Skip to main content

Morning Update

This morning futures are modestly higher head of the open with the Euro up 0.30% and European indices down. Today retail sales were released for October and came in at -0.3 versus -0.1$% expected. The reading was likely affected by hurricane Sandy, but the bottom line is that ales slowed after accelerating the month before. The PPI was also release this morning and like retail sales came in weaker than expected. Consensus estimates were for a 0.2% increase but the PPI was reported at -0.2% month over month. Food inflation rose 0.4% last month but energy decreased 0.5% led by gasoline prices, which eased 2.2%. The market will be closely following President Obama this week and into next as he aism to begin congressional budget talks this Friday. He is said to be calling for $1.6 trillion in tax revenue increases over the next 10 years, which is likely to be rejected by Republicans.

This morning 773 million Facebook shares will be free to hit the market as another stock lock-up expires. There are currently 2.3 billion shares circulating, so the new shares eligible to be traded today represent an increase of 33%. In the past Facebook’s stock price has tumbled on lock-up expiration days. This time, however, traders do not appear to be making as bearish bets as in the past. According to the WSJ the number of Facebook shares being borrowed to short has declined by 40% this month and is at its lowest level since June. The cost of borrowing Facebook shares has likewise been halved as demand is no longer there. Yesterday Facebook puts were very active, but mostly on the sell side. One trader sold 12,590 Nov. 19 puts for $0.30 with the stock trading 19.95. This is a bullish to neutral bet that Facebook will not decline below 18.70 (6.2% lower) by expiration this Friday. If Facebook is below 19, the trader will be put to the stock there, but regardless the trader gets to keep the $0.30 in premium received for writing the puts.

Prior to past lock-up expirations we have seen heavy put buying, so yesterday’s options trading was quite different. In total $1.6 million in put premium was sold yesterday on over twice the average daily trading volume. Selling an out of the money put is a bullish to neutral strategy, and by employing it yesterday traders are saying they think Facebook will not decline much more this week. The reason for this bullishness is simply that Facebook could be oversold – share are already down over 50% from its IPO price and down over 17% since it reported better than expected earnings on Oct. 23rd. The lock up could already be priced into the share’s price, making today a near term bottom. However, the fact that traders are selling November puts and not December or further dated contracts is telling that the risk in the stock over the long term remains to the downside.


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 …