What's On Our Minds...

Volatility as an asset class
 
Abercrombie & Fitch (ANF) is recently down $6.72 to $38.66 on weak European sales and guidance. June call option implied volatility is at 48, August is at 51; compared to its 26-week average of 47.
 
General Electric (GE) is recently up 72c to $19.11 after GE's Capital board declared a $475M dividend to its parent. June call option implied volatility is at 28, July and August is at 25; near its 26-week average.

SINA (SINA) is recently up $6.79 to $58.49 on better than expected Q1 results and optimism surrounding the launch of its Weibo displayed advertising system. June call option implied volatility is at 57, September is at 60; compared to its 26-week average of 67.
 
U.S. stocks mixed to lower on Greece political issues affecting European banks.
 
CBOE Volatility Index-VIX is up 22c to 22.19.

May 23rd – European Summit

The European debt crisis has continued to be an on and off again pain for global markets for a few years now.  Leaders of European nations will formally meet to discuss economic growth and job creation.

June 1st – Monthly Jobs Report

This has always been the most important date on my calendar aside from my wedding anniversary.  Not planning for either one can put me in a fast market condition.  Hiring was strong during the winter months but has slowed since February.  If this continues with the June report it will certainly raise concern that the recovery is waning.

May VIX Futures and Options settle at 21.46 this morning.  Near month is now June.

In the pre-market, US Stocks higher.   In foreign markets Asia was down big on growth concerns, Europe mixed.  The UK lowered growth forcasts for the balance of 2012, but Greek bank withdrawels slowed.

U.S. Housing Starts surprised to the upside, but Permits were soft.  Target beat estimates handily, and was up $0.95 in pre-market activity.

Facebook IPO priced after the close tomorrow.

VIX settlement for May later this morning.  VIX closed 21.97 last night.

Recap for Tuesday, May 15

Analysis from QuickTakesPro founder and Barron’s columnist Michael Kahn, CMT:

S&P 500 (SPX) – at the time of this broadcast, SPX was near 1342, up about 3 points from Monday. The neckline pattern that formed from the head and shoulder pattern on the SPX is broken to the downside. Also, the 50-day moving average has broken down. The support level of 1352 has been broken within today's trading day, will be interesting to see if stays broken at the close.  The MACD (Momentum) is also negative for the SPX.

Discussion from TradeKing Senior Options Analyst BrianOverby:

VIX  - at the time of this broadcast, VIX was around 21 down about a point on the day. VIX had been trading between the 50 day and 100 day moving average for weeks now, which is 17.38 and 18.49 respectively. It also broke hard out of this range when the SPX broke through the trendline that Michael mentioned. The jump to the 21-22 level has sustained since. The VIX futures for June and July are anticipating that these levels are here to stay through most of the summer or at least until some of the uncertainty within the Euro-zone gets cleared up.

Quick Takes Pro “Chart of the Day” - Visa (V)

Visa (V) at the time of this broadcast was 117.45 up 0.73 on the day. It is below its 50-day moving average of 119.01. It recently has tested what appears to be a support level a few times in the previous sessions at approximately 115.60. A trendline below that may also prove to be a support level at the 108.50 mark. The MACD is also negative for V. If V breaks down through current support level of 115.60, we could see it dip all the way to 108.50 because that is where it was before the jump in the stock back in February. Stock is looking kind of weak right now.

Macy’s (M) is a related stock to Visa. It too has broken down through it’s 50-day moving average, has negative momentum and is a consumer stock. At first glance Macy’s chart is very similar to Visa’s except the pattern has already broken to the downside and this may be an indication as to what is next for Visa.

Technical tools used:

- Moving averages

- Support / resistance

- Trendline

- Volatility Chart

Options Guy’s options trade based on “Chart of the Day” – V - Short Call Spread

V – Has had a lot of upside resistance against that 50 day moving average (119) and with the implied volatility and history volatility on the stock in the middle of the trading range (about 25%-28%), based on Michael's neutral to bearish forecast a Short Call Spread with using june options was discussed. June option expiration was chosen because earnings will be released in July and we would prefer to avoid the volatility the news event may create. 

