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Apr
28
Stocks Surge and the Dollar Falls After FOMC Statement
Filed Under Market Snapshots | Leave a Comment
Stocks moved higher after Federal Reserve officials concluded their latest meeting and signaled no real changes in monetary policy. As expected, rates were left unchanged. The Fed also said it was ending its QE2 bond buyback program amid signs of mounting inflationary pressures. However, the outlook for 2011 growth was reduced and officials retained their pledge to keep rates low for an “extended period”. Extended period has now been defined as several FOMC meetings.
Beyond the Fed, the early focus was on a March Durable Goods report that was a better-than-expected 2.5 percent. Economists were expecting 1.8 percent. The profit news remains mostly supportive as well, with Amazon.com (AMZN), Corning (GLW), and Dow component Boeing (BA) seeing post-earnings gains today.
Home Depot shares are up and notable trade in the Jan 2013 calls as the $35 strike is purchased 3,000x and the $45 call sold 6,000. This 1×2 was done for a $2.40 net debit and appears to be opening transaction.
Baker Hughes (BHI) climbed touching new 52-week highs today after the oil driller reported earnings of 87 cents per share, which was 9 cents better-than-expected. In options action, a noteworthy options spread traded after an investor sold 14,000 July 65 calls at $12.925 each and bought 20,000 July 75 calls at $5.50.
The US equity markets continue to grind higher, and a weak dollar continues to make riskier assets more attractive. The Bullish Dollar Fund (UUP) is down fell to new 52-week lows late-Wednesday, as the dollar buckles under another round of selling pressure today. The EUR/USD currency pair is now trading at 1.4775 and levels not seen since late-2009. In the dollar fund, trading is brisk, with 62,000 calls and 46,000 puts on the tape so far. The biggest trade is a 20,000-contract block of June 21 puts at 27 cents when the bid-ask was 27 to 29 cents.
The Australian dollar reached new 29-year highs against the dollar after stronger-than-expected Q1 CPI figures reinforced RBA rate hike expectations. Australian Q1 headline inflation rose 1.6%QoQ, against 1.2% expected, lifting the 12-month rate up to a 2-year high of 3.3%. The closely monitored RBA trimmed mean CPI rose 0.9%QoQ, against market expectations of a 0.7% print, which put the annual rate at 2.3%. AUD/USD rallied to a 1.0852 high as the figures reinforced expectations of RBA tightening in H2. The next major region of resistance/options barriers lies in 1.0885-1.0900 and may well be breached if an ultra-accommodative Fed supports a reflationary, buy-on-dips risk market bias today.
The VIX was whipsawed today moving up nearly 3 percentage points prior to the FOMC meeting and then slamming lower as equity price shot up after it became obvious that the Fed would continue a dovish stance.
Apr
27
Equity markets rallied on the back of continued solid earnings and better than expected data points in the housing sector. Today’s better than expected consumer confidence also boosted investor sentiment. Low interest rates in the US and a continued slide of the US dollar buoyed stocks, as the carry trade makes riskier assets more attractive.
The Dow Jones Industrial Average climbed 0.9%, to finish at 12595.37, a fresh three-year high. The Standard & Poor’s 500-stock index rose 11.99 points, or 0.9%, to 1347.24, while the Nasdaq Composite added 21.66 points, or 0.8%, to 2847.54. The broad advances put the S&P 500 at its highest since June 2008, while the Nasdaq Composite is just 12 points off a 10-year high.
A falling US dollar continues to help stocks. The dollar fell nearly 1% against a broad basket of currencies this week, following a drop of similar size last week. The U.S. Dollar Index closed at its lowest level since August 2008, before the financial crisis intensified.
The main driver for the dollar’s decline is low interest rates in the U.S. compared with higher and rising rates abroad. In Europe, the ECB increased interest rates recently, making its currency more attractive. Lower rates mean a lower return on cash and the pressure from that factor could intensify next week when the Federal Reserve’s rate-setting committee is expected to signal that U.S. short-term rates will likely remain near zero for many months to come. On Wednesday, Fed Chairman Ben Bernanke is scheduled to give the central bank’s first-ever press conference following a policy-setting meeting.
Gain in equities came amid an uptick in U.S. consumer sentiment, with the Conference Board’s index of consumer confidence registering its second-highest reading since the downturn in 2008.
Technology shares increased as AMD shares climbed. 30,000 calls and 5,160 puts traded on the chipmaker today. June 9 calls are seeing impressive volume. 21,750 contracts traded vs. 13,499 in open interest. 88 percent traded at the ask, including a 14,822-contract block at 45 cents on ISE when the market was 43 to 45 cents.
On the downside, SLV Silver shares trust, iShares lost ground as silver faces an aggressive round of profit-taking today. Silver had seen a three-month 75 percent surge prior to today. The metal is trading down on heavy volume. Meanwhile, SLV, which notched a new high of $47 per share and 1.4 million options traded on the ETF Monday, continues to see active trading. 230,000 calls and 217,000 puts so far. The top trade is a May 35 – 37 (2X1) put ratio spread at 3 cents, 10000X, and might have been initiated by a shareholder to help hedge recent gains. Or, it might be a straight bearish bet targeting $35 per share over the next 24 days.
The VIX climbed slightly to close near 15.60, after touching a low late last week near 14.60.
Apr
21
Volatility in the options market declined during the week despite a jolt early in the week after S&P announced that it was placing the US on negative watch. The VIX was unable to break through the 19% resistance level, and was sold into breaking to new lows as the equity markets rallied during the balance of the week. The VIX has found support near the 14 .50 level.
Overall equity prices performed well in the holiday shorten week, rebounding from a swoon after S&P put the US on negative watch. The Dow and S&P 500 climbed over 1%, while the Nasdaq 100 outperformed moving higher by nearly 3%.
Apple shares surged higher touching the 360 level after the technology titan released better than expected earnings. Option volume was heavy, with 322K calls and 232K puts on the tape. Upside strikes are the focus, with May 350 and 360 calls leading the volume and implied volatility up slightly. Weeklies were also busy.
Apple on Wednesday posted a quarterly profit of $5.99 billion, up 95% from $3.07 billion in the year-earlier quarter. Revenue rose 83% to $24.67 billion, while gross margin rose to 41.4% from 38.5%. Apple’s quarter was helped by sales of the iPhone. The company began selling its iPhone 4 through Verizon Wireless in February, its second carrier in the U.S. after an exclusive arrangement with AT&T Inc. ended.
Yahoo (YHOO), which gained 4.7 percent on earnings news yesterday, edged down a nickel to $16.83. One options investor sold the Jul 18 – Oct 16 bullish risk-reversal at 47 cents, 9500X. It was tied to 703K shares at $16.79 and appears to be opening. While open interest is sufficient to cover in both contracts, most of the interest in the Oct 16 puts is from Monday when 10K were sold at $1.45. They’re being sold again today at $1.19, which looks to be a bullish position.
Sandisk (SNDK) is up .66 cents to above $49 and it looks like one or more investors is accumulating a position in May 52.5 – 55 call spreads ahead of earnings. The top trade is 2000 of the May 52.5 – 55 call spreads at 59 cents on ISE. 12,500 now traded. Sentiment data and side-of-market suggest bullish vertical spreads are being opened ahead of the profit report. Shares sank 8.8 percent on 1/28 after earnings were last reported.
Xerox option flow was heavy after this morning’s earnings, with shares down about 4% to $10.40 in heavy volume of 23 Million shares. July 9 puts are the focus, with a buyer paying 13.6 cents for nearly 30K.
Global Economic Data of Mention – Next Week:
- Monday – US Pending Home Sales (1400 GMT)
- Tuesday – Australia CPI (130 GMT), US Case Shiller (1300 GMT)
- Wednesday – German CPI, EMU Industrial Orders (900 GMT), US Durable Goods (1230 GMT), RBNZ interest Rate Decision (2100 GMT)
- Thursday – BOJ Interest Rate Decision, German Unemployment (755 GMT), US GDP (1230 GMT)
- Friday – EMU employment rate (900 GMT), US Personal Income/Spending (1230 GMT)
Apr
21
Heavy Option Action on Gold and Silver as Equities Surge Higher
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US equity markets soared on the back of better than expected earnings, robust economic data, and positive European debt news in the form of a successful Spanish Auction. Benchmark technology sector stocks release impressive earnings yesterday after the US closed, which spilled over into day’s trading session.
On the earnings front, Intel blew past 1Q expectations and gave a surprisingly strong 2Q revenue view in the face of what had been conventional wisdom about supposedly weak desktop and laptop demand. Intel reported record quarterly results and provided better-than-expected second-quarter guidance, benefiting from strong growth in all of its product segments and bucking worries about weakening personal computer sales.
IBM’s first-quarter earnings grew 10%, beating expectations, as the tech giant posted improved margins and broad revenue growth. Yahoo’s first-quarter earnings fell 28% as the Internet heavyweight continues to contend with revenue-sharing costs hurting its top line.
In economic news that was pertinent, existing-home sales in the US increased 3.7% from a month earlier to a annual rate of 5.10 million, according to the National Association of Realtors. Economists surveyed had expected home sales to rise by 2.5% to an annual rate of 5.0 million. The median sales price for an existing home was $159,600, down 5.9% from the revised year-ago median price of $169,600.
