The Prepared Mind: August 31, 2015

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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

”Put your trust in God, my boys, but mind to keep your powder dry.”

Attributed to Oliver Cromwell


The markets are very nervous. I have been trading over 30 years. The past week’s equity markets exhibited behavior which rivaled any black swan markets I have ever traded. I was in the pits at the CBOE for over 20 years. During that time I traded the crash in 1987 and the collapse of the dot com market. I actively traded the financial crisis of 2008. In addition, I have traded individual equities which exceed these markets in volatility change and percentage movement. The past seven trading days have inflicted a psychic toll on traders similar to these previous

Markets such as these are very difficult to trade, even for the most experienced trader. There were intraday movements which exceeded recent weekly movement and had the same range has some recent months. This type of trading range exacerbates the losses associated with minor miscalculations in price or volatility direction. I reduce trade and position size in volatile markets. This allows me to be more opportunistic when opportunity presents itself. John Templeton, one of the most successful traders of all time, famously remarked on Black Monday in 1987, “I made my money by never buying a bottom and never selling a top.”


The week opened with a 1,000 point plunge in the Dow Jones Industrials. The Dow dropped nearly 1,300 points from Friday through Tuesday. On Wednesday and Thursday the Dow gained nearly 1,000 points.   Small gains on Friday left the Dow and the other major indexes up 1% to 3% for the week The range and speed of the intraday movements were dizzying. Brian Reynolds, chief market strategist for New Albion Partners summed up the week with, “It was an exhausting week, where it felt bad on the way down and just as bad on the way up.”


Here is an overview of the market behavior last week:

Index 28-Aug Weekly Change % Weekly 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 16643.01 183.26 1.11% -6.62% 25.31% (VXD)
S&P 500 (SPX) 1988.87 17.98 0.91% -3.40% 26.05% (VIX)
NASDAQ 100 (NDX) 4331.24 133.47 3.18% 2.17% 28.75% (VXN)
Russell 2000 (RUT) 1163.57 9.01 0.78% -3.41% 26.74% (RVX)
S&P 100 (OEX) 875.58 10.81 1.25% -3.61% 25.52% (VXO)
CBOE Volatility Index (VIX) 26.05 (1.98) -7.06% 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.



The VIX and related products – long and short – showed a new term structure this week. The VIX and the VXST (CBOE Short-term Volatility Index) moved lower while the longer term VIX futures and the CBOE 3 month and 6 month Volatility Indexes (VXV and VXMT) gained value. I have never seen this movement before. Friday saw the sale of a VIX Sept 16/20 call vertical for 3.06. The spread profits with the VIX lower the 19.06 at September expiration.


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

Indexes Ticker 28-Aug 21-Aug Change % Change
CBOE Volatility Index VIX 26.05 28.03 (1.98) -7.06%
VIX September Future VXU5 24.425 19.9 4.525 22.74%
VIX October Future VX5V 21.875 18.625 3.250 17.45%
VIX November Future VX5X 21.375 18.325 3.050 16.64%
CBOE Short-term Volatility Index VXST 27.11 38.96 (11.85) -30.42%
CBOE 3 Month Volatility Index VXV 25.34 23.47 1.87 7.97%
CBOE Mid-term Volatility Index (6 month) VXMT 24 22.33 1.67 7.48%
VIX of VIX VVIX 138.57 130.38 8.19 6.28%
Long VIX ETP’s      
iPath S&P 500 VIX Short Term Futures VXX 25.86 20.72 5.14 24.81%
pShares VIX Short Term Futures ETF VIXY 17.24 13.76 3.48 25.29%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 12.75 11.01 1.74 15.80%
Inverse VIX ETP’s      
Daily Inverse VIX Short Term ETN XIV 26.37 36.04 (9.67) -26.83%
ProShares Short VIX Short Term Future ETF SVXY 52.12 70.39 (18.27) -25.96%

Data Source: OptionVue7

Domestic and US markets will dominate price action this week. The coming week is “Employment Week.” Wednesday through Friday will be dominated by a slew US employment reports culminating in the release on Friday of the August Employment Situation. Other major reports are the release of the Chinese Purchasing Managers Index on Monday evening and US Factory Orders on Wednesday.