Short Call Spread:

- V at the time 117.73

- Sell 1 V June 120 Call

- Buy 1 V June 125 Call

- Bid/Ask was 1.40 x 1.43

- Max gain is 1.40 credit.

- Max potential loss is 3.60 debit if executed at the current bid price.

- Multi-Leg Commission to enter is 7.55.

TradeKing Options Tools used:  Detailed Quote/Earnings Calendar, Multi-Leg Quote Box, TradeKing Short Call Strategy, TradeKing Volatility Charts, TradeKing Options Chains

Don’t miss the next TradeKing Midday Market Call, every Tuesday midday from 12:00 - 12:15pm ET with Barron’s columnist and Chartered Market Technician, Michael Kahn of Quick Takes Pro, and TradeKing Option Guy Brian Overby. Register here:www.tradeking.com/events

Regards,

Kevin Corrigan

VP - Content and Social Media

www.tradeking.com

May VIX Settlement will take place tomorrow, May 16th.

Marty Kearney

Anyone who has heard of swing trading knows what’s involved: open positions on exaggerated price swings, wait for the correction and then close. A swing trader generally expects to see the round trip within three to five sessions.

The signals are well-known, too: narrow-range days (NRDs) often signal the end of momentum. A reversal day, of course, is the turn. And a volume spike is the third of three popular swing trading reversal signals.

Of course, there is more: candlestick reversals, momentum oscillators, and any technical signal occurring at or near resistance or support. But swing traders face a problem: Using shares of stock limits any ability to diversify just because of portfolio and capital limitations. And many swing traders get in at the bottom of swings with long stock but avoid the top because they don’t want to go short.

Options solve both of these problems. The great leverage possible with options increases potential many times while each contract controls 100 shares for a fraction of the cost.  Risks are also lower if you use only long options, because maximum loss is limited to the relatively small cost of the option. Finally, you can play the bearish swings with long puts, helping avoid the risks of going short on either stock or options.

Going beyond the basic swing trade with long calls and puts, you can also use short side trades including covered calls; collars; calendar spreads; and synthetic long or short stock. The synthetic alternative is quite interesting because net cost is close to zero, but the position duplicates movement in the underlying.

There is even more. You can weight the trade with ratio writes or variable ratio writes, making the favorable movement more profitable than with a straight one-to-one.

Swing trading with options opens many doors beyond the traditional use of shares of stock and reduces risks while expanding diversification. This is one of many ways that options just make sense.

Michael C. Thomsett

www.MichaelThomsett.com 
www.ThomsettPublishing.com

About this week's Heavy Hitter:  Michael C. Thomsett is a widely published options author, with six options books in print, published by John Wiley & Sons, FT Press, Amacom Books, and Traders Library. He blogs at FT Press, Minyanville, Benzinga and Seeking Alpha.

Home Depot (HD) is recently down 50c to $49.41 after reporting Q1 revenue of $17.8B, versus consensus $17.93B. June put option implied volatility is at 23, August is at 26, November is at 27; compared to its 26-week average of 26.
 
Avon Products (AVP) is recently down $2.15 to $18.28 after Coty withdrew its proposal to acquire the company. June and July call option implied volatility is at 47, October is at 42; above its 26-week average of 37.

iShares Silver Trust (SLV) June and July put option implied volatility of 31 is below its 26-week average of 35 as the trust trades near a five-month low.
 
VIX methodology for iShares Silver Trust-VXSLV down 1.3% to 34.57 as silver trends lower.
 
 
U.S. stocks are mixed to higher at midday on investor confidence of German economic growth and expectations for oil to continue trade at five-month lows.
 
CBOE Volatility Index (VIX) is recently down 87c to 21.03 on total option volume of 436K contracts.

Volatility as an asset class
 
Dick's Sporting (DKS) is trading up $2.26 to $49.50 after reporting Q1 EPS 45c, consensus 38c.  Revenue was better than expected at $1.3B, consensus $1.23B. Overall option implied volatility of 50 is above its 26-week average of 34.
 
