Skip to main content

Morning Update

Last night Speaker Boehner scraped the House’s vote on “Plan B” because there were not enough Republican votes to pass it. This sent stocks around the world tumbling and a heavy dose of risk aversion in currency markets. S&P 500 futures lost about 50 points in a matter of minutes but has since stabilized higher and are down 22 ahead of the open. The US dollar and Yen as also stronger this morning as trader s move into safe haven assets. The VIX is the real mover on the news and the Jan future is up over 7%. Speaker Boehner is expected to speak at 10 EST and could give the market a clue as to his next move. The good news out of the Plan B failure is that everyone, especially the President, knows which Republicans will not compromise on tax increases, whether Boehner wants them or not. Boehner will have to tell Obama that if he wants a bill he will have to rally Democrats to meet the Republics that are willing to compromise half way. However, if Obama cannot get Democrats to compromise or Boehner loses too many additional votes on a compromise bill the US is likely to go off the cliff.

One of the worst performing asset classes this month has been silver. The entire metals complex has been sold hard since the Fed’s announcement last week, and the move has many traders perplexed. Typically silver, like gold, is seen as an inflation hedge and would be expected to appreciate after the Fed announced it would increase its asset purchase program. We trade gold and silver based on a macroeconomic model and have found that part of the sell-off in metals has been due to a “risk on” trade where funds are buying riskier high-yield debt and selling metals, which yield nothing but are safe havens. We also suspect there has been short term pressure on the metals due to end of the year profit taking and fund liquidation.

Yesterday one trader sold a Jan. 29 call and put in SLV, the physical silver ETF, for a net credit of $1.55. This trade is a bet that silver will remain range bound between 27.45 and 30.55 (+/- 5%) over the next 28 days. Our models suggest gold and silver are near their fair value at current levels, and expect only a few percent in upside over the next month. The silver market is much smaller and therefore more volatile than the gold market, so silver is used as a beta play on gold. This makes silver options relatively more expensive than gold which means that there is more premium to be collected by selling options. Of course with more potential reward comes more risk, and silver has been known to move over 3% on a daily basis.

While I like the idea of betting on range bound silver, I think this trade, with unlimited risk in both directions is too risky. Because I am mildly bullish on metals here I prefer a covered call position where you are long the ETF and short an at the money call. This position will profit if silver remains range bound to up, and will have limited risk on 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 …