Earnings should not impact the market this week. It is time to start laying the groundwork for the next earnings cycle. Earnings announcements this week include: Dollar Tree, H&R Block, Bob Evans Farms, Oxford Industries, Medtronic, Campbell Soup, Genesco, Cooper Co, and Joy Global. 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 October and November monthly expirations encompass over 90% of the 3nd 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 31:


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


International Economic: China PMI Manufacturing Index – 9:45 PM.


Optionable Earnings: None meeting criteria.



Tuesday September 1:


Economic: Motor Vehicle Sales, Gallup US Economic Confidence Index – 8:30, Redbook – 8:55, PMI Manufacturing Index – 9:45, ISM Manufacturing Index – 10:00, Construction Spending – 10:00


International Economic: Germany Unemployment Rate – 3:55 AM, EMU PMI Manufacturing Index – 4:00 AM, EMU Unemployment Rate – 5:00 AM.


Other: Boston Federal Reserve Bank President Eric Rosengren speech on the economic outlook, in New York – 1:10 PM.


Optionable Earnings:

Symbol Company Name August 28 Close IV30 B/A
QIWI Qiwi PLC $25.69 68.93 BMO
DLTR Dollar Tree, Inc. $76.79 34.38 BMO
QIHU Qihoo 360 Technology Co Ltd $51.29 78.01 AMC
AMBA Ambarella Inc $90.82 80.18 AMC
BOBE Bob Evans Farms Inc $43.65 47.03 AMC
HRB H & R Block Inc $34.37 38.39  



Wednesday September 2:


Economic: MBA Mortgage Applications – 7:00, ADP Employment Report p 8:15, Productivity and Costs – 8:30, Gallup US Job Creation Index – 8:30, Factory Orders – 10:00, EIA Petroleum Status Report – 10:30, Beige Book 2:00..


International Economic: Germany Retail Sales – 2:00 AM.




Optionable Earnings:

Symbol Company Name August 28 Close IV30 B/A
FIVE Five Below Inc $37.60 54.98 AMC
GIII G-III Apparel Group, Ltd. $68.51 56.40 AMC




Thursday September 3:


Economic: US Chain Store Sales. Challenger Job-Cut Report – 7:30, International Trade 8:30, Gallup US Payroll to Population – 8:30, PMI Services Index – 9:45,Weekly Jobless Claims – 8:30, Bloomberg Consumer Comfort Index – 9:45, ISM Non-Manufacturing Index – 10:00, EIA Natural Gas Report – 10:30.


International Economic: EMU Retail Sales – 6:00 AM.


Other: European Central Bank (ECB) Announcement – 7:45. Markets Closed in China.


Optionable Earnings:

Symbol Company Name August 28 Close IV30 B/A
CPB Campbell Soup Company $47.72 28.52 BMO
MEI Methode Electronics Inc. $26.67 67.86 BMO
MDT Medtronic PLC $73.52 25.56 BMO
LE Lands’ End, Inc. $23.89 63.81 BMO
CIEN Ciena Corporation $22.57 56.49 BMO
JOY Joy Global Inc. $24.31 56.45 BMO
PAY VeriFone Systems Inc $31.36 47.03 AMC




Friday September 4:


Economic: August Employment Situation – 8:30, Baker-Hughes Rig Count – 1:00.


International Economic:  Germany Manufacturers’ Orders – 2:00 AM. Markets Closed in China.


Other: Richmond Federal Reserve Bank Jeffrey Lacker speech on the case against further delay, in Richmond – 8:10 AM.


Optionable Earnings: None meeting criteria.


Monday September 7:


U.S. Holiday – Labor Day. All Markets Closed.


International Economic: Germany Industrial Production – 2:00AM.


Optionable Earnings: None meeting criteria.



Tuesday September 8:


Economic: NFIB Small Business Optimism Index – 6:00 AM, Gallup US Consumer Spending Measure – 8:30, RedBook – 8:55, Labor Market Conditions Index – 10:00.


International Economic: Germany Merchandise Trade – 2:00AM.


Other: Richmond Federal Reserve Bank Jeffrey Lacker speech on the case against further delay, in Richmond – 8:10 AM.


Optionable Earnings:

Symbol Company Name August 28 Close IV30 B/A
MW Men’s Wearhouse Inc $56.90 48.03 AMC




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