The Prepared Mind: September 8, 2015

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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

“A loss never bothers me after I take it. I forget it overnight. But being wrong- not taking the loss that is what does damage to the pocketbook and to the soul.”

Jesse Livermore


The week ended with equities selling off after the release of a mixed jobs report which traders think makes it more likely the Fed will raise rates at their September meeting. This was a case where good news was bad news for the equity markets. Market volatility continues to as the markets showed major intraday and interday fluctuations. The Chinese markets were closed on Thursday and Friday. Their reopening on Sunday night will be watched closely to see if additional volatility is injected back into the US market.

Technical indicators are bearish . The S&P 500 appears to have established a new trading range = 1870 to 1990. Markets like this bring out the technician in all of us. Here is a summary of opinions from professional market technicians. The SPX is bearish and trending lower. Technical indicators remain bearish. Equity only Put/Call ratios are trending upwards and are firmly “oversold.” It is important to remember the terms oversold and overbought are not predictors for the future direction of the market.   Market breadth has rolled over to buy signals.

Here is an overview of the market behavior last week:

Index 4-Sep Weekly Change % Weekly 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 16102.38 (540.63) -3.25% -9.65% 26.92% (VXD)
S&P 500 (SPX) 1921.22 (67.65) -3.40% -6.69% 27.80% (VIX)
NASDAQ 100 (NDX) 4193.51 (137.73) -3.18% -1.08% 28.92% (VXN)
Russell 2000 (RUT) 1135.86 (27.71) -2.38% -5.71% 27.37% (RVX)
S&P 100 (OEX) 844.77 (30.81) -3.52% -7.00% 28.04% (VXO)
CBOE Volatility Index (VIX) 27.80 1.75 6.72% NA  

Data Source: OptionVue7


The short-term VIX products – the VIX and the VXST – underperformed when compared to other long VIX and VIX associated products. The probable source of this deference is the impact of a three day weekend.   The VIX and VXST, with their emphasis on a near term window, are sensitive to the impact of being closed for three days versus bren closed for two days for a non-holiday weekend. Per the CBOE, “ the VXST provides a market-based gauge of expectations of 9-day volatility, making it particularly responsive to changes in the S&P 500® Index.” A Three day closure significantly impacts to the calculations associated with a 9-day window. The trend in the VIX is bearish with support at 19.

Russell Rhoads, Senior Instructor at the Options Institute, provides a weekly review the “VIX Trade of the Week.” Russell was unable to find any notable trade for his weekly discussion. However, he noticed a them in Friday’s trades. He observed that any trade of a significant size was a sale of volatility. These sales were predominantly September out-of-the-money calls or call spreads.

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

Indexes Ticker 4-Sep 28-Aug Change % Change
CBOE Volatility Index VIX 27.8 26.05 1.75 6.72%
VIX September Future VXU5 28.025 24.425 3.600 14.74%
VIX October Future VX5V 25.775 21.875 3.900 17.83%
VIX November Future VX5X 24.800 21.375 3.425 16.02%
CBOE Short-term Volatility Index VXST 26.88 27.11 (0.23) -0.85%
CBOE 3 Month Volatility Index VXV 28.07 25.34 2.73 10.77%
CBOE Mid-term Volatility Index (6 month) VXMT 26.25 24.00 2.25 9.38%
VIX of VIX VVIX 127.18 123.15 4.03 3.27%
Long VIX ETP’s      
iPath S&P 500 VIX Short Term Futures ETN VXX 29.32 25.86 3.46 13.38%
pShares VIX Short Term Futures ETF VIXY 19.52 17.24 2.28 13.23%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 14.15 12.75 1.40 10.98%
Inverse VIX ETP’s      
Daily Inverse VIX Short Term ETN XIV 22.75 26.67 (3.92) -14.70%
ProShares Short VIX Short Term Future ETF SVXY 44.40 52.12 (7.72) -14.81%

Data Source: OptionVue7

The coming week starts with a US holiday – Labor Day. There are very few domestic or international domestic reports. The major reports for the week are Chinese PPI on Wednesday and the US PPI-FD on Friday. Monday’s Chinese Merchandise Trade Balance will have the ability to move Chinese markets and, by extension, European and the US markets. Concern about the refugee crisis in the Mideast on the EU is starting to build. Germany announced they expect to settle 800,000 refugees before the end of the year. This crisis is a wild card which can only have negative implication for the markets. Congress returns from summer recess. Be nimble.

The December S&P 500 becomes the front month on Wednesday. CME Group Equity Index futures allow market participants to roll their futures positions from one quarterly futures contract month to the next at any time they choose. For example, participants can roll their futures positions from September to December at any time. However, the trading floor convention is to roll the expiring quarterly futures contract month eight calendar days before the contract expires. This is known as the roll date. The next roll date is September 10, 2015. After the roll date, it is customary to identify the second nearest expiration month as the “lead month” or “front month” for the equity index futures. This is because the nearest expiring contract will terminate soon and will have a less liquid market than the new “front month” contract

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: Men’s Wearhouse, Casey’s General Stores, Barnes&Noble, Pep Boys, and Kroger.. It is time to lay groundwork for the next earnings cycle. 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 and 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
“When I’m bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don’t buy long stocks on a scale down, I buy on a scale up.”
Jesse Livermore




Monday September 7:


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


International Economic: China Merchandise Trade Balance, 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, Labor Market Conditions Index – 10:00.


International Economic: Germany Merchandise Trade – 2:00AM, EMU GDP – 5:00 AM.


Other: Congress returns from summer recess.


Optionable Earnings:

Symbol Company Name Sept 4 Close IV30 B/A
MW Men’s Wearhouse Inc $54.64 53.90 AMC



Wednesday September 9:


Economic: MBA Mortgage Applications – 7:00, Redbook – 8:55, JOLTS – 10:00.


International Economic: Great Britain Industrial Production – 4:30 AM, China CPI – 9:30 PM.


Optionable Earnings:

Symbol Company Name Sept 4 Close IV30 B/A
CONN CONN’S, Inc. $28.05 101.52 BMO
HDS HD Supply Holdings Inc $32.48 40.78 AMC
PANW Palo Alto Networks Inc $162.04 53.77 AMC
RH Restoration Hardware Holdings Inc $92.66 47.68 AMC




Thursday September 10:


Economic: Weekly Jobless Claims – 8:30, Import and Export Prices – 8:30, Bloomberg Consumer Comfort Index – 9:45, Wholesale Trade – 10:00, EIA Natural Gas Report – 10:30, EIA Petroleum Status Report – 10:30.


International Economic: French Industrial Production – 2:45 AM.


Other: Roll date for S&P E-mini from September to December contract – December becomes the “front month.” Bank of England Announcement and Minutes.


Optionable Earnings:

Symbol Company Name Sept 4 Close IV30 B/A
LULU Lululemon Athletica inc. $64.95 53.62 AMC




Friday September 11:


Economic: PPI – Final Demand – 8:30, Reuters /University of Michigan Consumer Sentiment – 10:00, Baker-Hughes Rig Count – 1:00.


International Economic:  Germany CPI – 2:00 AM,


Optionable Earnings:

Symbol Company Name Sept 4 Close IV30 B/A
KR Kroger Co $34.57 40.57 BMO


Monday September 14:


Economic: No major announcements.


International Economic:   EMU Industrial Production – 5:00.


Other: Bank of Japan Announcement.


Optionable Earnings: None meeting criteria.


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