What's On Our Minds... - Page 2

Volatility as an asset class
 
McDermott (MDR) is recently $1.37 to $11.26 on better than expected Q1 results, margins and bookings outlook. June call option implied volatility is at 55, August is at 54, November is at 49; below its 26-week average of 59.
 
Nordstrom (JWN) is recently down $2.40 to $51.13 after backing FY12 EPS $3.30-$3.45, consensus $3.48. June call option implied volatility is at 25, July is at 23, October is at 27; below its 26-week average of 33.
 
Nuance (NUAN) is recently up 18c to $23.27 after selling off to $21.71 as Q2 profits fell 49% on greater expenses and higher tax provisions. June call option implied volatility is at 41, July is at 38; below its 26-week average of 45.
 
U.S. equities are near their high of the day after opening lower on a JPMorgan (JPM) $2B credit derivative loss.
 
CBOE Volatility Index (VIX) up 6c to 19.89. VIX May and June 24 calls are active on 222K
contracts.

Volatility as an asset class

Nvidia (NVDA) is recently up 94c to $13.38 after reporting Q1 adjusted EPS 16c, consensus 10c. May weekly call option implied volatility was at 118, May standards is at 68, June is at 46, September is at 43.

JP Morgan (JPM) is recently down $3.29 (~8%) to $37.44 in the premarket after announcing a large, illiquid hedge position which has already resulted in a $2B loss. JP Morgan overall option implied volatility of 30 is below its 26-week average of 34.

Arena (ARNA) is recently up $3.54 to $7.20 in the premarket after an FDA advisory panel voted 18-4 in favor of the company's obesity drug. Overall option implied volatility of 201 is above its 26-week average of 141.
 
Financial Select Sector overall volatility at 25, 26-week average is 25.
 

CBOE Volatility Index-VIX closed at 18.82, 10-day moving average is 18.05, 50-day moving average is 17.18.

U.S. equities are lower by .5% on JPMorgan $2B credit derivative loss. European stocks lower on JPM news and another Spanish bank bailout.  To pile on with more bad news, China and India had very soft economic numbers and one analyst lowered AAPL estimates.

April PPI came in with a drop of 0.2%, better than the flat to off 0.1%.  The Core rate (excluding food and energy) came in as expected showing a rise of 0.2%

Remember Mom Sunday.

Volatility as an asset class

PepsiCo (PEP) is recently up $1.19 to $67.13 after reiterating that it is targeting nearly $8B in cash flow from operating activities and that it anticipates more than $3B in share repurchases for 2012, and expects to pay $3.3B in dividends for 2012. Overall option implied volatility of 15 is below its 26-week average of 18.

Newell Rubbermaid (NWL) is recently up 18c to $18.45 after announcing a 25% dividend increase to 10c per share. June put option implied volatility is at 32, September is at 33; below its 26-week average of 35.
 
Costco (COST) is recently up $1.59 to $84.12 after announcing a quarterly cash dividend increase to 27.5c from 24c per share. June put option implied volatility is at 23, July is at 21; compared to its 26-week average of 21.

U.S. equities are higher on calm European debt markets.
 
CBOE Volatility Index (VIX) is recently down 1.16 to 18.92. May 18 and June 22 puts are active on total volume of 173K contracts.

Volatility as an asset class
 
Tesla Motors (TSLA) is up $2.50 to $32.56 in the premarket after reporting Q1 adjusted EPS (76c), consensus (69c). Overall option implied volatility of 58 compares to its 26-week average of 51.
 
Priceline.com (PCLN) is recently down $10 to $708.95 in the premarket on guidance of Q2 adj EPS $7.20-$7.40. Overall option implied volatility of 74 is above its 26-week average of 42.

Cisco (CSCO) is down $1.48 to $17.30 in the premarket on Q3 EPS 48c, consensus 47c and the company issuing cautious guidance. Overall option implied volatility of 32 compares to its 26-week average of 31.
 
U.S. equities are mixed to higher.  Asian stocks decline on Euro/Greece concerns, but European stocks led by DAX +1% may help US equities.  Weekly jobless claims fell slightly.
 
CBOE Volatility Index-VIX closed at 20.27, 10-day moving average is 17.79, 50-day moving average is 17.17.

Read more: http://www.xpoundblog.com/2012/05/market_recovers_dollar_holds_0_1.html#ixzz1uOw4Y456

The reputation of options as high-risk speculative side bets persists even as the market expands and its utility becomes more mainstream. But in fact, options can be speculative and high-risk or very conservative and used to manage risk in a long position portfolio.

The idea of options as risk management tools should not be surprising; in fact, more traders and investors are using conservative strategies to reduce risk and augment portfolio income than ever before. Think about the many combinations and hedges that do just that, and it becomes obvious that options are great ways to manage the portfolio beyond the traditional decisions, limiting you to buy, hold or sell.

