Skip to main content

Morning Update

This morning S&P futures are lower ahead of the market open. Sentiment in the European session as negative after the German IFO business climate index was reported at 101.4, the fift consecutive monthly decline. In particular European basic materials equities are being sold as fears of a Chinese slowdown continue to weigh on the sector. Gold, silver, and crude oil are all lower as well with the US dollar higher.

Friday we saw unusual options activity in XRT and FB. XRT is the SPDR Retail ETF, and one trader is betting it will make a big move before October expiration. 27,975 60 Oct. puts and 27,975 Oct. 68 calls were bought on for a net price of $0.30. With XRT at 64.02 at yesterday’s close, this strangle makes money if the stock moves above 68.30 or below 63.70 at expiration. A strangle is a spread option traders use when they believe a stock is about to make an explosive move but are unsure of the direction. The spread is also used when they believe a stock’s implied volatility is too low and likely to increase. XRT 30-day implied volatility made a new 52-week low on Friday, which could have been the reason this spread was bought.

Another large trade was saw Friday was the sale of 12,500 Oct. 19 FB puts for $0.15. This trade makes money if FB is above 19 at expiration, which is 16% below Friday’s close. Often traders sell a put on stock they would like to own at a level they are willing buyers. If the stock is below the strike their option is exercised and they are put the stock. If the stock rises they get to keep the premium collected for selling the option, which is like being paid to wait for a good entry.

Comments

Popular posts from this blog

Wake Me Up When September Ends

The fiscal year for the U.S. Government ends September 30th, 2017. Which is something market participants could care less about if not for, sometime near that date, Congress needs to raise the debt ceiling. Missing that deadline would result in a self-inflicted financial wound that would send shock-waves throughout global markets.  The U.S. Government has been paying off debt since the Andrew Jackson administration without missing a single payment. Raising the debt ceiling is a routine vote.

In fact, with the polarized Washington we have seen in recent years, it is happening a lot more frequently, as Congress has only once passed a budget in the past eight years. In lieu of a budget, Congress passes what is known as a continuing resolution.  A continuing resolution is a type of legislation in which Congress decides to let last year’s budget continue as this year’s budget. Nevertheless, a continuing resolution is incomplete, as it does not allow for the government to spend the money a…

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."


Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. 
Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). 
So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…