Commodity prices also moved higher sending commodity orient stocks such as miners, producers and refiners higher. Gold prices touched a new all time high and Silver pushed above the $44 dollar per ounce level. Oil prices moved higher pushing through resistance near 110.00 and close near the 111 level after the Department of Energy released strong inventory numbers.
U.S. commercial crude oil inventories decreased by 2.3 million barrels from the previous week. At 357.0 million barrels, analyst had expected crude oil investor’s to build. Total motor gasoline inventories decreased by 1.6 million barrels last week and are in the lower limit of the average range. The combination of high demand and low supply is driving the gasoline markets higher. Both finished gasoline inventories and blending components inventories decreased last week. Distillate fuel inventories decreased by 2.5 million barrels last week. The bullish fundamental data is driving oil prices higher.
Options action was significant with iShares Gold touching a new 52- week high of $146.84 and option volume is 2.5X with call volume of 220,000 contracts swamping the 56,000 of puts traded. The volume is being driven by a few notable big blocks that appear to be rolling up of bullish positions; in the front month May the $140 calls saw a 20k block go at the $7.05 asking price at the same time a 27,500 of the $145 calls traded at the $3.28 asking price. In the Jan 2012 Leap saw the $115/$135 call spread trade 26,150 times at $16.30 in what looks like a roll up of a bullish position (sold to close $115 and bought to open $135) that was established over the course of three days in mid January when GLD was trading around $134 a share.
Flow in the SLV Flow in the iShares Silver ETF was just as heavy as gold, as shares set another all-time high and the underlying metal continues to climb toward the $50 level. Nearly 870,000 option contracts have traded today, with May 45 calls the most active and ATM IV[30d] up nearly 3points to 40%. Nearly $130million in call premium has traded, triple the daily average, with the largest trade of the day involving the May 34-36 put spread, bought 25,000x for 13cents on the NYSE Arca exchange.
The VIX volatility index surged to new 2011 lows at riskier assets rose in value. The Index was capped by resistance near 19 after S&P put US debt on negative watch. The Index seemed to hold support levels near the 14.90 level, despite creating a new low print near 14.30.
Apr
18
Standard & Poor’s Ratings Services Inc. cut its outlook on the U.S. to negative, increasing the likelihood of a potential downgrade from its triple-A rating, as the path from large budget deficits and rising government debt remains unclear. S&P stated that a downgrade is still unlikely, somewhere in the “33% range.
The move comes amid continued hand-wringing over the balance sheet of the world’s largest economy and disagreement among politicians on how to address fiscal woes as economic growth remains sluggish. S&P said Monday it sees material risk that policymakers might not agree on how to address budgetary challenges by 2013, which would render the U.S. fiscal profile weaker than that of other triple-A-rated countries.
The S&P statement means that the agencies do not have unlimited patience with regards to US fiscal policy and the rising debt load. The IMF recently revised up its deficit forecasts as a percentage of GDP for 2011 and 2012 to -10.8% and -7.5% from -9.7% and -6.6% of previously. The 2011 US forecast is the highest in Developed markets, though the 2012 forecast has Japan overtaking the US as the worst in DM with -8.4%.
The VIX volatility index jumped as the US equity markets moved lower, testing the resistance level near 19, which coincides with the 50-day moving average. A break of this level, would target the 20.43, 200-day moving average. US markets moved lower, with the S&P 500 benchmark down more than 20 points touching 1295 intra-day.
Overall contract volume was average, which shows that market particpants are not overly bearish on a heavy down day.
Cisco Systems lead the tech heavy Nasdaq lower sliding to a new 52-week low and is down 36 cents to $16.67. In options action, an investor bought a 20000-contract block of June 15 puts at 21 cents each. Total volume in Cisco is heavy, with 55,000 calls and 60,000 changing hands on the day.
Implied volatility on shorter term weekly options continue to look attractive relative to longer term options with increased time decay. Weekly’s are relative new instruments introduced by the CBOE within the past year. To learn more about this dynamic new investment vehicle visit the options university webinar.
Some of the market was able to experience solid upward volume. Celgene (CELG) displayed relative strength and increasing call volume. Shares are up 55 cents to $57.53 and May 60s are the most actives. 2,535 traded (62 percent Ask). Similar action in the May 57.5 and 65 calls. 14,000 call options and 5,815 puts now traded in the name. Briefing cites “positive ISI comments ahead of expected May trial data”.
Additionally, Akamai (AKAM) showed increasing call volume. Shares were up $1.42 to $39.51 and 25,000 calls traded, which is 4X the norm and 3X the day’s put volume. May 45 calls are the most actives. 4,500 traded (54 percent Ask). May 40 and 41 calls are busy as well.
In the Oil patch prices moved lower on a combination of Saudi comments mentioning that they plan to cut oil production given they perceive the demand is not available. Prices were also hit by the credit watch downgrade placed by S&P.
Apr
15
Equity markets consolidated and continued to have a negative bias as financial institution were under pressure over an investigation by the Justice Department and the SEC over Libor manipulation. U.S. investigators are examining whether some of the world’s biggest banks colluded to manipulate a key interest rate before and during the financial crisis, affecting trillions of dollars in loans and derivatives. Regulators are examining a whether banks were understating their borrowing costs. At the time, banks were struggling with souring assets on balance sheets and questions about liquidity.
Additionally, investors were absorbing Obama’s vision for trimming $4 trillion from federal budget deficits over the next 12 years. The plan calls for ending the Bush-era tax cuts for the wealthiest Americans.
In economic news, jobless claims increased by 27,000 to 412,000 in the week ended April 9, according to the Labor Department. The prior week’s figures were revised up to 385,000 from an originally reported 382,000. Economists had forecast claims would rise by 3,000 in the latest week. Also, The PPI, which measures how much manufacturers and wholesalers pay for goods and materials, rose 0.7% in March, according to Labor Department. The gains in March were driven by a 2.6% rise in energy costs, including a 5.7% jump in gasoline prices. Core prices, which strip out volatile food and energy components rose a more modest 0.3% last month.
Gold and Silver prices moved higher as sentiment toward the precious metal complex improved after the Labor department released stronger than expected core PPI data. The ETF GLD and SLV surged higher and receive positive flows from options transactions. Call volume in the SLV ETF topped 125 thousand contracts compared to the 55 thousand puts transacted. The total was more than 3 times normal trading volume.
The technology sector saw a fair bit of options activity. The top equity options trade for the today was in Microsoft (MSFT), which is trading down $25.30. One investor bought 108,000 July 27 calls at 44 cents and sold 71,000 October 26 calls at $1.24. A Microsoft shareholder might be initiating these spreads as part of buy-write strategy.
In the FX world, China announced that FX reserves topped $3 trillion for the first time, up $53 billion for March, and new bank loan growth came in stronger than expected as well. The recent positive Chinese data will likely lead to China continue to tighten rates at their gradual pace using a combination of reserve requirements, interest rates, loan quotas and FX appreciation.
Volume on the S&P 500 options contract increased as the equity markets turned from a double digit loss to a small gain toward the end of the trading session. Despite the increase in volume, the VIX continued to sag.
Apr
14
Option volatility moved higher today, specifically in the commodity space as Goldman Sachs announced an unwind of their long commodity basket position. The investment bank called for a nearly $20 decline in Brent crude oil, saying speculators had pushed prices ahead of fundamentals. Goldman Sachs chief energy analyst David Greely said the run-up in prices looked overdone. Oil prices have fallen more than $7 dollar per barrel in the last two sessions and in-turn have increased implied volatility on crude oil and oil producers. Implied volatility on crude oil jumped more than 10% from 30% to 33%.
The Goldman Sachs warning signals effected commodities across the board. As unrest spread in North Africa and the Middle East, investors accumulated the equivalent of almost 100 million barrels of oil between mid-February and late March on top of their existing positions, adding approximately $10 to the risk premium.
Worries about the Japanese nuclear crisis also plagued the equity markets. The rating for the disaster has been raised to 7 from 5, putting it on par with the 1986 Chernobyl meltdown. Alcoa (AA) shares declined 6.1 percent and easily the biggest loser in the Dow Jones Industrial Average after the aluminum-maker reported revenues that fell short of expectations.
Silver Prices also experienced heavy selling and the IShares Silver Trust saw large put buying. The silver ETF has nearly 280,000 contracts transacted as the ETF trades down to $39.08. Yesterday’s million dollar block of July 25 puts is up 60% to a 16 cent bid with no sign of closing trades, and today’s largest trade is another downside position: the May 34-36-38 put fly bought for 31cents 25,000x when the ETF was near 38.85.
Not all commodity oriented equities felt the pinch of the Goldman announcement. Monsanto (MON) showed strong relative strength and bullish order flow today. Shares of the St. Louis-based chemicals company are up $2.08 to $69.25 and 30,000 calls traded in the name. Put volume is about 5,800 contracts. Trading is heavy in the May 70, 75 and 77.5 calls as well. Shares were weighed down by disappointing earnings last week and suffered a four-day 10.7 percent drop, before a two-day 4.6 percent advance so far this week.