Groupon (GRPN) higher by $2.99 to $14.71 in the premarket on better than expected results and guidance. Overall option implied volatility of 92 is above its 24-week average of 57.

SPDR Gold Trust (GLD) June put option implied volatility is at 18, July is at 19, below its 26-week average of 21 as gold trades near a four-month low of $1,560.
 
CBOE Gold ETF Volatility Index (GVZ) closed at 20.05, a two-month high: www.cboe.com/GVZ
 
CBOE Volatility Index-VIX closed at 21.87, 10-day moving average is 18.88, 50-day moving average is 17.32.
 
 
 
Puts with volume increases;
 
GLD 5/19/2012 143 20K contracts
 
CHK 6/16/2012 17 20K

NRG 1/18/2014 10 6K

SFI 1/18/2014 5 5K

JPM 5/19/2012 36 5K

AAPL 5/19/2012 560 5K

DF 1/19/2013 5 4K

U.S. equities positive on higher German economic growth and no bad news in Europe. oil falls to a five-month low.

Economic numbers in line this morning.  CPI unchanged, Core up 0.2%.  Retail Sales up 0.1%

Chesapeake Energy (CHK) is recently up 70c to $15.52 after the company said it had arranged for a $3B unsecured loan to aid its financial flexibility as it continues to sell off assets. Also, the Wall Street Journal reported that activist investor Carl Icahn will likely reveal he once again has increased his stake in the company. June put option implied volatility is at 96, July is at 89; above its 26-week average of 46.

JPMorgan Chase (JPM) is recently down 83c to $36.14 as the company continues to deal with the fallout of its $2B trading loss. June put option implied volatility is at 37, July is at 36, August is at 38; compared to its 26-week average of 34.

Best Buy (BBY) is recently up 27c to $19.55 on Chairman Richard Schulze stepping down when his term ends after the company's investigation into its former CEO Brian Dunn found that Dunn violated company policy, Schulze failed to bring the matter to the board's audit committee when he first learned of the allegations. BBY June call option implied volatility is at 44, September is at 48, above its 26-week average of 40.
 
CBOE Volatility Index-VIX up 1.44 to 21.33; S&P 500 recently down 0.74% as investors lighten positions on Europe political issues and China growth concerns.

Though the second losing week in a row wasn't as bad as the first, in some ways, it was more damaging.  We saw lower lows made by most of the major indices, and even the ones that didn't were pushed to the brink.  And in all cases it became pretty clear that support levels are hanging by a thread.  If the bulls don't pull a trick out of their hat this week, things could get real ugly, real quick.

We'll look at the near-term good and bad below, right after we start to paint the bigger picture with the broad strokes of economic data.

Economic Calendar

Last week was light in terms of the number of economic data nuggets we had to sift through, though a handful of important numbers were put on the table.

A couple of them were, of course, in the unemployment claims arena.  Initial claims came in about even, at 367K, while continuing claims rolled in at 3.229 million, slightly down from the previous week's 3.29 million.  Both have been rather stagnant of late.

We also saw a surprise drop in producer inflation (the input costs incurred by factories and plants in making goods ultimately passed on to consumers).  Those prices dropped by 0.2% overall, but on a core basis (excluding food and energy) were still only up 0.2% for April. It certainly pokes the 'rampant inflation' theory from a year ago in the eye, and gives the Fed some room to maneuver.  This Tuesday's consumer inflation snapshot will round out the picture, though the pros don't think the change will be much different from that perspective than it was for producers.

And what about the wild surge in consumer credit levels?  Forecasters were only expecting an $11.0 billion increase for March, but we saw a $21.4 billion increase instead. It's more of the same story we've already been seeing.... the bulk of it was student loans.  Students are trying to secure loan money now before a likely increase in student loan rates on July 1st. 

