The Prepared Mind: September 14, 2015

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

“Chance favors the prepared mind.” — Louis Pasteur

By Frank Fahey

“As far as the laws of mathematics refer to reality, they are not certain; And as far as they are certain, they do not refer to reality.”   -Albert Einstein
Uncertainty continues to dominate the markets. Relative strength in the energy sector helped the Dow Jones Industrial Average record its largest gain in nearly six months. The other major indexes followed suit. The SPX has vacillated between weekly gains and losses for the past 10 weeks. The string of back and forth weekly gains and losses for the Dow Jones Industrial Average is nine weeks. If the trend continues, we should expect losses next week. The uncertainty in the market is apparent in volatile intraday and overnight price moves. This is a time to be wary. Reduced position size and risk have little downside.” At time like this I am reminded of Bernard Baruch’s sage advice, “Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.”

Here is an overview of the market behavior last week:

Index 11-Sep Weekly Change % Weekly 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 16433.09 330.71 2.05% -7.80% 23.00% (VXD)
S&P 500 (SPX) 1961.05 39.83 2.07% -4.75% 23.200% (VIX)
NASDAQ 100 (NDX) 4324.58 131.07 3.13% 2.01% 25.02% (VXN)
Russell 2000 (RUT) 1159.84 23.98 2.11% -3.72% 24.31% (RVX)
S&P 100 (OEX) 863.01 18.24 2.16% -5.00% 23.79% (VXO)
CBOE Volatility Index (VIX) 23.20 (4.60) -16.55% NA  

Data Source: OptionVue7

 

Market volatility showed a downward move in response to the 2% gain in the S&P 500 (SPX.) The VIX and associated products (VXST, VXV, VXMT and VXX) all move significantly lower. The September VIX future and options expire on the morning of Wednesday September 16. The FOMC will be announcing their interest rate policy on Thursday September 17. The expiration of the future prior to the announcement should result in a beginning of the week disappearance of backwardization of the September contracts.

This past week the relationship between the RVX and VIX showed an anomaly. For the first time in my memory, the daily closing of the CBOE Russell 2000 Volatility Index (RVX was lower than the CBOE Volatility Index (VIX. This reflects a greater concern fir large cap multinational firms relative to the risk of US dominated small cap firms. This may be a reflection of the impact of a slowing of the Chinese economy.

Many traders are expecting a decrease in market volatility once the FOMC the timing and magnitude of the interest rate decision. I expect a change in volatility levels once the decision is announced. The VIX would me much lower if the decrease were a given. Be prepared for the announcement on Thursday. We have 3 ½ trading days to manage the position risk associated with the announcement.

 

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

Indexes Ticker 11-Sep 4-Sep Change % Change
CBOE Volatility Index VIX 23.20 27.80 (4.60) -16.55%
VIX September Future VXU5 23.800 28.025 (4.225) -15.08%
VIX October Future VX5V 22.925 25.775 (2.850) -11.06%
VIX November Future VX5X 22.725 24.800 (2.075) -8.37%
CBOE Short-term Volatility Index VXST 23.43 26.88 (3.45) -12.83%
CBOE 3 Month Volatility Index VXV 24.68 28.07 (3.39) -12.08%
CBOE Mid-term Volatility Index (6 month) VXMT 24.87 26.25 (1.38) -5.26%
VIX of VIX VVIX 119.09 123.15 (4.06) -3.30%
Long VIX ETP’s      
iPath S&P 500 VIX Short Term Futures ETN VXX 26.04 29.32 (3.28) -11.19%
pShares VIX Short Term Futures ETF VIXY 17.35 19.52 (2.17) -11.12%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 13.44 14.15 (0.71) -5.02%
Inverse VIX ETP’s      
Daily Inverse VIX Short Term ETN XIV 25.27 22.75 2.52 11.08%
ProShares Short VIX Short Term Future ETF SVXY 49.38 44.40 4.98 11.22%