For example, a stock in your portfolio recently leapt to the upside and gained 20%. You think it will retreat at least to a degree. So do you sell? Maybe you really want to keep this company in your portfolio, but at the same time you’re afraid of losing those paper profits. Second, if you do sell, it will be a short-term capital gain and your taxes will take a hit you’re not prepared for. This is where several possibilities come in, including the insurance put to gain downside protection; the deep ITM call (advancing yourself income far above your original basis, so that if the stock price does retreat, you close at a profit; or if the stock price does not retreat you accept exercise, close, or roll forward). These are only the most obvious examples; if you think about it, you can come up with many more conservative options strategies to manage portfolio positions, protect paper profits, and create income.

Looking at the opposite movement: What happens if your stock price declines and now you’re stuck with a paper loss? You expect a rebound, but how long will that take? You need a recovery strategy in this case. It may consist of long calls or even short puts. You reduce your paper loss in either case when the stock price moves up. And if it continues down, your short put discounts your loss and you can close or roll forward. In other words, there is always the possibility of a way out, that you probably do not have just by owning stock.

Options and their perception in the market are gaining a better reputation. They might have been the market bad kid many years ago, but today they have redeemed themselves. As the range and scope of strategies grows and as options expand into many more forms of underlying, more investors will embrace them -- gradually perhaps, but eventually even the most ardent old-style buy-and-hold true believer will be ready to take options home to meet the folks.

Michael C. Thomsett
 

www.MichaelThomsett.com 
www.ThomsettPublishing.com

Volatility as an asset class
 
Walt Disney (DIS) is up 26c to $44.56 in the premarket after reporting Q2 EPS ex-items 58c on revenue of $9.63B.  Overall option implied volatility of 25 is below its 26-week average of 29.

Macy's (M) is down $1.57 to $37.94 following the affirmed view of FY12 EPS $3.25-$3.30, consensus $3.41. Overall option implied volatility of 34 is near its 26-week average of 35.

SodaStream (SODA) is recently up $5.11 to $34.34 after a Q1 beat and raised outlook. Overall option implied volatility of 86 is above its 26-week average of 63.
 
 
Stocks with significant call strike volume increases;
 
SPY 6/16/2012 140 16K contracts
MS 6/16/2012 18 14K
AVP 7/21/2012 20 10K
ARNA 5/19/2012 3.5 9K

CBOE Volatility Index-VIX closed at 19.04, 10-day moving average is 17.46, 50-day moving average is 17.13.

U.S. equities are lower on European capital uncertainty. S&P 500 approaching fairly critical support levels.

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I pay more attention to what is being done than what is being said.  We can listen and believe in whatever is spoken but at the end of the day it is the actions that count most.  We see what is being done everyday by market players – buy, sell, hold.  We hear analysts say this or that about company XYZ, just an opinion.  We listen to company executives spin a recent quarter and offer up hope for the future.  All of that chatter is meaningless – show me what is being done rather than being said!

The last couple of days may have put the bulls on their heels.  No dip buying, increased fear, buying protection (high put/call ratio), and increased volatility.  Perhaps the reality of the economy slowing down from the blistering pace of 2.2% in Q1 (insert joke here) is hitting investors and traders.

Friday’s non-farm payrolls number was not horrible when you factor in the adjustments, revisions and seasonality but it is a far cry from where the economy should be on job growth. At this point of a long cycle the economy should be creating more than 300K jobs a month to make up for the enormous losses in 2008/09.

What action did we see the last few days?  Selling – pure selling of stocks.  For whatever reason there is, it doesn’t matter what that reason – the sell button was far more active than we’ve seen in recent days/weeks.  I don’t care the excuse – there are a million of them.

We can argue about the reasons for the dismal numbers but the facts are there – low job creation will hold back a strong recovery.  The results (or lack thereof) may be a game-changer come November. Additionally, there is nothing the Fed can/will do to improve the situation – they have done so much already and have already said the road to recovery would be long and difficult.

Timing is everything in this business.  Not being prepared at the turn can be costly.  As an options trader I prefer to wait for signals before making a financial commitment.  That timing will always be later than most but will serve me better as a trend follower.  Momentum is a powerful signal and shows me where money moving.  Again, action speaks to me more than anything.

We are upon one of the worst months historically for markets.  Why is that?  Is there any month in the calendar that tells you to ‘go away’?  From a psychological standpoint the phrase ‘sell in May and go away’ is paralyzing to an investor.  Should you sell some or all of it?  Do nothing?

If you do sell, when do you get back in the game?  There are more questions, too.  Do you play defense?  Protect gains rather than sell?  Do you join the ‘talking herd’ or just follow your own plan?  Too many questions to answer and you then suffer from analysis paralysis.  Confusion – indeed.

