Skip to main content

Morning Update

Yesterday as election results rolled in the S&P 500 futures sold off, hitting lows for the night as NBC announced Obama had won the election. After the news the futures rallied to test the 50-day moving average but the level was swiftly rejected as Mario Draghi said the European debt crisis was beginning to hurt Germany, Europe’s largest and most resilient economy. This caused traders to go into risk-off mode, with bonds catching a bid and equities across North America and Europe being sold.

As Americans took to the polls yesterday to choose the country’s new leader, China’s Politiburo Standing Committee is preparing for the 18th National Congress of the Chinese Community Party which will begin Thursday and result in a new ruling elite. Expectations are for Xi Jinping to be named party chief, effective next March. As a result there has been heavy options activity in FXI, the China 25 Index ETF. Yesterday one trader sold 19,875 Dec. 36.5 puts for $0.68 and bought 13,250 Dec. 38 calls for $1.02. The idea behind this spread is to gain long exposure to the FXI via long calls, but to offset the cost of buying those calls by selling puts. This spread was done for a net cost of zero, and will profit if FXI is above 38 at December expiration, which is in 44 days.

The bullish case for China centers around better than expected economic data released this month, and hopes that the leadership will tackle some of the many problems facing the country. China’s third quarter GDP was reported in line with estimates at 7.4%, but new estimates have been revised up from 7.4% to 8.1% growth in the fourth quarter and 9.0% in the first half of 2013. The catalyst for rising growth estimates has been China’s $1T+ stimulus in the past months. Some expect that when new leaders come to power following the National Congress more stimulus will be announced in order to maintain China’s rapid growth.

To play a pop in the FXI following the once in a decade National Congress this spread is worth considering. However, if FXI drops below 36.5, traders will be put the stock and must therefore be willing buyers there. To limit downside risk traders could forego selling a downside put, but this will move the trade’s upside breakeven higher, meaning a bigger move will be required to make a profit.


Popular posts from this blog

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…

The market should take Trump seriously this time.

Kim Jung-Un gave the U.S. an unwelcome birthday present as he test launched an ICBM capable of reaching Alaska.  North Korea has made it very clear that their intention is to grow their nuclear capability to be able to reach the Continental United States.  This would destabilize the region, and world overnight.
Now I don’t expect the war drum beating will spill over into mortar shells raining down on Seoul anytime soon.  There has been a choreographed diplomatic dance going on for the past 40 years with North Korea that is likely to continue as follows; North Korea acts out, U.S. gets upset, U.S. sanctions them (with help from China).  North Korea gives up their acting out activity (promises they won’t do it again), a North Korean South Korean gesture of goodwill takes place, such as joint Olympic teams, joint economic projects, North Korea gets to declare victory.
However, this go around seems slightly different.  Now we have a President who has made it very clear in his campaign tha…