The Prepared Mind: August 24, 2015

"Chance favors the prepared mind." -- Louis Pasteur

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

“The market is characterized by long periods of boredom

interrupted by moments of panic.” – Bob Price

This is a week where a picture is worth a thousand words.   The past week saw a global sell-off led by Chinese markets. The sell-off culminated on Friday with the worst daily sell-off in four years. On Friday, the Dow Jones Industrials fell 531 points or 3.1%. The DJIA was down 5.7% for the week and is down 10% from its all time record high on May 19, 2015. The Dow Jones has erased all last year’s gains.   The other major indexes – the S&P 500, S&P 100, NASDAQ 100, and the Russell 2000 – showed similar losses for the week. All the major indexes are now in negative territory for the year.

 

The chart for the SPX from 1:05 PM CDT on August 19 to the close on August 21 tells the story for the S&P 500. The S&P 500 was within 1.8% of its all-time high at 1:00 PM CDT on August 19. The index sold off 6% during the intervening 13 hours of trading. It is a natural reaction to attempt to make sense of the sell-off.   I do not have the answer. It is not a time to panic. It is a time to be wary.

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Data Source: thinkorswwim

 

Here is an overview of the market behavior last week:

Index 21-Aug Weekly Change % Weekly 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 16459.75 (1,017.65) -5.82% -7.65% 28.03% (VXD)
S&P 500 (SPX) 1970.89 (120.65) -5.77% -4.27% 28.03% (VIX)
NASDAQ 100 (NDX) 4197.77 (334.86) -7.39% -0.98% 30.20% (VXN)
Russell 2000 (RUT) 1154.56 (57.29) -4.73% -4.16% 29.50% (RVX)
S&P 100 (OEX) 864.77 (55.98) -6.08% -4.80% 28.34% (VXO)
CBOE Volatility Index (VIX) 28.03 15.20 118.47% NA  

Data Source: OptionVue7

 

The chart for the same time period for the VIX shows levels not seen for years or ever. The VIX increased by more than 118% last week. This was the biggest week to week increase In VIX history. The VIX curve shifted into backwardization. Backwardization is where near term futures are more expensive than longer-term futures. The futures curve is downward sloping. This is the opposite of contango. In contango, near term VIX futures are cheaper than longer term VIX futures. Contango is very common in VIX futures, especially when the spot VIX Index is very low.

 

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Data Source: thinkorswwim

 

The VIX related products – long and short – underperformed the spot or cash VIX. These products use front month VIX futures to compute valuation. August VIX futures expired this past Wednesday. These products are priced based on exposure to September and October VIX futures.   The September VIX future is the most heavily weighted in these calculations. The September VIX future was up 31.57% versus 118.47% for the spot VIX. The October future , which is also part of the calculations, was up only 17.69%. This difference between the futures price and the VIX spot explains the perception of “under performance” for VIX related products.

 

Here is an overview of last week for the VIX and related products:

Indexes Ticker 29-Aug 22-Aug Change % Change
CBOE Volatility Index VIX 28.03 12.83 15.20 118.47%
VIX September Future VXQ5 19.900 15.125 5.625 31.57%
VIX October Future VXU5 18.625 15.825 3.500 17.69%
VIX November Future VX5V 18.325 16.325 2.800 12.25%
CBOE Short-term Volatility Index VXST 38.96 11.87 27.09 228.22%
CBOE 3 Month Volatility Index VXV 23.47 15.51 7.96 51.32%
CBOE Mid-term Volatility Index (6 month) VXMT 22.33 16.96 5.37 31.66%
VIX of VIX VVIX 138.57 89.38 49.19 55.03%
Long VIX ETP’s      
iPath S&P 500 VIX Short Term Futures VXX 20.72 15.99 4.73 29.58%
pShares VIX Short Term Futures ETF VIXY 13.76 10.66 3.10 29.08%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 11.01 10.22 0.79 7.73%
Inverse VIX ETP’s      
Daily Inverse VIX Short Term ETN XIV 36.04 47.84 (11.80) -24.67%
ProShares Short VIX Short Term Future ETF SVXY 70.39 93.66 (23.27) -24.85%