What I teach my clients or students about this troubling issue is to be true to the plan – the ultimate goal.  Do not listen to the noise, rather pay attention to what the market is saying (action) rather than what is being talked about in other circles (words).

If you are a contrarian, don’t just go against the grain ‘just because’.  Have a game plan in mind and stick to it.

Bob Lang

Bob Lang is the Senior Market Strategist for options trading newsletter Explosive Options

Volatility as an asset class
 
Scotts Miracle-Gro (SMG) is recently down $8.75 to $46.20 on lower than expected FY12 EPS guidance. June put option implied volatility is at 29, September is at 30; near its 26-week average of 31.

OfficeMax (OMX) is recently up 46c to $4.96 after reporting Q1 adjusted EPS 23c, consensus 16c. June call option implied volatility is at 56, August is at 54; below its 26-week average of 67.
 
Mako Surgical (MAKO) is recently down $14.84 to $26.55 after the medical device manufacturer had higher cost growth than revenue. June put option implied volatility is at 67, August is at 69, above its 26-week average of 59.
 
U.S. equities are lower as markets sell off on expectations Greece left-wing leaders have a plan to leave the Euro.
 
CBOE Volatility Index-VIX is recently up 1.02 to 19.96, above its 10-day moving average of 17.56 and its 50-day moving average of 17.15.

Volatility as an asset class
 
Electronic Arts (EA) opens down 68c to $14.45 in the premarket on weak core revenue and less than expected guidance. Overall option implied volatility of 52 is above its 26-week average.
 
Rackspace (RAX) is off $7.80 to $50.00 on less than expected earnings and customer additions. Overall option implied volatility of 50 is above its 26-week average of 45.

Wynn Resorts (WYNN) is off $4.00 to $121.19 on Q1 profits decreasing 19% on a smaller cut of revenue from its table games in Las Vegas. Overall option implied volatility of 44 compares to its 26-week average of 47.
 
CBOE Volatility Index-VIX is at 19.33, a gain of 0.39 after closing at 18.94, 10-day moving average is 17.37, 50-day moving average is 17.11.
 
 
Stocks with significant put strike volume increases;
 
SPY 5/19/2012 140 10K contracts
 
AAPL 5/11/2012 570 8K
 
BAC 7/21/2012 12 7K
 
EA 5/19/2012 15 6K

U.S. equities are lower on concerns Greece may default on its debt in June.
 

What a week!  Stocks got whacked on Friday, we saw a surprise winner in a great Kentucky Derby, employment levels managed to turn things around before they got dire (sort of), and oil is back under $100 for the first time since February.  What the heck is going on?  We'll look at almost all of it below, starting from the top - with the economic data - and working our way down.  You might want to hang on tight too, 'cause we got a lot to get through, wrapping up with a quick earnings scoreboard.

Economic Calendar

There was just too much stuff in the economic lineup last week to touch on all of it, so we're just going to hit the highlights, and make the key points... starting with the obvious biggie - the employment situation.

The good news is, the unemployment rate dropped to 8.1%.  Almost just as good, the number of people on extended and emergency benefits also dropped, even if just slightly.  For the weekly data, both continuing claims as well as new claims fell, likely renewing well-established downtrends for each.

Yet, all that moderately good news wasn't enough to trump the one piece of bad news... that only 115K nonfarm payrolls were added in April, and only 130K nonfarm private payrolls (meaning the government shed 15K workers).  Neither came close to expectations, and seeing as how this is the market's biggest vulnerability - low employment - the market voted with its dollars, selling stocks in protest of tepid job creation.

Unemployment Snapshot, as of April 2012

Everything else was a mixed bag. Income was up 0.4%, beating the expected 0.2% rise for March, but spending - at a 0.3% increase - fell short of the forecasted 0.5% improvement.  Factory orders were down by 1.5%, yet the ISM Index for April grew rose from 53.4 to 54.8.  The Chicago PMI reading fell from 62.2 to 56.2, yet while construction spending was nearly flat at a 0.1% rise.... though that easily topped the forecasted 1.4% dip. 

In other words, last week gave the bears enough ammo and motivation to dig in, so they did.

Economic Calendar

This week should be much less hectic on the economic front.

Consumer credit kicks things off on Monday.  The pros say total credit usage is going to rise by $11.0, which is significantly better than February's $8.7 billion increase, yet actually below most of the recent readings (six months' worth) in the high teens.

Then there's not much else in the lineup until Thursday's unemployment claims, though they're clearly going to make waves.  Economists say this week's numbers should roll in at around last week's levels.  Any moderate variation above or below could mean fireworks for the better or worse (depending on the direction of the variation).  Just be ready.

