Skip to main content

Morning Update

This morning US stock futures are moderately higher ahead of the open, driven by an overnight rally in Greek bonds and positive US retails sales. Month over month retails sales came in at 1.1% versus 0.7% consensus. The rest of the week will be packed with data, such as the CPI and industrial production tomorrow, housing starts Wednesday, and existing home sales Friday.

On Friday we noticed unusual options volume in Yahoo. The biggest trade of the day was the sale of 27,000 Oct. 16 calls for $0.09 with the stock trading at 15.88. Next Monday Yahoo will report quarterly earnings for the first time since CEO Melissa Myers took the helm. However Oct. expiration is this Friday so these options will expire ahead of the announcement. This trade is very likely a hedge to a long stock position in a trade known as a covered call or buy-write. This is a conservative strategy traders use when they expect sideways to mildly bullish price action. In this case the trader is being paid $0.09 to forgo any upside gains on his long stock position above $16.00 per share. Since the trader collects $0.09, this trade will outperform a naked long stock position if the stock remains below 16.09 this week. If Yahoo is above 16 the trader will make the $0.09 collected from selling the call plus $0.12 from buying stock at 15.88 and selling it at 16.00, which is a 1.3% return in a week. If Yahoo sells off this week the trader will have the $0.09 collected as a cushion to downside losses in the stock.

Yahoo’s stock has had a strong run-up since September 4th when it traded 14.59 and is nearing a major area of congestion and resistance in the 16 – 16.5 range. For investors who are long the stock but want to reduce some of the stocks day to day volatility, a buy-write strategy like this makes sense. However, since the options in this trade will expire ahead of Yahoo’s earnings it will not dampen the potentially sharp swings the stock could have next week. For investors looking for a little protection from the earnings announcement they should look to sell Nov. call options. These have elevated implied volatilities due to the pending news and will therefore offer sellers large premiums.

Comments

Popular posts from this blog

FED Rate Hikes Could Cause Unintended Volatility Shock

Last week the Federal Open Market Committee surprised no one when they raised rates 0.25 basis points to increase rates to between 1% and 1.25%.  What did surprise the market, was the revelation that the FED is committed to normalize rates, even if inflation does not meet their target.  This was reiterated this week in a speech by William Dudley, President of the Federal Reserve Bank of New York, who stated he feels the FED needs to raise rates, despite low inflation, to be ready to act if the economy does slow down.
The market has been quick to respond, and nothing was hit harder by a reduction in inflation expectations than commodities.  Gold, since the announcement, is lower by 2.39%, and oil is down -3.18%.  Crude futures have broken their upward trend line and appear poised to test the previous low of $39.56.
While, oil has been under pressure all year, the S&P 500 does not seem to care, as it continues to make all-time highs.  Oil is down 23% year to date, while the S&P…

Gold and Treasuries Say “RISK OFF”, But VIX Says "RISK ON"

Today we are seeing a modest rebound in the market after yesterday’s small selloff.  Volatility remains extremely low, with the VIX hovering around 10.  It’s important for traders to recognize how low the VIX has been lately.  Since 2010, the VIX has only closed below 10 five times, and each of those five times has come in the last month.                   However, the market is not without risks right now.  Gold has rallied 6.5% since May 9th.  Treasuries have rallied, pushing rates to below 2.15.  So, the market is currently in a risk off mode while equities are in a period of historically low risk.  The VVIX (the VIX of the VIX), for its part, is not sounding the all clear signal, 87 is in the medium range for VIX volatility.  Tomorrow we have a potential market moving event with James Comey’s testimony to Congress.  The last time Comey’s name was in the news, we saw the VIX move from 10.5 to over 15 in one trading day (a 50% increase) on a day where the market was down over 2%.  …

Markets Soft without Stimulus

Markets around the world pulled back the reigns as central banks look to taper quantitative easing. Japan’s central bank decided to leave their current pace of monetary policy unchecked, which has effectively cut the Nikkei down 1.5% on the day, affecting nearly every market in-between, scaring the DJIA 165 points off the start this morning. US Treasuries have now notched the highest yield in 14 months on the 10 year note.

This morning 55,257 EEM July 35 puts were purchased by a trader for $0.29 each, costing him a large $1,602,453. This is a bearish move on the Emerging Markets ETF, with expectations that by the July expiration, the price of EEM will dip below $34.71. EEM opened today at $39.32 and if this trader was to pass the breakeven point, the ETF would have to drop by more than 11.7% within a little over a month.

EEM opened today 1.9% lower than its closing price yesterday and since the 52-week high the ETF experienced in early January, it has lowered by over 13%. While this …