, the element making the plate NOT clean at all.  Perhaps as a balm to the recently acquired wounds (SVXY is what I speak of; not referring to the TVIX which never did a thing to harm me) I decided to leave my SVXY short calls (had previously been covered) undisturbed.  (Now naked.)  So all I could hope for was one direction for VIX and the other direction for its friend SVXY, and I’d call SVXY a friend as I’d reap (hopefully) the benefit from deflating premium on the calls I had sold (detailed in previous post).  Those calls were SVXY July29 61.50 calls, sold for $1.00 last Friday, July 15th.  Pictorial of the story is below:

Oops!  I gave away the ending to this story.  Today in a fit of fear that SVXY might rise again to bite me (no, more like rip my leg off), I made the decision – loathe though I am to ever take a loss – to buy those calls back for $1.10 each.  Two reasons went into the decision:  1. I didn’t want to wait and see if this option would move against me even more than it already had.  Yesterday it traded for $1.60, and that was with SVXY never reaching so high as $61 during the day.  Significant moves higher in SVXY next week would inflict some real damage on me, I knew.  So I took the not-quite-even buying price and got out.   2. While I wanted to stick to my original plan and just have the shares called away from me next week and keep the premium, I had already negated half that plan (I had sold the shares), and after accounting for the risk I just mentioned in point 1, I didn’t think waiting one week to learn the outcome of this trade was worthwhile or prudent.  In making the calls naked, I had turned the nice dog on a leash into a Tasmanian devil off the leash.

So that’s all scrapped and I’m not very happy about it.  Let’s total up all the gains and losses in the pile, though, to assess the exact damages:

As printed last week:

Above is one small collection of trades revolving around the SVXY position.  There is the $1,867 collected as short put premium; this resulted in the shares being put to me (you will see below that some were put to me early and some upon expiration.)  Also, there are two sets of covered calls I wrote against the shares after they were put to me; one set expired worthless and I booked $307 gain; one I bought back and booked $173 gain.

Add in the remainder of the transactions:

There are the lots of shares put to me; 600 shares assigned to me on Tuesday of the week of expiration and 200 shares assigned after expiration.  Then you see my sale of the shares today.  The difference is my loss on the shares.  Also above are the calls I wrote against the shares last Friday; today I bought them back at a loss of $107.  Not pictured is a fee I had credited to me by the brokerage as a courtesy, which the kids suggested be used to buy ice cream (and that we did.)

Adding the pluses and subtracting the minuses goes like this: Pluses: $1,867 + $173 + $307 + $20 + $48,230 = $50,597.  Subtract: -$39,020 -$13,020 -$107 and the end result is a minus figure of $1,550.

Let’s not forget to mention TVIX shares sold short and then covered.  I mentioned in the last post that I had sold TVIX short at $1.60.

Yesterday (July 20th) I covered them at $1.37 and will look for a place to re-short.  See the first graphic in this post.  As of this writing (Thursday, July 21st at 2:40PM), TVIX is $1.45.  What is it as you read this post?  With the help of VIX, which I doubt will stay the same every minute from here on out,  I’ll make sure we have plenty to talk about next time – you can be sure of that!

Analysis of an IBM Earnings Trade

Students from CBOE classes often keep in close touch with us long after they have visited the Options Institute.  I heard from one OI alumnus on Monday who noticed that IBM was set to report earnings after the close. They also had taken a look at the stock price reaction to earnings over the last three years.  On average IBM has moved up or down about 4%, but the majority of those moves had been to the downside.  The thing that stood out for this former student was that the biggest move to the upside out of IBM was only 1.77%.  Based on that information, with IBM just under 160.00, they decided to do the following trade –

Sell IBM Jul 22nd 165 Call at 1.69

Buy IBM Jul 22nd 180 Call at 0.09

Net Credit = 1.60

The payoff diagram below assumes they will hold the trade through Friday’s expiration (they didn’t).  At first glance the dollar risk / reward isn’t all that attractive with a 1.60 gain vs. a potential 13.40 loss.  However, IBM would need to rally 12.5% after earnings which would be well outside the historical norm.