Additionally, many transportation companies performed well and options activity reflected capital flow into airlines. Call volume climbed past 100,000 contracts or nearly 10x the typical full day call volume in Delta Airlines (DAL). Shares moved higher by 5% in heavy volume. Both the Sep 11-12 call spread bought for 31cents and June Sep 11 call spread bought for 41cents approx 17,000 times are confirmed as news long call positions. Volume in Delta Airlines exploded to the upside, the largest increase during the past 3 months.
Benchmark Implied volatility (VIX) increased by nearly 4%, closing at 17.25. Resistance is seen near 18.90 which is the 50-day moving average and then higher near 21 which is the 20-day moving average.
Jan
8
Market Analysis January 8, 2008
Filed Under Market Snapshots | Leave a Comment
After two weeks of holiday interrupted, low volume trading, the US equities markets got back on a regular schedule yesterday and it looks as though the weakness could be with us for some time for fundamental, technical, and geo-political reasons. With the dollar at historic lows, energy at historic highs, top lending institutions denying rumors of bankruptcy, and the always uncertain status of
But the general gloomy scenario continues to loom, and it is difficult to avoid reference to the dirty word of “stagflation” especially since it recently was on the omniscient lips of former Federal Reserve Chairman Greenspan. Crude oil briefly touched $100 per barrel twice last week before retreating to slightly over $95 per barrel yesterday, which is, depending on calculation method, just about on par with inflation adjusted all time highs of the early 1980’s. Add to that the compounding data that is pointing directly at an economic contraction cycle, and it would seem that additional downside is waiting in the wings, regardless of the smoke and mirrors that is being used to manipulate the global liquidity situation.
Of course anyone who is an Options University/Options University Strategist student or subscriber would have been prepared for this downside by being properly hedged and completely expectant of the movement that we have seen. But the beat goes on, and last week was a very interesting one as it pertained to the manner in which the markets digested macroeconomic data. For quite some time, recessionary data had been construed by the markets as buying stimulus, simply for the fact that it would undoubtedly cause the FOMC to ease monetary policy and therefore prop up the markets, artificially in my opinion. However, beginning with two events last week, the ISM index on Wednesday, and the employment report on Friday, that paradigm has begun to change. Both numbers came in below market expectations quite significantly to add to the recessionary case. However, after each report, instead of rallying in hopes of further cuts, the markets tanked quite drastically. And with the fed fund futures seemingly pricing in another 50 bp cut at the Jan 29 meeting, the subtle recessionary news released by AT&T and CFC today, resulted in a nearly 300 pt. tailspin in the INDU.
Technically, all three major indices have closed below the November lows, and the SPX closed today below its 500 day simple moving average. Moreover, after finding obvious, although temporary, support at several Fibonacci retracement levels from the March low to the October high, the only level left is the 100% for the SPX and that would bring us to 1364. As foretold by the staff at OU, the VIX reverted to its mean from the December 24 low, coincidentally at the 200 day sma, to add almost 38% in two weeks. There are a lot of ways to make money in these markets, but only if you are educated enough to take advantage of the opportunities.
Gregory Wolfe
The
Dec
4
Market Analysis December 2, 2007
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It appears as if the Federal Open Markets Committee will once again play Superman to the Lois Lane that is the US equities markets. The scary/recessionary macro economic reports and subsequent announcements by Fed chairman Bernanke and his second in command last week appeared to have erased all doubts of the expected December 11 rate cut, and replaced the level headed bearish theme of the last couple of weeks with the “band-aid on a melanoma” bulls who are addicted to interest rate cuts like heroin junkies. They know that a quick fix will provide short term relief, but it is just another step on the way to inevitable disaster.
The 1,000 plus points that the DJIA gave up since the last meeting, and similar sell offs in the other major averages, were due, mostly, to the wire that the fed was walking between the weakened dollar/outrageous energy and commodity prices and the expected fallout from the sub prime lending disaster. This led to, as related in the minutes from the Oct. 31st meeting that were released last Monday, to a “close call” between a cut and a status quo at that particular meeting, while most of the recent bull run was already pricing in a December cut.. However recent dovish data has once again enlivened the bulls and the Dow added 390 pts last week to close at 13,371. The S&P 500 index followed suit to close the week up 40 pts. To 1481, while the NASDAQ completed the trifecta with a net gain of 64 to close the week at 2660. Add to this a sell off in oil in excess of $10 for the week to close at a dirt cheap $88.71, and the S&P finding 78% Fibonacci retracement support at 1409, and you have at the very least an excuse for short covering and profit taking by the bears, if not new bullish positions being instilled by the junkies.
Although breadth was also bullish last week with advancers leading decliners on the NYSE by a margin of 2630 to 930, there were 605 stocks that found new lows while only 144 reached new highs. As we languish fundamentally between true recession and the lure of cheaper money, and technically as all averages toe their 200 day sma, indecision will continue to be the theme. In the week ahead, it would be safe to assume that anything that would give the fed more comfort in a 50 bp cut (i.e. recessionary data, England easing their interest rates on Thursday) will lead to fervent buying, and a scenario more tepid could lead to some selling. However, with implied volatilities still relatively low in the options markets, there are many ways to be profitable here. It also should be taken into account that the anticipation of the cut has recently led to the buying while the activity subsequent to the cuts has been the selling off.
Nov
6
Market Talk – November 4, 2007
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November 4, 2007
The stock gave up nearly $5 on Thursday and Friday to close at $37.73.
My assessment of the week from a fundamental standpoint was that most of the data was stronger than expected, oil closed at a ridiculous $95.93, and the dollar is at all time lows versus basically every other currency. The whispers of a pause, if not a hike, will shake these markets further, because the additional 25 basis point cut that is expected on December 11, which I alluded to in earlier articles, might not take place and the technical dynamics of the major averages are having very difficult times with these toppy levels.
However, the VIX remains curiously low (went out at 23.01 on Friday), and downside protection will be cheap to come by. As a matter of fact, it is this author’s opinion that the time to get long the dollar could be right around the corner, and of course that would lead one to be short equities, energy, and commodities and long the VIX. Although, that is predicated on the fact that the folks in
From an options standpoint, cheap volatility and substantial intraday price swings would lead most traders to consider long gamma positions, this strategy would been appropriate in the recent past. For an explanation of this strategy, go to www.optionsuniversity.com. In addition, subscribers to our membership site would have been made aware of a possible short term price reversal in MRK, based on a technical scenario called price/volume divergence. From Wednesday’s close to Friday’s close, MRK was down over $2, with very little in the way of extrinsic price in the Nov 60 puts. I would tend to expect some short term sideways activity forthcoming with little in the way of data or earnings to be expected. However, geopolitical activity is always on the radar, as is now perhaps some more resignations in the financial sector???
Greg Wolfe,
Oct
14
October 14, 2007 Market Report
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Fundamentally speaking, the bulls appear to be a little bit uneasy about their additional 50 basis points cut that most expected to be a sure thing before the end of the year. Slightly stronger than expected data in the weekly jobs report and retail sales and PPI numbers point to a possibility that the much feared recessionary boogey man could be avoided. Add to that the rumblings from
Technically the Dow ended the week up a meager 28 points for the week although there were several days of tremendous volatility, and the index closed above the very important level of 14,020, although not decisively enough for me to turn bull nor was it on impressive volume. Looking to the SPY, the sell off that occurred on Thursday was on almost twice the volume that the rally days of the week had. Energy and commodities continue to soar, and earnings are looming. Monday, Citigroup will report before the bell with 44 cents per share expected, and Intel will report after the bell on Tuesday with an expectation of 30 cents per share.
In a market environment like this, with cheap volatility and violent intraday swings, the long gamma trading strategy can be quite profitable if the trader is vigilant. A trader can use his gamma position(by purchasing options) to flip stock throughout the day and not have to exceed much in the way of his short theta (decay), because the price he paid for that gamma is relatively cheap.
There are two things one might consider going into this week. First, will the devalued dollar serve to enable company earnings to be over inflated and therefore exceed expectations? Secondly, E-Trade Corp. reports earnings after the close on Wednesday. If they soundly exceed expectations, could that lead one to believe that more retail long players are entering the market, leading one to believe that we may be looking at the top in US equities? Or would we be better off to continue to be indecisive?
Gregory Wolfe
The
Oct
11
Change Of Heart On Baidu.com Reverses Equity Market Optimism
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Today’stickers: BIDU, VIX, JWN, SII, F, GM, WMT, NRG, GSF, GOOG
BIDU – When Confucius said that a journey of a thousand miles starts with a single step, he didn’t know he was likely referring to the share price performance of Chinese Internet search-engine Baidu.com. Just one year ago the shares could be bought for less than $100 each and until today the march upwards has met with only a tiny degree of resistance. Shares traded at a record high this morning above $350. the company has been likened to Google, with the added boost that the company operates in China, where replication of just half of the success that Google has had, will lead to a phenomenal performance for Baidu. However, today’s revenue forecast reduction from a JP Morgan analyst sent shares into a tailspin quickly losing 10% of its value. The latest 65% EPS growth and all of the opportunity that the company promises in Asia has left the company sitting on a PE ratio of 156 times. JP Morgan only reduced its revenue forecast by 3.2% to $65.7 million but perhaps the episode serves to remind investors that Baidu revenues don’t compare to those of Google and that no matter how attractive Asian markets might appear, investors need to understand the size and profitability of the companies they are investing in. Today’s move weighed heavily across the market and turned a positive day into a key reversal with many markets reaching record heights before closing lower on this side of the Atlantic. This might upset the cozy applecart in the fourth quarter where investors were beginning to overlook the low bar set for minimal earnings growth.
