This week the slow and steady market rally we have
experienced this year has slowed even more, although the uptrend is still very
much intact. One option trader is betting that the Nasdaq-100 is at a near term
top at its current levels, and sold 8000 of the QQQ 69 calls expiring on 4/26
against a stock position for $0.91. This buy-write or covered call has a
neutral to bullish bias to the market meaning that it will profit if the QQQ stays
around this level or moves higher. If QQQ is at 69 at expiration the stock
position will breakeven but the option will expire worthless, showing a profit
of $0.91. If the Nasdaq-100 declines then losses on the stock position will be offset
by the $0.91 of premium collected on the options. Lots of traders and investors
are having a hard time seeing how the market will be able to rally
significantly higher from here in the near term and are concerned about the
seasonal “sell in May and go away” trade that could pressure the market. If you
are in this camp then consider a covered call like this. This position is less
risky than a simple long stock position because it will allow you to continue
to profit if the market simply sputters and stalls here and also cushions the
downside if we do see a sell off. The other option is to buy puts, which, even
with volatility near multi-year lows, can be costly. We currently have many of
our clients in strategies like this in order to collect income as we wait for a
clearer indication of what direction the market will take next.
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. (Source: Access Hollywood) 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. A...
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