IBM PO 2

I’m able to write this trade up for two reasons.  First the trader behind it agreed to let me tell their trading story.  Second, they exited the short leg of the spread today though buying back the 165 Call at 0.06.  IBM is still hovering around the 160.00 range and the 165 Call experienced what trader’s commonly refer to as a volatility crush.

From the trader I got a the comment that they didn’t think the last $6 of profit was worth checking the stock two or three times a day.  It’s hard to argue with that.

 

How Judy Greer Might Suggest Cheryl Tunt Hedge Her Portfolio

I’m using my blogging ability to wish a happy birthday to an American Treasure, Judy Greer.  Greer first caught my eye as the younger sister in the under-appreciated classic Chicago movie, Kissing a Fool.  Many people may remember her as Jennifer Garner’s enemy in 13 Going on 30 (I was rooting for Judy’s character).  She’s also appeared in many TV shows such as Arrested Development and Two and a Half Men.  My favorite role, however, just uses Judy’s voice as Cheryl Tunt in my favorite animated series Archer.  For those unfamiliar with her character in Archer, she works as a receptionist, but is extremely wealthy.  I would assume with such wealth Cheryl has a very diversified portfolio and if she watches the markets closely may sometimes be concerned about a pullback in the stock market.  If Judy Greer’s talents include knowledge of the option markets I believe she would suggest Cheryl Tunt consider a collar with SPX options to lock in the value of her portfolio in a low cost manner.

With anticipation that the S&P 500 may give up 10% or 20% and take Cheryl’s fortune down with it, Judy may suggest buying S&P 500 (SPX) put options in a dollar amount equal to the value of her portfolio and then selling SPX call options to help pay for that protection.  The result can be locking in the value of a portfolio, but of course, giving up any upside.  With 100’s of millions of dollars in the bank, Cheryl Tunt probably would be most concerned with preserving that capital than growing it, I mean how much money does a girl need?

As a more specific example, the S&P 500 is trading around 2160 as I type this, if Cheryl were concerned about the stock market through the end of August she may consider purchasing the SPX Aug 31st 2160 Put for 34.10 and selling the SPX Aug 31st 2160 Call for 29.10 and a net cost of 5.00 per collar or $500 before commissions.  This would cost about 0.25% of the portfolio value since the notional value of each of these SPX options is equal to $216,000.  The result of this would be sacrificing any market upside, but being assured that in the case of some sort of market correction, the value of her stock portfolio is safe.  At least through August 31st.

Hunter S. Thompson Would Suggest Focus in Your Trading

If he were alive today Hunter S. Thompson would be one year short of becoming an octogenarian and celebrating his 79th birthday.  Anyone who has seen Johnny Depp’s depiction of the ‘gonzo journalist’ in the 1998 movie Fear and Loathing in Las Vegas knows that would be nothing short of a miracle.  What initially made Thompson famous was the book Hell’s Angels:  The Strange and Terrible Saga of the Outlaw Motorcycle Gangs which was published in 1966.  When researching the book, he immersed himself in the culture 1960’s motorcycle gangs by spending almost all of his time with the Hell’s Angels chapters in San Francisco and Oakland for almost two years.  The result was a wonderful work where Thompson was writing about something he was focused on very intently.  I believe if Thompson were alive today he would agree that this sort of focus can be the key to success in trading.

When I travel on behalf of CBOE I often get questions regarding the success rates of individual traders.  There are no real statistics to refer to, but I do know that successful traders tend to be focused on the markets they trade and the strategies they use to implement their market outlook.  Traders do not have to trade the latest fad or most recent stock mentioned by a talking head on your favorite business network (think Nintendo and the Pokemon Go craze).  Also, by focusing on just a few markets or individual stocks you have an advantage on traders who spread themselves too thin.  As far as the actual trades used to take advantage of a market outlook, sticking with a small number of those is another key to success.

Hunter S. Thompson became an internationally known author after focusing on a specific topic and then writing about it.  I’m pretty sure he would say this sort of focus would be a key to success as a trader as well.