The downgrade sparked heavy options trading on Baidu. There was heavy selling in the October call at the 350 strike, which was the most heavily traded series today. More than 700 calls traded to the bid at a premium of around 17.0. Earlier in the session, the same calls were traded at premiums in excess of 20.0 and during the fallout lost as much as 75% of their value trading at 4.5. In the November contract put buyers emerged on decent volume as low as the 280 strike indicating a fear that Baidu shares may fall further in coming sessions. Options implied volatility jumped 21% to stand at 91% late in the session as options traders were caught on the hop with the oversized reaction to the news. The historical movement on the share price is around half of today’s closing options volatility.
VIX futures surged late in the session as the stock market turned southwards reversing a triple-digit Dow industrials gain and turning into a 69 point loss. As such investors reached for portfolio insurance and bought VIX futures driving the index up from a loss on the day to a 13% gain to close at 18.94. Heavy volume was apparent in the November strikes at the 22.5 and 25 contracts where premiums rose by around one half this afternoon.
JWN – Bearer of bad retail tidings, department store chain Nordstrom cropped its Q3 profit forecast due to weak sales growth and stagnant inventories. Shares are currently trading 6.5% lower at $45.41, 12% below its average share price for the year to date. A look at today’s option action shows traders bearing little confidence that Nordstrom can pull off a substantial recovery even after the holiday shopping season. Some of the volume in the January contract looks like it may be deployed in call spreads, involving the purchase of the 45 calls, funded by the sale of the same month’s calls at the 50 strike. A look at the delta on the 45 calls shows option traders pricing in better than 50/50 chance of that strike being profitable by expiry. By comparison, the 50 strike has only about a one-in-three chance of landing safely in the money. To put Nordstrom’s current woes in perspective, last winter’s sales took Nordstrom shares within range of $60 – its standing 52-week high of $59.70 was set back on February 22.
GSF – Offshire oil driller GlobalSantaFe, which operates a fleet of 61 marine drilling rigs, is trading 2% higher today at $79.30, and the options market is rife with bullish speculation in the company. Options are trading at 28 times the average volume, with the 76,000 active contracts matching about a fifth of prior open option positions in Global Santa Fe. Today’s volume is split between the October 80 and November 85 calls, which have traded to buyers on sharply higher premiums, as traders wager on a move past the standing 52-week high of $80.34 by mid-November.
SII – Fellow oil services ticker Smith International, the producer of small hardware for the oil and gas exploratory and production sectors, is also revelling in a 1.5% gain in shares to $74.76. Options are moving at 10 times the normal level, with trading in calls and puts picking up sharply today, on no apparent news catalyst. The brisk buying in the October 80 and November 85 calls, implying continued upside tear in the next two months, is given particular gravitas when you consider that Smith’s prices have more than doubled in value this year. Today’s share price represents a fresh 52-week high. Implied volatility has remained mostly steady since late August.
F – Yesterday’s 6-hour walkout by Chrysler auto workers under the banner of the UAW was mercifully brief thanks to an accord that will create a union-run medical fund for Chrysler workers, but without the rub of future job guarantees like those wangled from talks frontunner GM. The agreement raised prospects that a strikeless settlement can be reached with tertiary target Ford, generally regarded as the weak link of the three auto makers – the one with the shallowest pockets for concessions and with the greatest potential damage effect from a strike. Ford shares responded buoyantly to the news, gaining 5.6% to $8.69. Volume appears clustered in the November and December contract, where traders wrote November 9.0 calls in fresh positioning, against the purchase of November 8.0 puts. The strategy was reversed in the December contract, where December 9.0 calls were bought against the sale of puts at the 7.0 strike level.
GM – Meanwhile, shares in Ford peer General Motors bounded to a two-year high today, up 5% to stand just above $40 after UAW members ratified the terms of its recent collective bargain agreement. Option traders put more than 308,000 contracts in play, plowing into the October 40 calls, which were heavily bought. The same strike in the November contract attracted buyers and sellers, as the price of the November 40 call doubled in price today. While overall open interest shows investors still defensively positioned in GM options, with puts outweighing calls by a factor of 1.8, today’s volume is an indication of some traders betting on a return of GM shares to 2004 levels.
WMT – This morning’s rise in September same-store sales and upscaling of Q3 earnings guidance were a welcome revelation to investors weary of sifting through the jumble-sale prospects of leading retailers. Just a couple of months ago the big-box chain was sounding the alarm over the pinched state of the American discount consumer. The news sent shares 3% higher to $47.00 today, with more than 102,000 option contracts in play. A look at options action shows traders less inclined to jump on the directional bandwagon and likelier to take profits. Twice as many calls are moving as puts today, with heavy selling in the November 47.50 calls, where premiums increased 100% overnight. The urge to close out call positions extended into the December contract at the 50 strike, where premiums are up 62% today.
NRG – Shares are currently 1.6% higher at $44.39, having been up as much as 4% early in the session, sending options traders on a quest for bull plays. With options trading at more than 5 and a half times the average volume, call buyers are plying into the 45 and 50 calls in the October, November and December contracts on sharply higher premiums. Implied volatility, at 40% and rising, also shows a keen elevation from the 25% historical reading. NSF reports earnings on October 29.
GOOG – The enchanted search engine continues to cast a spell over market bulls, but early gains have turned flat this afternoon, as the ticker trades at $624.04 this afternoon. Option players activated more than 211,000 contracts this afternoon, with a volume bias to calls. The upward trek was accompanied by implied volatility – which took a 12% leap this morning, 1 week ahead of earnings. Today’s activity is a call flurry in the front month contract at strikes of 620 to 650, with builds at the 750 strike seen in October and November after a fresh wave of punditry betting on Google “trigger-numbers” inthe $735-750 range.
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Andrew Wilkinson |
Rebecca Engmann Darst |
Oct
8
October 7, 2007 Market Report
Filed Under Market Snapshots | Leave a Comment
Having said that, I personally cannot see much of a case for the health of a market where the basic prescribed key to rescue the economy is to cheapen the dollar, print more money and encourage Americans to purchase and consume things that they cannot afford that were bought from other countries that employ slave laborers. I guess it’s easy to see that I am a little bearish on equities here. I also would like someone to explain to me how it is now being proposed that these “strong employment numbers” that indicate “healthy economy” will now make the 50 basis point cuts that were basically priced in for the next two FOMC meetings now unnecessary. Will that be bullish as well? Not to mention the enormous draw downs by several large financial institutions, which was brought on by the still to be determined damage by the credit crisis and reckless loaning/borrowing. In addition, we also must deal with the constant specter of outlandishly priced energy and commodities.
Earnings season is upon us, and with the expected aggregate numbers to be much lower than previously expected (according to the analysts), one would expect some warnings to be forthcoming. The DOW did sell off quite significantly in the last hour of trading on Friday, which could be somewhat comforting for the bears. However, after the close, previous month’s employment numbers were revised to show stronger data. I guess someone saw what a few extra jobs in Sep. could do to the market and then decided that better numbers from the last two months could give us even more upside.
Technically, it is obvious that the markets are having a difficult time with these levels, and while I predicted last week that we would find the all time high imminently, I also said that I believe consolidation will occur for quite a while at these levels. With the VIX down 1.53 for the week to close at 16.91, I feel fairly comfortable that will be the case. That would mean a concentration on selling premium such as buy-writes, short iron condors/butterflies, long condors/butterflies, long time spreads, and vertical spreads with short at the money options. I personally use a 3% false violation parameter when considering a move to be a violation of resistance, especially in the indices, and we are quite a way from there. But still the question remains. Is bad news good or bad news bad? Fighting the tape is a lonely place regardless.
Gregory Wolfe
The
Oct
2
Today’s tickers: SLM, WAG, GRMN, RIO, FCX, NEM, AA, MFE, PDLI, CREE & CBH
SLM – News today that an investment consortium led by J.C. Flowers and including Bank of America and JP Morgan Chase would offer $50 per share for Sallie Mae (SLM) in combination with warrants for outstanding shares, sent the company’s fortunes up .34% this afternoon to $50.07. A post-deal analysis in the Wall Street Journal noted that these warrants – pending Sallie Mae’s business performance going forward – could be worth up to $10 per share, creating the impression that J.C. Flowers’ original $60-per-share offer (a price from which the buyers balked last week) is still nominally intact. Option traders put more than 132,000 Sallie Mae options in play, with calls and puts trading at near parity – but virtually no one staking bets on that elusive $60 mark. The October 50 strike appeared to be the watermark for today’s activity. The 30,000 lot-volume in the October 50 calls looks to have been generated by sellers, unloading for $2.40 positions that were bought at prices of $1.20-1.85 last week. Puts at the same strike in the October contract traded to buyers and sellers. We also noted heavy liquidity in the November 50 calls, which traded 13,600 times – open interest having tripled at this strike over the past week. Implied volatility has continued its decline, since topping out at 67% last Thursday, and now rests at 33%.