Data Source: OptionVue7

Domestic and US markets will dominate price action this week. Chinese markets will open Sunday evening US time. The E-Mini, a future based on the S&P 500, opens for trade on Sunday at 6:00 PM EST. These markets will provide indication of the direction of the US equity markets on Monday. Economic reports will focus on the housing sector. Other major reports are Durable Goods Orders on Wednesday morning and GDP prior to the market open on Thursday. The following week is employment week. Wednesday through Friday the week after next will see the release of employment reports with the potential to move equity markets.

The earnings season is over at the end of this week. It is time to start laying the groundwork for the next earnings cycle. Earnings announcements this week include: Sanderson Farms, Toll Brothers, Valspar, Best Buy, Abercrombie Fitch, Guess?, Williams Sonoma, Fred’s, J.M. Smucker, GameStop, Autodesk, Tiffany, Dollar General and Big Lots. It is imperative for an option trader to know the date of earnings announcements in relationship to the expiration date of options being traded.   It is your responsibility to know the dates of announcements. You should call an confirm earnings dates with the individual company’s investor relations department. The July and August monthly expirations encompass over 90% of the 2nd quarter earnings announcements for the S&P 500. OptionVue provides information on the effect of individual earnings announcements on the historic stock price and the pre and post earnings implied volatility of the options. These OptionVue tools designed to help the trader successfully trade options around earnings plays. There are five different kinds of earnings play which OptionVue tracks.

I have provided a list of major earning announcements along with Friday’s closing price and implied volatility, time of announcement, and expected earning range. The selected stocks are the result of a scan for stocks announcing earnings in the coming week using the following criteria: Price > 20, 30 Day Implied Volatility > 22, and Average Daily Option Volume > 200 contracts. Once again, it is your responsibility to confirm these earnings dates. The date and time of earnings announcements can and do change.

Advice to stimulate your imagination:

 

“Chance favors the Prepared Mind.” – Louis Pasteur
“Yesterday’s bullet won’t kill you. Tomorrow’s bullet just might.” = Bernie Provan

 

“It’s not because things are difficult that we dare not venture.

It’s because we dare not venture that they are difficult.” — Seneca

 

“Test fast, fail fast, adjust fast.” — Tom Peters

 

 

Monday August 24:

 

Economic: Chicago Fed National Activity Index – 8:30 AM.

 

International Economic: No major announcements.

 

Other: Atlanta Federal Reserve Bank President Dennis Lockhart speech to public pension forum, in Berkley, California -3:55 PM.

 

Optionable Earnings:

Symbol Company Name August 21 Close IV30 B/A
QUNR Qunar Cayman Islands Ltd $32.75 85.11 AMC
QIHU Qihoo 360 Technology Co Ltd $57.42 56.23 AMC

 

 

 

Tuesday August 25:

 

Economic: Redbook – 8:55, FHFA House Price Index – 9:00, S&P Case-Shiller HPI – 9:00, New Homes Sales – 10:00, Consumer Confidence – 10:00, Richmond Fed Manufacturing Index – Sate Street Investor Confidence Index – 10:00,.

 

International Economic: Germany GDP – 2:00 AM.