Economic Calendar

As for the coming week, the fireworks don't begin until Tuesday, but they begin with a bang.  We'll hear about April's retail sales as well as last month's consumer inflation rate that morning.  Retail spending should be up a tepid 0.2%, with or without autos.  Consumer inflation should be non-existent overall, and only up 0.2% on a core (excluding food and energy) basis.  Again, inflation is not anywhere close to being in a position to derail the economy here - deflation may be the bigger worry at this point.

Wednesday's housing starts and building permits should be a meaningful update on the construction front; both should hold steady.  That won't be the important data from Wednesday though.  No, that honor belongs to capacity utilization and industrial production... two data sets with an amazingly high correlation with the market's long-term direction [neither means much for the short-term ebb and flow though].  Each are expected to grow modestly, though that's enough to keep the bull market alive.

We'll hear about last week's unemployment claims on Thursday, though economists don't see much change in the lineup.

All in all there's more good than bad ready to be unveiled on the economic front.  However, given how small the improvements are, investors may still find reason to be dissatisfied.

Stock Markets

To the bulls' credit, they still haven't let the bears push them back behind the last bastion of a foothold (DIA) (QQQ) (IWM). On the other hand, it may be a lost cause.

It's quite clear the sellers have the momentum here, as indicated by last week's lower low, under the S&P 500 Index (SPX) (SPY) April low of 1357, (dashed), and the fact that the 20-day moving average (blue) has crossed under the 50-day line (purple)

That 'last bastion of a foothold' for the S&P 500 is the floor at 1346, where the lower 20-day Bollinger band (dark gray) as well as the lower 50-day Bollinger band (orange) have merged, just in time to set up a support level, and perhaps even inspire a rebound.

That's a long shot at this point though.  The bears have convincingly made their point, and after four days of dancing with those two lower Bollinger bands, the bulls have come up with absolutely nothing.  Take a look at the daily chart, but be sure to keep reading.

SPX & VIX - Daily

At the same time, the CBOE Volatility Index (VIX) (VXX) (VZZ) is now officially trending higher...which is bearish for stocks.  That upward move from the VIX actually started in mid-April, but didn't fully materialize until this week after the VIX got comfortable above its key moving average lines [which have also crossed over for the first time since the middle of last year].

The VIX is also putting pressure on its upper 20-day Bollinger band (red).  If the VIX's ceiling at 21.1 (dashed) doesn't hold it down at the same time the S&P 500's floor at 1346 doesn't hold it up, that should pretty much start the next leg of the current market downtrend.

Now, with the details of the daily chart fresh in your mind, take a look at the weekly chart for the needed perspective.

S&P 500 - Weekly

This is a message we've sent before, but it merits repeating now.... the market's due for a dip, and the chart - as well as the VIX - say that dip is unfurling now.  It's simply a pattern that's been in place since the bull market began back in early 2009.  The SPX is falling now, and the VIX is rising now; even just a quick visual glance can tell you that.  There's still a slight possibility the bulls can step in here and stave off a pullback.  That's the less likely outcome here, now, however.

If things do get really nasty from here, it may take a move back to the 1270-ish area before the bleeding is stopped.

Index Comparison

We mentioned above that all the major indices were hanging by a thread. Here's a closer look at that reality.

The 'thread' is the 100-day simple moving average lines, which are plotted in gray for all the indices on the chart below.  In all three cases the sellers tested that line as a support level.  Though the Dow (DIA) was the only index to close under it, it's clear the NASDAQ (QQQ) and the S&P 500 are both right on the verge.  More than that though, the shape of all three index charts almost says the market's trying to make it happen - it just needs one more good nudge.

The most likely floors for another bearish leg here would be the 200-day lines, which are plotted in green.

Index Charts - Dow, S&P 500, NASDAQ Composite

Trade Well,

Price Headley
BigTrends.com

Volatility as an asset class
 
Yahoo! (YHOO) is up 30c to $15.49 in the premarket after announcing that the Board of Directors has named Fred Amoroso as Chairman of the Board of Directors and Ross Levinsohn as interim Chief Executive Officer, effective immediately. Overall option implied volatility of 33 is below its 26-week average of 39.