HSY – Shares in Hershey, the country’s biggest candy maker, were unsettled by this morning’s news of the departure at year’s end of CEO Richard Lenny, due to reported wrangling with the majority shareholding Hershey Trust over the company’s strategic direction. Implied volatility ticked up to 26% as a trader took the opportunity to enter a 9,000 position in the January 40/50 strangle. The position, which costs $1.20 to enter, supposes a break outside the range of the strike prices above $51.20 or below $38.80 in the wake of Lenny’s departure. Hershey’s share price has shown a mostly steady decline for the past 6 months since peaking at $56.75 in early April – the reigning 52-week high. The current share price is hovering just about $2 above the 52-week low set in August. Hershey’s shares were trading as high as the $60 mark in October 2005, but hasn’t touched those levels since.
GRMN – GPS-technology maker (GRMN) continues to captivate option traders’ attention in the wake of Nokia’s contentious bid for Navteq yesterday. Shares are extending the downtrend from yesterday, down 7% to $99.80, with 116,770 options – the rough equivalent of 42% of its open interest – in play. It appears that the October 100 calls are the pivot point for extensive volatility positioning in the October contract, some of this possibly tied up in the 100 straddle, a position which costs more than 10% of today’s share price to buy – or with strangles involving the 95 puts. Activity in the November contracts seems to show traders favoring a sale of calls at strikes 105 and 100.
WAG – Shares in Walgreen’s (WAG) tacked on another .40% loss today to stand at $40.00 – slightly off a new 52-week low set earlier today – while options remain a favorite target for option traders. The 87,760 options in play this afternoon reflect traders waging bets on the at-the-money front-month straddle, which has traded on comparable volume to buyers and sellers today.
There was a strong overnight performance for Asian equities with more stories surfacing that the $200 billion Chinese investment fund would buy Chinese stocks listed in Hong Kong. Local stocks rose by more than 3%. Elsewhere around the globe new record highs are being set by the day as investors buy the story that growth outside of the U.S. continues to steal the limelight from the overused terms of “subprime and credit concerns.” In Monday the price of gold (the anti-dollar) rose close to a 28-year high as the value of the dollar slumped to a secular low. The dollar boost was exacerbated following comments from European central bank members who noted the potential damage to the fragile domestic economy from a swift rise in the value of the euro.
But Tuesday is a different day. Investors in the local market are watching to see what reaction Monday’s convincing penetration of index highs will bring. So far some light profit taking is the order of the day. Meanwhile the dollar has bounced hard against the euro currency and its trade weighted value as measured by the NYBOT’s dollar index contract has risen by 0.5%. Broadly speaking that move is bad for commodities – we note that gold has shed 2.5% today to $728.50 per ounce in the October contract. Meanwhile, shares at several mining companies are facing selling pressures.
RIO – Cia Vale do Rio Doce saw its share price slide 2% to $35.35. It’s on days like this that options traders put a brave foot forward and take the opportunity to place bullish trades. The call/put ratio at 1.6 indicates one third more call activity than across the put complex. The bulk of Tuesday’s activity stood at the October 35 line where nearly 14,000 contracts changed hands reserving the right to buy shares at that price ahead of expiration in two weeks time. At a premium of 1.95 shares would need to break above $36.95 for option buyers to be profitable. The likelihood of these calls landing in the money according to the delta on the calls is three-in-four.
FCX – Freeport McMoRan shares fell in line with the rally in the dollar losing 2% to stand at $109.15. Again call buyers were out in force on the price decline and buyers of the November calls at the 105 strike took advantage of lower premium prices as they bought 2,900 lots. The October straddle at the 110 strike gives a good reading of implied volatility on the options. Today that straddle – the combined cost of a call and a put is 9.25 generating a share price range of between $101.25 and $119.25 over the coming couple of weeks. Actual implied volatility stands at 48%, which is in line with the historic reading of volatility on the underlying shares.
NEM – Newmont Mining Corp. saw its share price lose 2% to stand at $45.14 today, but unlike above, put buyers seemed to arrive on the scene. Implied volatility on the options at 33% shows that options players aren’t overly concerned by today’s push lower. In Monday’s session it appears that fresh positioning of 3,000 puts at the March 45 strike took place. Today it was the turn of the January series where 11,000 puts at the same 45 strike traded at 2.95. Such puts would protect a long investor in Newmont against share price declines below $42.05. Still the bulls wouldn’t be deterred and added call spreads in the October contract as they bought the 47 strike for 0.40 and sold the 50 calls for 0.10. At a net premium of 0.30 it’s a cheap play on a big rebound on the gold price, which investors would hope filters through dramatically to boost the fortunes at Newmont.
AA – Alcoa Inc. We noted some bull call positioning in Alcoa shares today even though its share price declined .77% to $38.85. In the January 47.5 contract some 2,200 calls were bought at 0.85 indicating that investors see a bounce ahead for the stock. In the April 40 puts a seller sold around 6,700 lots at around 4.4. That would indicate that they see shares moving higher. Don’t forget that Alcoa was left jilted at the altar when Rio Tinto stole the Canadian bride-to-be away from Alcan. Additional positioning in April calls at the same strike confirm the bullish profile. The logic seems to be that if commodity prices and demand both remain firm, there is no reason that the fortunes for Alcoa are as bad as was suggested by the share price decline following the failure to acquire its Canadian rival. Shares fell from close to $50 to almost $30 in the aftermath and the past few days performance suggests a revival is imminent.
MFE – The revival and swift propagation of M&A rumors suggesting a possible tie-up with Dell (DELL), coming one day after a major product announcement, has led to a rabid level of interest in options in tech security giant McAfee (MFE – $36.84). Implied volatility rose more than 18% on the session to stand at 43.11%, as options traded at 28 times the average rate. Of note was heavy buying in the October 40 calls, which were snatched up at $0.40 apiece. We also observed heavy liquidity in the November 40 calls. Traffic in each of these strikes appeared to be fresh positioning – i.e., not the closing out of previously open positions. McAfee shares have shown a gradual but consistent incline over the past year, up 48.5% during the past year, handily outperforming the S&P Midcap Index, of which the company is a component. Yesterday McAfee formally announced that it was first-to-market in unveiling an industry standard “triple play” security offering on the IT market, providing protection for consumer PC, web and mobile phones.
PDLI – Following yesterday’s executive announcement that PDL Pharmaceuticals (PDLI) – maker of drugs for hypertension, acute myocardial infection and leukemia – will seek to sell the entire company, option traders rejoindered in the affirmative… and in trend with a near-9% gain for shares to $23.28. Traders today put more than 56,000 contracts in action – matching about 20% of its total open interest, and 5 times the normal level. Today’s volume was skewed to the calls, where three-figure percentage increases in call premiums were indicative of much of the action. Volume appeared heaviest at strikes 22.50 in the October and November contracts, while volume of 1,000 lots has gone through in the October 25 calls and the November calls. Traders here appear to be positioning for a test of the previous 52-week high of $27.98. Meanwhile, implied volatility in PDL shares surged about 18% to 49% – still below the 69% volatility that its shares have shown historically.
CREE – Options activity in North Carolina-based semiconductor maker Cree Corp (CREE) piqued our volume scanners today, with nearly 26,000 contracts in play against a 2% gain for shares to $32.72. The stock has been the subject of previous takeover scuttle, but as yet all the talk has failed to give form to the fog. Earlier today we observed heavy liquidity on either side of the October 30 and 35 strikes, with premiums favoring the call side. The calls, it seems, sold to the bid, while the puts traded to the middle of the market. Note here that the price of the October 35 straddle is $4.25 – 12% of the share price, and indicative of a traditionally volatile stock. While option traders are factoring in 60% volatility, Cree is a stock that has shown more than a 57% degree of fluctuation historically. And as for the October 35 call strike – delta on this call shows option traders pricing in about a 40% chance that this strike will land in the money, placing Cree on the perch of a new 52-week high, by October expiry.
CBH – Following this morning’s news of a buyout by Canada’s TD Bank Financial Group – options in Jersey-based Commerce Bancorp (CBH) picked up to twice the average clip, as shares traded flat-to-lower at $39.47. The 20,000 contracts in play matched more than 10% of Commerce Bank’s prior open interest. Today’s volume appeared hemmed in the front month, where traders may have sought to avail themselves of a 50% overnight drop in implied volatility by selling the October 37.50/40 strangle. This same sharp retreat in implied volatility made short order of yesterday’s build in open interest in the October 42.50 calls. Possibly acting on a rumor on the eve of TD’s bid, traders sent open interest on the October 42.50 from a meager 735 contracts to nearly 4,370 at closing bell, with contracts commanding $0.55 apiece. After TD’s $42-per-share bid, those $42.50 calls plummeted in value to only about a dime apiece, and traders may have closed those positions out this morning. This is also a hint that the market believes Commerce Bank’s shares are fairly valued by TD, owing to the anticipated dilution in earnings following the deal.
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Rebecca Engmann Darst |
Oct
1
Today’s tickers: HLF, CVS, AKS, GRMN, WAG, C, RIO, NVT & EWH
WAG – Walgreens share price took a smack on the chin despite a bullish start to the week. The near-15% slump in its shares created a fertile battleground for options traders thanks to the presence of liquidity and volatility. The company announced a 4% decline in quarterly profits thanks to a nasty combination of rising wage costs, store expenses and lower reimbursements for generic drugs. That potent potion is precisely why the stock is being punished today. None of the inputs are necessarily one off problems for the quarter and looking forward investors will need to see precisely what strategic shifts management makes to address the concerns.