 

Other:

                                             

Optionable Earnings:

Symbol Company Name August 21 Close IV30 B/A
BHP BHP Billiton Limited (ADR) $35.87 49.49 BMO
PKX POSCO (ADR) $38.10 38.53 BMO
KLXI KLX Inc $37.46 41.88 BMO
DSW DSW Inc. $32.54 42.56 BMO
SAFM Sanderson Farms, Inc. $71.72 37.58 BMO
TOL Toll Brothers Inc $40.75 32.34 BMO
BMO Bank of Montreal (USA) $53.57 27.68 BMO
BBY Best Buy Co Inc $31.43 49.58 BMO
PLCE Childrens Place Inc $59.64 41.24 BMO
VAL The Valspar Corp $80.51 33.68 BMO
DY Dycom Industries, Inc. $64.21 56.41 AMC
NMBL Nimble Storage Inc $24.71 56.70 AMC
LCI Lannett Company, Inc. $49.58 58.38 AMC

 

 

Wednesday August 26:

 

Economic: MBA Mortgage Applications – 7:00, Durable Goods Orders – 8:30, PMI Services Flash – 9:45, EIA Petroleum Status Report – 10:30.

 

International Economic: No major announcements.

 

Other:

 

Optionable Earnings:

Symbol Company Name August 21 Close IV30 B/A
RY Royal Bank of Canada $56.59 29.13 BMO
GLNG Golar LNG Limited (USA) $36.80 72.53 BMO
GES Guess?, Inc. $20.58 47.09 AMC
PVH PVH Corp $114.98 35.40 AMC
WDAY Workday Inc $77.02 63.11 AMC
AVGO Avago Technologies Ltd $115.03 57.24 AMC

 

 

Thursday August 27:

 

Economic: Weekly Jobless Claims – 8:30, GDP – 8:30, Corporate Profits – 8:30, Bloomberg Consumer Comfort Index – 9:45, Pending Home Sales Index – (:45, Philadelphia Fed Business Outlook Survey – 10:00, EIA Natural Gas Report – 10:30, Kansas City Fed Manufacturing Index – 11:00..

 

International Economic: WMU M3 Money Supply – 4:00 AM, Japan CPI, Household Spending, Unemployment Rate, Retail Sales – 7:50 PM.

 

Other: Jackson Hole Symposium – Annual economic symposium to include global economic and financial leaders, in Jackson Hole, Wyoming.

 

Optionable Earnings:

Symbol Company Name August 21 Close IV30 B/A
SIG Signet Jewelers Ltd. $125.77 31.91 DMT
TIF Tiffany & Co. $88.99 38.91 BMO
TD Toronto-Dominion Bank $38.92 25.91 BMO
PTR PetroChina Company Limited (ADR) $86.45 40.07 BMO
BURL Burlington Stores Inc $53.65 48.39 BMO
GME GameStop Corp. $45.23 51.19 BMO
DG Dollar General Corp. $80.22 28.09 BMO
VEEV Veeva Systems Inc $24.49 57.14 AMC
ULTA Ulta Salon, Cosmetics & Fragrance $171.30 43.19 AMC
ADSK Autodesk, Inc. $53.10 42.99 AMC
SPLK Splunk Inc $64.39 60.72 AMC
ZOES Zoe’s Kitchen Inc $37.80 71.31 AMC
OVTI OmniVision Technologies, Inc. $24.15 48.65 AMC

 

 

Friday August 28:

 

Economic: Personal Income and Outlays – 8:30, Consumer Sentiment – 10:00, Baker-Hughes Rig Count – 1:00.

 

International Economic:  Germany CPI – 8:00 AM.

 

Other: Jackson Hole Symposium – Annual economic symposium to include global economic and financial leaders, in Jackson Hole, Wyoming.

 

Optionable Earnings:

Symbol Company Name August 21 Close IV30 B/A
BIG Big Lots, Inc. $42.05 48.73 BMO
BNS Bank of Nova Scotia $44.79 27.18 BMO

 

 

Monday August 31:

 

Economic: Chicago PMI – 9:45, Dallas Fed Manufacturing Survey – 10:30.

 

International Economic: No major announcements.

 

Other: Atlanta Federal Reserve Bank President Dennis Lockhart speech to public pension forum, in Berkley, California -3:55 PM.

 

Optionable Earnings: None meeting criteria.

 

 

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