Chesapeake (CHK) is recenlty up 67c to $15.50 on activist investor Carl Icahn will soon disclose that he has taken a significant stake in the troubled natural gas company, sources say, the Wall Street Journal reports. Overall option implied volatility of 93 is above its 26-week average of 46.
 
IShares Barclay 20+ YR Treasury ETF (TLT) is higher by $1.36 to $120.91 in the premarket as investor purchase treasuries as a safe haven to global uncertainty.  Overall option implied volatility of 14 is below its 26-week average of 18.
 


Puts with volume increases;
 
SPY 5/11/2012 136 32K contracts
 
BAC 5/19/2012 7 17K
 
AAPL 5/11/2012 570 13K

CBOE Volatility Index-VIX closed at 19.89, 10-day moving average is 18.41, 50-day moving average is 17.23.
 
U.S. equities are lower on Greece’s attempt to form a government.  China lowering bank reserves last night helped Asain stocks slightly.  Res Cap bankrupcy not helping US markets.

Traders talking about NATO summit starting in Chicago next weekend.  Will Graham Nash's "Please Come to Chicago" be the theme song?

Options Action –

A big focus of the opening discussion was about the JP Morgan (JPM – 36.96) issues that came out late this past week.  A trade came out of this discussion that assumes JPM continues to move down over the near term.  Using a put spread to take advantage of the high implied volatility that exists in JPM options.  This trade buys the JPM Jun 36 Put at 1.00 and sells the JPM Jun 34 Put at 0.50 for a net cost of 0.50.  If the stock drops about 3 points from current levels or more at June expiration the result is a 1.50 profit on a cost of 0.50.  The basic idea here is that JPM is going to continue move lower over the next few weeks.

The second trade idea is on Zynga (ZNGA – 7.48) and based on a derivative play with Facebook coming public next week.  With the expectation of a small bounce in the shares and the implied volatility being elevated in front of the Facebook offering the trade recommendation is to sell a put.  A short put position results in the obligation to buy shares at the strike price.  The ZNGA Jun 7 Put could be sold for 0.50 which would be the resulting profit as long as ZNGA is above 7.00 at expiration. 

Investor’s Business Daily – Monday Edition

The Options Institute is teaming up with IBD in June for a very special class.  More information may be found at –

http://www.cboe.com/LearnCenter/ViewSeminar.aspx?SeminarId=67

On page B5 of the Monday Edition (that comes out Saturday morning) there is a good article about finding an early buy point on stocks that are at the beginning of a breakout.  The sample stock is Intuitive Surgical (ISRG – 558.95) and the time frame discussed was from back in 2004.  It is a good tutorial on how to go about picking an entry point on a stock that is in the process of coming out of a long term base.

Barron’s –

Steve Sosnick from Timber Hill was the guest author for the Striking Price column and hit on my favorite topic – VIX.  The article is a great description of how the VIX is considered a fear gauge, but also how this term may be misunderstood.  The VIX is a measure of risk being priced in by SPX option contracts.  Steve illustrates how the VIX should be compared to current recent market volatility when deciding whether the VIX is truly indicating more or less risk in the stock market going forward.  For VIX followers and traders it is definitely a good read.  I know a couple of new studies that I am going to perform have popped into my mind while reading this column. 

On Tuesday, May 1st, $SPX traded at 1415. Now, just 7 trading days later, the entire psyche of the market has become dark and brooding.

$SPX broke down through support at 1390 last Friday. But the crucial level is support at 1340, which has held so far.

Equity-only put-call ratios remain on sell signals. This has been the most bearish indicator all throughout this decline.

Breadth oscillators rolled over to sell signals on May 3rd -- a week ago. Since then they have moved into oversold territory.

For the most part, the volatility indices ($VIX and $VXO) have been bouncing around in the ranges that they had established earlier this year. For $VIX, that is the 17-21 range.

In summary, the selloff of the past seven trading days has taken a toll on the technical indicators. The 1340 level on $SPX remains important, and a close below there would warrant a bearish stance. But if that level somehow manages to hold, the bulls could once again strongly take charge.

Larry McMillan