Around 135,600 options contracts were in circulation Monday or put in an alternative context that’s about 67% of the overall open interest in the options series. Implied volatility surged by around one-third as uncertainty returned to the direction for the stock. Volatility jumped to 27.5%. Shares in Walgreens, which haven’t traded below $43 this year, fell to $40.31 – a 52-week low. October call options prices slumped with calls at the 40 strike losing 83% of its value to 1.25. On the other side of the coin put values surged. The October 42.5 calls for example, having settled at just a nickel on Friday, were actively traded at prices as high as $2.80 today.
It does appear that some investors are betting on steeper declines looking forward or simply betting that this might need a stronger prescription from management. There seems to have been a heavy amount of call option selling in the January 40 calls, where several blocks of 500 contracts were sold to the bid. Premiums slipped from 3.5 to 2.5 during the morning on volume of 11,650 lots.
CVS – Arch-rival CVS/Caremark came out shortly after the Walgreens release to reiterate its profit guidance for the year, but that didn’t stop a 6% pummeling-by-proxy for its shares on the market. With 95,000-plus option contracts trading this afternoon, we observed what may have been call holders looking to unload positions at the November 40 strike as premiums eroded, with volume at the 37.50 strike trading to buyers and sellers. Given the comparably heavy volume, and distribution of buyers and sellers, on the other side of that strike on the puts, it seems conceivable that today’s play is the at-the-money November straddle. A buyer of this strike pays the $2.75 premium in the belief that – whether CVS/Caremark’s profit guidance stocks – its shares are set for tumult in the coming weeks. A seller would take comfort in last week’s bank upgrade, and the fact that shares are still within 5% of a 52-week high, and play against short-term sniffles for the stock, pocketing the premium for good measure.
HLF –Options activity in nutritional supplement maker Herbalife ticked our volume scanners today as shares settled on a new 52-week high of $45.74. But despite short term bull momentum for the stock, it appears that skittish option traders holding Herbalife stock may have sought to hedge their bets on the mid-term outlook by playing the November collar. This would have involved buying the 40 puts at today’s premium of $1.05 against the sale of calls at the November 50 strike at $0.90 apiece in hopes of protecting against a sudden drop in share price below the $39.85 mark by November’s expiry. Overall open interest in Herbalife shows a surprising balance of outstanding puts and calls, with puts narrowly outnumbering calls by a factor of 1.1. Significantly, much of this build in puts accumulated during the month of September.
C – Citigroup Inc. shares reacted positively to its forewarning of a 60% dip in quarterly profits earlier today and losses incurred to its exposure to subprime debt. Investors seem to have taken the confession with a huge sigh of relief and bought stock, perhaps in the hope that this is the bloodletting that people have demanded to see. Shares have recently held at the $45 support line. Implied volatility came off while put premiums at the 45 line sank by around one half. Shares in the bank gained 2.2% to stand at $47.70. The December calls at the 50 strike reflected optimism by investors as premium rose by one-third to 1.0. Shares slipped below $50 in late July and haven’t recovered since. The 50 line was the most active call line in today’s trade. In the March contract it looks as though a couple of thousand puts at the 42.5 line may have been sold against call purchases at the 50 and 55 lines.
RIO – Cia Vale do Rio Doce – Commodity companies shares remained an investor favorite given the solid case afforded to them by the combination of a weakening dollar and strong commodity demand. Shares in Brazilian copper miner Vale rallied 6.5% Monday to stand at $36.15. Premiums at the October 35 and 37.5 calls jumped by around one half on heavy volume. Strongest volume occurred at the January 32.5 strike in the put side where some 13,500 contracts traded. As the stock rallied premiums came off, but this looks more like put selling rather than buying indicating continued conviction in a rally in shares.
AKS – AK Steel Holdings piqued our volume scanners today with nearly 127,000 active contracts against open interest of just about 335,000. Interested by the modest, half-percent gain in shares to $44.88, it appears that a trader closed out a position involving 24,000 lots in the October 35 puts in favor of new positioning in the November 40 puts, which traded on inflated premiums of around $1.90. AK Steel is due to report Q3 earnings on October 23.
NVT – Navteq Corp. Options activity at nearly 60,000 comprised exceeded the previous overall options open interest. Despite news that handset maker Nokia would buy the navigation software maker, shares took a 2% shave in early trading and sustained the loss this afternoon. The deal agreement sent implied volatility sharper lower and undermined any bullish positioning in the call options. For example, October calls at the 80 strike trading at 0.40 lost 85% of their value today.
GRMN – While news of Nokia’s acquisition was – somewhat counter-intuitively – bad news for Navtech’s share price, it was even worse for Navtech crosstown rival Garmin Ltd., whose shares swan-dived 10% to $107.25. Implied volatility shot up to 60%, having remained stable at 50% for much of September – a phenomenon that has borne out in put-side premiums today. Today’s 116,000 active option contracts show volume actively dispersed throughout the October contract, particularly concentrated between strikes 110 and 115 in both calls and puts. This is a strong hint of traders looking to position for continued volatility in Garmin share prices in the coming weeks. An interesting note about those October 100 calls, which traded 10,000 times today at prices around $9.80 – the going price for this contract last Thursday was $21.80. Ouch!
EWH – iShares MSCI Hong Kong – Shares jumped 1.8% today to rise to $21.42. Options activity was a robust 44,600 contracts – equivalent to around one-half of current open interest on the shares. The December 18 and 20 calls have traded on volume of 20,000 contracts each on prices of 0.30 and 0.75. It could be that as shares have ratcheted higher, an investor has rolled up the strike to remain closer to the current share price. Shares have been on a tear over the last six weeks adding around one third as the Pacific rim continues toshow economic strength.
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Rebecca Engmann Darst |
Oct
1
The third fiscal quarter ended on Friday on a bearish note, although US equities are once again flirting with lofty all time highs. The lagging volume and consolidating technical pattern of all the major markets, coupled with a slight move to the downside on the last day of a bullish quarter could lead some to believe that the approaching apex of 14,024 in the DJIA could be a very convenient wall of resistance and an impetus of a substantial retracement. The fascinating thing to me is that the ambivalent perception of the impact of forthcoming economic data, continuing debate over the severity of global credit issues, a totally devalued dollar, astronomical energy and commodity prices, and totally undefined corporate earnings are meeting at a plexus right at our ALL TIME highs.
One could easily hold a position that the major averages are not really trading at these levels at all, simply smoke and mirrors resulting from band-aid policies of liquidity infusion and interest rate cuts. With October a historically foreboding and bear friendly month, this may not be the time to speculate with any long directional positions that are not completely hedged, with locked in loss parameters (i.e. appropriate options strategies/spreads). From a technical aspect, the DJIA recent bull activity seems a bit overheated, and the Fast Stochastic %K has crossed over the %D moving down from overbought areas. Meanwhile the SPY, or spiders, the tradable index of the spx, has formed a fairly symmetrical tightening triangle on constricting volume and could be another case made for some downside. Unfortunately, if you look hard enough, an indicator can always be found that will make you a bull or a bear in any market.Final settlement prices for the week on Friday were as follows: DJIA, 13,895, + 75.44; COMP 2701.50, +30.28; SPX, 1526.75, +1.00. Two other interesting pieces of information are that the advancers vs. decliners on the NYSE almost fell to parity last week, and Russell 2000 small cap was off 3.4 %for the quarter after advancing the last four quarters. Additionally Crude closed at $81.66, -.04 for the week and gold traded up over $11 per ounce to close at $742.80. The CBOE volatility index was of f 1.04 to close at 18.00 for the week, and the put/call ratio heated up to a bullish 153/100 as opposed to last week’s 130/100, although that is a suspect indication of institutional bias.
The week ahead sees the ISM index for September to be released at 10 a.m. on Monday, August factory orders will be stated at 10 am on Thursday, and Friday will see employment data and consumer credit numbers at 8:30. Of course this week, as stated before, will be quite interesting as this fundamental data could have to be digested by the markets at historic technical levels.
Gregory Wolfe, The
September 30, 2007
Sep
28
Risk Reversal at JB Hunt…and an Intriguing VIX Volatility Strangle
Filed Under Market Snapshots | Leave a Comment
Today’s tickers: JBHT, WYNN, VIX, AL, WHR, SYNA, AEO, CVS, RAD, JNPR & TZOO
JBHT – Conjecture about consolidation in the transport industry and comments from the analyst community on the “undervalued” nature of the sector as a whole spun options in JB Hunt Transport (JBHT) into a momentum web earlier this week. While the immediate rumors failed to pan out, options are still trading at 10 times their average volume today – and the 15,000-plus active contracts amounted to just shy of half the number of contracts outstanding – against a .65% gain in share prices to $26.27. Much of this volume appeared to be tied up in collar plays in the February ’08 and May ’08 contracts, involving the 25.0 puts and the 30.0 calls, against stock held. Given current premiums, the position in the February risk reversal play costs $0.95 to enter while the May position costs $0.80. A trader in this case is limiting upside by selling the call at the upper strike, but is still hoping for a break above $30 next spring.