On Friday we'll hear about producers' inflation... the PPI.  It should be flat overall, and only up 0.2% on a core basis.  Inflation has NOT become the problem many expected **bleep** to become a year ago.  The consumer inflation numbers won't be out until the following Tuesday. 
 
Stock Markets

Last week's 34.26 point (-2.44%) dip for the S&P 500 (SPX (SPY) was the biggest weekly loss so far this year, leaving the index at 1369.10.  That's not even the troubling part of it though (for the bulls).  No, the most troubling part about last week is that the SPX closed back under the 20-day and 50-day moving averages - again - just a week after it fought so hard to crawl back above them.  There's a nuance this time, though, that makes this one a little more troubling than the last...... this time, the pullback pulled the 20-day average line (blue) under the 50-day line (purple) for the first time since December.  Not good.  Take a look, but keep reading.

SPX & VIX - Daily

You'll see the same basic bearish idea on the weekly chart in a second, but before you stick your head in the even, let's look at this thing from the other angle.

Yes, for a while now we've been (mostly) pounding a bearish drum warning (DIA) (QQQ) (IWM).  It wasn't a call for a new bear market.  It was just an expectation of a modest correction after the market become so incredibly overbought.  Last week's dip is part of that correction effort.  Here's the thing... the S&P 500 stayed that pullback off for so long, it gave the index's key long-term moving average lines like the 100-day and 200-day average time to catch up. The 100-day average (gray) is now at 1343, and the 200-day line (green) is at 1311.

There's another well-proven floor for the SPX at 1357, which lines up all of April's lows (dashed), and is also where the lower 20-day Bollinger band is waiting.

Point being, there's not a ton of room left to fall before the S&P 500 finds organic support.  Until the SPX actually moves under at least the 1342 level, we can only chalk the bearish pressure up to volatility.

To make the mess even more complicated given the size of Friday's plunge (-1.6%), there's a reasonable chance of a dead-cat bounce in the making.  It could be an inspiration for the bulls to give it another try, making most of the prior discussion moot.

Back on the other side of the fence, the CBOE Volatility Index (VIX) (VXX) (VXZ) has resumed its uptrend, and like the market's bigger-picture shift, the VIX's 20-day average is now above the 50-day line for the first time since last fall.  And, visually speaking, the daily chart of the VIX does indeed show us upward momentum is trying to develop.

If you really want to put it all in perspective though, check out the weekly chart.  With the weekly view of the S&P 500, we can see just how vulnerable the market is following the big December-through-April runup.  If the floors around 1345 don't hold up, there's not much else left to stop the bleeding for a while.

More than that though, it's with the weekly chart that we can see how hard the VIX is trying to get its new uptrend going.  If the VIX can get above the recent ceiling of 21.0, then odds are the SPX won't find support until the 1275-ish area.

In the meantime, all we can do is wait and see how this unfolds.

SPX & VIX - Weekly

Trade Well,

Price Headley
BigTrends.com

Volatility as an asset class
 
Vertex (VRTX) is recently up $17.95 to $55.26 after the company reported better than expected data from the Phase II trial of KALYDECO + VX-809 in cystic fibrosis patients. June call option implied volatility is at 48, July is at 54; compared to its 26-week average of 52.
 
Sysco (SYY) is recently up 50c to $28.39 after reporting Q3 adjusted EPS 49c on revenue $10.5B. Overall option implied volatility of 24 is near its 26-week average.

Cognizant (CTSH) is recently down $11.34 to $58.35 after lowering 2012 guidance. June and July call option implied volatility of 32 is below its 26-week average of 35. 

CBOE Volatility Index-VIX is recently down 65c to 18.51; as stocks are trading near their highs of the day after selling off on the open following election results in France, Germany and France.

Editors Note:  This posting from Friday, May 4th.

Earlier last week, a strong upside breakout was accompanied by generally positive

technical indicators.  But worries over the unemployment report have upset things somewhat.

I'm not sure how the positive technicals got hijacked by the negative media and

fundamentalist attitude about one economic number, but they did.

$SPX has pulled all the way back to the 1390 support level. There is resistance

at 1415-1420 and support at 1358.

The equity-only put-call ratios remain on sell signals.

Breadth indicators have turned negative as well.

Volatility indices ($VIX and $VXO) present a more positive picture.

$VIX dropped below 17 when $SPX broke out, and $VIX has been hovering

at or below that level ever since.

In summary, the market now sits right on an inflection point: $SPX 1390. 

A breakdown below this level, especially on a closing basis, will represent a

return to the somewhat volatile trading range environment of April.  But if this level holds,

then look for another assault on the 1420 resistance.  A successful breakout of that level
would be extremely bullish.

Larry McMillan

optionstrategist.com