Data Source: OptionVue7

The entire focus of the week is the FOMC meeting on Wednesday and Thursday. Nothing really matters other than the Fed’s decision on the direction and timing of interest rate increases. Economists are evenly split on the odds of a rate increase announcement on Thursday. Other factors may impact the market as traders wait for Thursday 3 PM Eastern. announcement. Expect volatility to remain high in light of this uncertainty. Friday’s expiration is one of four annual “Quadruple Witchings.” The quadruple witching refers to the near simultaneous quarterly expiration of stock index futures, stock index options, stock options and single stock futures. Other factors which may lead to intraday moves are US retail sales and housing starts. The wild card remains the state of the Chinese economy.
Earnings will not impact the market this week. During my time as a market maker in equity pits at the CBOE , I was either trading earnings or preparing to trade earnings. It is time to start laying the groundwork for the next earnings cycle. Earnings announcements this week include: Oracle, Herman Miller, FedEx, Analogic, and Adobe Systems. 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

“It is not certain that everything is uncertain.” – Blaise Pascal
“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 14:

 

Economic: No major announcements.

 

International Economic:   EMU Industrial Production – 5:00.

 

Other: Bank of Japan Announcement.

 

Optionable Earnings: None meeting criteria.

 

 

Tuesday September 15:

 

Economic: Retail Sales- 8:30, Empire State Manufacturing Survey – 8:30, Rebook – 8:55, Industrial Production – 9:15, Business Inventories 10:00.

 

International Economic: EMU Merchandise Trade – 5:00 AM.

 

Optionable Earnings:

Symbol Company Name Sept 11 Close IV30 B/A
FDS FactSet Research Systems Inc. $162.12 30.17 BMO

 

 

 

Wednesday September 16:

 

Economic: MBA Mortgage Applications – 7:00, Consumer Price Index – 8:30, Housing Market Index – 10:00, EIA Petroleum Status Report – 10:30.

 

International Economic: EMU HICP – 5:500, , Japan Merchandise Trade – 7:50 PM.

 

Other: FOMC meeting begins.

 

Optionable Earnings:

Symbol Company Name Sept 11 Close IV30 B/A
CBRL Cracker Barrel Old Country Store, Inc. $149.60 30.87 BMO
FDX FedEx Corporation $149.57 29.32 BMO
GIS General Mills, Inc. $55.89 24.23 BMO

 

 

 

Thursday September 17:

 

Economic: Weekly Jobless Claims – 8:30, Housing Starts – 8:30, Current Account – 8:30, Bloomberg Consumer Comfort Index – 9:45, Philadelphia Fed Business Outlook Survey – 10:00, EIA Natural Gas Report – 10:30

 

International Economic: Bank of Japan Minutes – 7:50 PM.

 

Other: FOMC Meeting announcement and forecasts – 2:00, Fed Chair Press Conference – 2:30.

 

Optionable Earnings:

Symbol Company Name Sept 11 Close IV30 B/A
LEN Lennar Corporation $51.22 36.54 BMO
ADBE Adobe Systems Incorporated $78.70 40.05 AMC
ORCL Oracle Corporation $37.61 31.97 AMC
RHT Red Hat Inc $70.37 45.27 AMC

 

Friday September 18:

 

Economic: Leading Indicators – 10:00, Baker-Hughes Rig Count – 1:00.

 

International Economic:  No major announcements.

 

Other: Quadruple Witching – Expiration

 

Optionable Earnings:

Symbol Company Name Sept 11 Close IV30 B/A
ZAYO Zayo Group Holdings Inc $28.40 39.70 BMO

 

 

Monday September 21:

 

Economic: Existing Home Loans – 10:00, Atlanta Fed Business Inflation Expectations – 10:00.

 

International Economic: Germany PPI – 2:00 AM.

 

Other: Atlanta Federal Reserve Bank President Dennis Lockhart speech in Atlanta – 1:00.

 

Optionable Earnings: None meeting criteria.

 

Comments are closed