WYNN – Casino operator Wynn Resorts, that mainstay of the Vegas strip, saw the price of its October 170 calls shoot up in price to $6.80 yesterday – having traded as low as $0.70 a pop a week ago, on price speculation regarding a secondary share offering. When news of the share price – $158 – gapped below the moxiest market forecasts, Wynn shares fell back 4.78% to $158.96, and the price of the 170 call retreated 45%, attracting volume from buyers and sellers today. Elsewhere in the October contract we observed heavy buying and selling in the 160 straddle, which is going for $15 today. A buyer of this position is looking for a break above $175 or below $145 – an ambitious bet given that options traders are pricing in 50% degree of fluctuation in share prices as expressed in implied volatility. A seller of this position is taking advantage of still-elevated premiums in the series against the belief that shares will remain at or around current levels for the month to come.
VIX – The CBOE volatility index rose 6.2% Friday to 18.06 despite only a moderate easing for equity prices. November and December call options were bought. The November 30 strike and December 22.5 were in strong demand. But the headline trade for the day went to what appears to be a 20,250 lot strangle in the February contract. The trade involved puts at the 17 strike and calls at the 27.5 strike at a net premium of 2.4. If the strangle was sold as we believe it may have been, this investor expects implied volatility to remain within the boundary of these strike prices by expiration. If that’s the case the investor gets to keep the 2.4 premium. A seller of the strangle would profit if implied volatility burst outside of the trade strike prices beyond the value of the total premium. In other words a breach of 14.6 or 29.9 for the VIX by expiration would see the trade in the black for a buyer. During the course of the past 28 trading days the VIX has traded within a range of 28.82 and 16.91 and on only three days during August did the index close above 29.
AL – Shareholders in U.K. listed Rio Tinto voted 97% in favor of the takeover of Canadian aluminium producer, Alcan Inc. today. The company hopes to conclude the $101 per share deal in the final quarter of this year in a $38.1 billion takeover deal. Alcan’s share price was steady at $100.08 but options traders used the confirmation of the event to take in premium on nearby put options. Given the almost certain outcome that Alcan’s share price will remain above $101 to close the year has given confidence to put sellers to take in the nickel per contract premium available on the October, November and December contracts. The most active contract was the December 95 put strike where a block of 17,875 contracts traded. It’s understandable that, given the friendly nature of the deal now backed by shareholder approval, options traders see little to cause Alcan’s shares to decline. Implied option volatility at just 3.6% supports that notion.
WHR – Whirlpool shares rallied .94% to stand at $89.10 with one news service attributing elevated options buzz to an unsubstantiated market rumor that General Electric might bid for the maker of domestic appliances. Certainly there was above average interest in Whirlpool options, where current open interest stands at 44,710 lots. Today’s 14,840 contracts in action favored the bulls with 2 times as many calls traded when compared to puts. However, of interest to us is that in the bigger picture there are 1.4 puts in play according to open interest data compared to calls. And looking at the chart pattern confirms why investors have traditionally south protection. The share price has been in freefall since closing below $110 in July. Both first and second quarter sales were impressive, but recent weakness in the domestic housing market seems to have undermined investor confidence in the stock.
Since then shares have pulled back firmly towards $85. Implied volatility is higher today at 39.4% but that’s more likely thanks to call-inspired demand than any substance to the rumor. The historic volatility on the stock runs at around 34%. Today’s volume was focused on the October calls between the 90-100 strikes. The upper strike commanded a premium of 0.55, which is 120% higher than Thursday’s closing price. Traders currently see a one-in-eight chance of shares closing at or above $100 by October. However, the chances of that happening by the time the November contract expires is one-in-four. The premium in that contract today stands at around 2.0 per 100 shares.
SYNA – Synaptics Inc. After reaching a new 52-week high early on Friday, shares in this touch-pad maker turned tail as protective put-buyers perhaps eager to lock in gains came out of the woodwork. Shares have doubled in less than six months in the company, which provides interface software solutions for mobile devices that communicate with one another. With shares lower by 4.5% this afternoon at $47.76 it looks as though some put spreading may have occurred with October 40 strike puts sold in order to finance buying in the 45 strike. The November 50 puts were eagerly bid and traded 5,249 times at prices between 3.2 and 4.5. Overall volume today at 15,347 lots was equivalent to more than half of total open interest on the stock options. Implied volatility at 43% stands just a shade higher than historic volatility on the shares. The company did file earlier today with the SEC to report the forthcoming departure of its founder who has served with the company for 20 years. Still, a single buyer of 1,400 November calls at the 50 strike took advantage of today’s share price decline, scooping up calls 19% cheaper than at yesterday’s closing price.
AEO – Shares in teen clothing retailer American Eagle Outfitters (AEO) have benefited in recent days from a major bank upgrade and reports that the chain is one of a handful of mass-market fashion names benefiting from the emergent trend of “second wave” back-to-school shopping. The 18,000 active contracts in play today equalled more than 10% of its open interest, making it a volume story of note to us, as shares gave back early gains to close flat at $26.31. Buying in the October 30 calls was fresh, where 9,875 lots traded on premiums of $0.30 each. A modest groundswell of fresh call buying was also observed at this same strike in the November and January calls. Although we’d seen online reports attributing the early-session resurgent call interest to “unsubstantiated chatter,” the volume build, strike price positioning, and implied volatility as yet lack the momentum that might lend credence to scuttle of that sort. American Eagle shares traded above $30 for much of the first half year, but dipped below that level in May in a general down trend. Since bottoming out in August, its share price has shown signs of slow recovery, and today’s call-buying may be an indication that “second wave” back-to-school buying will help it patch back to early ’07 highs.
CVS – Two days after hitting a new high for the year at $39.80, shares in retail drugstore chain CVS/Caremark are closed flat just below the highs at $39.63. It appears that option traders may have been looking to unload open strangle positions in anticipation of a low-volatility environment for CVS share prices heading toward year’s end. The November 35/37.50 strangle traded to the middle of the market, on volume of 14,000 lots, a level within existing open interest. Action was also seen in the February contract, where 5,000 lots of the 37.50 puts sold to the bid at $1.30, and the 42.50 calls traded to the middle of the market at $1.30.
RAD – Today’s option volume has been strictly five-and-dime at CVS competitor, RiteAid (RAD), whose shares lost nearly 6%, closing at $4.55 after second quarter earnings fell short of street estimates, due in part to the absorption of costs from its acquisition of Eckerd pharmacies. The development lent to a nearly 30% climb for implied volatility, which peaked earlier today at 49% – significantly above the 34% level of volatility that Rite Aid shares have documented in the past. By comparison, CVS options implied volatility at 21% is below the historic reading. The development is reflected in today’s higher put-side premiums in Rite Aid options. Overall open interest shows puts moderately outnumbering calls by a factor of 1.3. JNPR – Options in Juniper Networks, the Silicon Valley telecom company that makes routers, firewalls and IP phone equipment for partners including Ericcson and Alcatel-Lucent, traded on a volume of 42,000 lots today, calls and puts trading with equal frequency. With shares closing .80% higher at $36.61, it appears that traders may have been looking to unload the October 37.50 straddle for a combined premium of $2.90, while calls were bought at the same month’s 40.0 strike. The market is currently pricing in a one-in-five probability that Juniper shares will break above $40 next month.
TZOO – Momentum swarmed throughout the session around online travel site Travelzoo, and the buzz bore out in option activity. This ticker caught our attention early this morning as our market scanners showed options were moving at 64 times the average volume, coinciding with a 45% climb in implied volatility to 72% – all this as its shares gained 13.4% on the session to close at $22.95. Today’s volume was cloistered in at-the-money 22.50 calls in the October and November contracts, while 3,275 lots have traded one strike higher at 25.00 for a buck-fifty apiece.
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Rebecca Engmann Darst |
Sep
26
Today’s tickers: BBBY, F, SHW, GM, IYT, DAL, NWA, SLM, CBAK & CSUN
From Yahoo! Finance
GM – General Motors – Resolution to the auto workers strike was greeted with a 6% pop-up in shares at GM to stand at $36.52. Implied volatility on options traded on the stock dropped by almost one quarter to 45%. That meant that call buyers eager to capitalize on the anticipated rise in the stock got hurt as they paid up to 3.3 for rights to buy GM shares at a fixed $35.00 by October’s expiration. The drop in volatility was accompanied by call selling on the rally leaving those calls with gains of 20% rather than the 74% gain as trading started. Call sellers at 3.3 for example are protected against share price gains until the stock reaches $38.30, which would still require a 6.6% rally from today’s current price.
Meanwhile put prices in the October contract reflected the double-whammy of “good news” (a rally in the stock and a drop in volatility) by cratering by as much as two-thirds. The 35 strike shed 54% on yesterday’s session leaving premiums at just 1.2. the November series was most active on the call side at the 37.5 strike where 2,300 lots traded in comparison to 1,590 puts at the lower 35 strike. Overall some 127,000 contracts traded by 11am with 1.8 calls trading in comparison to puts.