Weekly Market Outlook – A Breakout Amid High Valuations

The market (the S&P 500 anyway) rekindled the rally early last week, finally pushing through the resistance of its May 2015 peak at 2135 to move to a high of 2169. But, it didn’t end the week with the same zeal it started it with. In fact, on Friday the index lost a little ground, and logged the first lower low in almost two weeks.

A sign that the weight of the 8% gain over the past three weeks and the 16% gain since February has become too much? Possibly. Yet, that doesn’t inherently mean the market has to pull back here and now… though it would be oddly impressive if stocks were to advance any deeper quickly, with an already-frothy valuation.

We’ll discuss the recent strong market momentum below, after dissecting last week’s and this week’s economic data.

Economic Data

Last week was plenty busy on the economic news front, though there were only three biggies worth a closer look…. Inflation, industrial activity, and retail sales. All but the producer price inflation data was unveiled on Friday. In no certain order…

Inflation is mixed, but even with last month’s broad rises, it’s contained. The Fed’s only worry needs to be that the current trend is going to be unstoppable when the time comes (or stoppable only with huge Fed intervention).

As of the latest look, the overall consumer inflation rate stands at 1.0%. It’s 2.3% when taking out food and energy, and that’s rising fast. It’s tolerable though. And, producer price inflation is negative overall — on an annualized basis — and only up 0.9% when taking food and energy out of the equation.

Inflation Chart

1

Source: Thomson Reuters

As for manufacturing productivity, it was marginally better in June. Capacity utilization edged a little higher, to 75.4, while the manufacturing productivity index moved up to 103.9. Both rolled in better than expected to. However, neither are back into firm uptrends yet. It will take a couple more progressive months before the data is constructive again.

Capacity Utilization and Industrial Productivity Chart

2

Source: Thomson Reuters

Retail sales were surprisingly strong last month too, exceeding expectations with or without automobiles factored in. Last month, overall retail spending was up 3.0% versus spending from June of 2015. That marks the fifth month in a row retail consumption not counting food services was up on a year-over-year basis, and when factoring in food, we’re well into a multi-year streak of some degree of monthly year-over-year growth.

Retail Sales Chart

3

Source: Thomson Reuters

In other words, consumers are doing their fair share to pull the economy along, despite little corporate or government help.

Everything else is on the grid:

Economic Calendar More

Weekend Review – VIX Options and Futures – 7/11 – 7/15

With VIX testing 2016 lows this past week the soon to be retired July future headed lower at a slightly faster rate than VIX dropping 6.43% versus 4.02%.  Even with the bigger loss on the week the July contract finished the week at more than a one premium to VIX.  We will see on Wednesday morning if the futures or the spot index win the tug of war into July settlement.  I would be remiss if I didn’t point out the steepness of the VIX curve from August to December.  VIX is low now, but the futures are braced for some sort of move higher.

VIX Curve Table

In a previous blog I mentioned VIX call buying that appeared to be short covering on Friday.  Here are the two instances that I came across.  First, one good trade appears to have sold 1000 of the VIX Jul 27th 22 Calls for 0.75 back on July 1st.  They came in Friday and bought those contracts back at 0.15 for a nice profit of 0.60.  The second trade has a couple of moving parts.  Back on July 6th there was a seller of 3000 VIX Jul 27th 15 Calls at 3.12 who also purchased 3000 VIX Jul 27th 23 Calls for 0.70 and a net credit of 2.42.   They closed on leg of this trade by covering the short calls for 0.85 on Friday and chose to leave the long piece of the spread trade open.  This means they have booked a profit of 1.57 and if we get any volatility event in the next few days they may improve on that outcome by cashing out the long 23 Calls.

Weekend Review – Volatility Indexes and ETPs – 7/11 – 7/15

Short term volatility was the big loser among the four S&P 500 related volatility indexes as VXST lost over 10% last week.  This was more than two times the drop in VIX and more than three times the drop in VXV and VXMT.  The result is a pretty darn steep curve indicating concerns about the second half of this year for the stock market are lurking around in option volatility.

VXST VIX VXV VXMT

More