F – “Detroit fever” in the options market finally made its way to Ford (F), where option traders have remained firmly on the sidelines in view of the unfolding strike drama at GM. Shares tacked on a 5.6% gain to $8.81, and with 99,000 options trading it appears that some investors felt assured enough of the sticking power of today’s UAW/GM deal to let go of about 61,750 “doomsday puts” in the January ’09 series that would have allowed them to dump Ford shares for $5 apiece in January of 2009. Elsewhere, we observed confident positioning in the December 10 calls, where more than 10,000 lots traded. As is the case with GM, implied volatility beat a fast retreat and at 34% is now about 2% below the historic volatility reading for Ford shares.
BBBY – A seeming contradictoriness over the market’s perception of home improvement retailers to navigate in the current dicey environment is also apparent in shares of Bed Bath & Beyond, due to report earnings today. Shares were up 6% after the bell at $35.19, with 18,000 options moving actively, showing a slight skew to the puts. While option traders appeared loath to venture “beyond” the October contract, the positioning here suggests a couple of scenarios. We can ascertain that about a quarter of today’s volume – 3,000 lots – is seated in the October 35 calls, but because these are logged to the middle of the market, we can’t confirm whether they were bought or sold. Given that we know the 1,200 lots calls trading at the 32.50 strike were bought on the offer, some traders may be selling the 35 calls to fund exposure at the 32.50 level. Or they may be involved in sold straddles or strangles involving puts at the 30 and 32.50 strikes. Whether the market has simply become inured to pale prognostications on the buying power of home-loving US shoppers, traders do not appear to be positioning for any great shakes in volatility for Bed Bath & Beyond, and even an upside surprise in earnings is unlikely to take shares past the $35 level.
SHW – A whitewash of the current housing market woes, or is the market being primed for yet another takeover rumor? We were surprised to see this morning’s M&A rumor-mill seize upon a ticker with such unmitigated exposure to the sagging home improvement market. Sherwin-Williams, producer behind the eponymous Sherwin-Williams and Dutch Boy paint brands, is commanding more than 6 times the average volume in options trading today, with shares up 3.4% to $66.91. So what’s in the Sherwin-Williams mix that hasn’t rubbed off on the likes of Lowe’s? We’re observing heavy buying in the October 70 and 75 calls, in positioning that’s as fresh as a coat of buff! Heading into today’s session, total open interest showed about 2.7 open put positions for every call, implying a prevailingly bearish sentiment on Sherwin-Williams, a company that has underperformed the S&P by about 3.4% for the year to date, but outperformed peers in the consumer discretionary index.
IYT – iShares Dow Jones US Transport index ETF – shares rose 0.6% to $86.58 Wednesday and continued to pull away from support at $80.40 and $83.49 put to the test over the summer months. No doubt the high price of crude oil has been adding additional weight on the sector, yet the sector seems to have found some friends at least. Option open interest is scant at just 11,983 lots, which is why put trading today is of interest to us. The deep-in-the-money December 100 strike puts saw heavy volume of 2,731 lots at a price of 13.50. The bulk of that volume appears to have traded to the bid side indicating that investors have confidence that transport share prices will rally going forward. If they do continue to rally the put premium at the 100 strike will erode. Not only that, but as time lapses towards expiry the time value element that makes up options prices will decay. As long as share prices at least stand still in the sector these investors may be onto a healthy trade. Yesterday we noted a buzz in the options market as trucker YRC Worldwide took on the appearance of a takeover target.
DAL – Delta Airlines options were notably active thanks to the purchase of 21,000 calls at the December 17.5 strike price. Shares in the airline were higher by 4.5% at $17.84 and so left these calls in-the-money. An investor clearly sees relief in the sector ahead following a rebound for Delta off a $15.90 low. Implied volatility pretty much matches the activity on the underlying share price performance at around 54%. Today’s option volume stacks up to around 15% of overall open interest on Delta’s options contracts.
NWA – Northwest Airlines options volume was also significant. The bulk of today’s trading, unlike as occurred with Delta, was on the put side, where it would appear that a large chunk of October 15 puts were bought. Some 15,000 lots traded today premium of 0.50. However, an investor is picking these up at a nickel below Tuesday’s closing price at a time when shares have rallied 2.9% to stand at $17.01. This investor is looking for a share price slide of as much as 6.9% before breaking even on this trade. Also in play today were puts at the March 22.5 strike where a buyer snapped up 2,100 lots at around a 6.0 premium.
SLM – Shares closed 2.4% lower at $45.08 after Sallie Mae confirmed that a JC Flowers/Bank of America consortium had reneged on the terms of its $25 billion buyout. Options traders reacted immediately, putting more than 200,000 contracts in play. Earlier today, option traders appeared keen on volatility positioning in the front month contract. Once news of the shelved agreement was made public late in the session, traders made a rush to shed calls at the 50 and 55 strikes in the November and January contracts. A telling commentary on the volatile plight of this troubled takeover candidate, option implied volatility stands at 67% – compared to 28% historic volatility.
CBAK, CSUN – The ranks of relative volume gainers included a couple of conspicuous Chinese tech companies with exposure to the consumer electronics sector. China Bak Battery (CBAK), one of the leading makers of rechargeable lithium-ion batteries, saw its volume surge to more than 80 times the average as shares added 26% on the day to stand at a $6.35. Implied volatility rose 40% to 66.3 on the session, as option traders rushed to buy calls at the 7.50 in the October and December contracts. Meanwhile, options in the ADR-traded shares of China-based solar cell maker China Sunergy (CSUN) attracted 14 times the average volume against a modest 2.7% gain in shares to $10. Traders appeared to zero in on the front month at-the-money strangle, which at $2.35 represents more than20% of today’s share price.
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Andrew Wilkinson |
Rebecca Engmann Darst |
Sep
24
The US equities markets all posted strong gains last week, initiated by a relatively unexpected substantial easing of fed fund policy on Tuesday. Appearing as a pre-emptive strike against the expected pending recession being predicted by many economists, The FOMC slashed both the fed funds rate and the discount rate by 50 basis points. The move led to a sharp intraday rally of about 250 pts. in the DJIA subsequent to the announcement, which would be expected as the cheapening of the
The issue at hand for traders, directionally at least, is that the markets are at a fulcrum of how the economic data will be digested and thereby if the bull or bear will show up. Now that the poor data has led to substantial cuts as well as an infusion of liquidity to bail out the credit markets, will bad news continue to be good news (leading to rate cuts) or will the bad news signal a true slowdown and hand the ball over to the bears? In addition, although the words continue to be “stable” and “in control” regarding inflation, we still see energy and commodity prices in the stratosphere and the dollar faring so poorly against other world currencies that it is at parity with the Canadian dollar.
For the week, the DJIA was up 377 pts to 13820 on strong NYSE volume, with advancing issues outpacing decliners 27-3 for the week. The NASDAQ composite index gained 69.04 for the week to close at 2671.22, and the S&P also benefited from the cuts by posting 41.50 in gains to end the week at 1525.75. Crude oil closed the week at $81.62, gaining over $2 for the week, based upon the cuts and predictions of possible activity on the hurricane front which is always good for a little panic buying.
Technically, I don’t see much standing in the way of the Dow reaching its highs of 14,024, but some poor earnings and more news of a slowdown, along with overpriced energy could see a bearish retracement from that high. This is especially true when it is noted that recent buying activity has put many technical indicators flashing a highly overbought scenario.
As would be expected after the rally in the equities, the VIX saw a sell off last week closing at 19 even on Friday after opening the week at 26.45. The put/call ratio on the spx remained bullish at 130/100 although less heated than the previous week’s 151/100. A very busy week of economic data as well, including existing home sales on Tuesday and Durable Goods on Wednesday. In addition earnings numbers from KB Home on Thursday should allow for a small peek into how much blood is in the housing market. Interesting how all of this will come to a confluence while the Dow will be flirting with its all time high, albeit in my opinion, an artificial one.
Gregory Wolfe, The
Sep
16
However, as alluded to earlier, the markets did rally last week with the DJIA gaining 329 pts for the week to end up trading on Friday at 13,442. The broader based s&p 500 index added over 30 pts to close at 1484.25, and the NASDAQ composite also followed the way of the bull finishing the week up over 36 pts to 2602.18. Crude oil prices briefly peeked its head over the lofty $80 per barrel mark before settling on Friday at $79.10, yet the noise out of
Technically, all of the averages have been basically toeing the line of the 20 day simple moving average, while vacillating between the 200 day sma as support and the 50 day sma as resistance, with little volume. All of this is, ostensibly, in anticipation of the allegedly necessary rate cut that will be brought to fruition on Tuesday. The question no longer is if there will be a cut but how much. Conventional wisdom would appear to assume that a 25 basis point cut would lead to an equity sell off, while 50 pts would see a rally. However, with the tens of billions of dollars that was recently flooded into the economy to aid the ailing credit markets, one must wonder just how much more the US dollar can be devalued. The comments made by FOMC chairman Bernanke will also be under great scrutiny as many economic analysts have already priced in 100 points being shaved off of the fed funds rate by years end.
Macro economic data is also due out this week which may or may not support this easing bias. On Tuesday the August PPI will be released. On Wednesday, the August CPI and August Housing Starts are due, and Thursday will see August Leading Indicators and The September Philadelphia Fed Survey. In addition, earnings season is here once again and many companies will release their numbers, including several financials which could affect the markets as well. One must wonder though, how much lower the dollar can go against other world currencies and if there is an egregious mispricing, where would these markets be if that mispricing was ever corrected?
Gregory Wolfe
The
