The Prepared Mind: October 5, 2015

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

“Chance favors the prepared mind.” — Louis Pasteur

by Frank Fahey

When I get to the bottom I go back to the top of the slide
Where I stop and I turn and I go for a ride
Till I get to the bottom and I see you again
Yeah yeah yeah hey

“Helter Skelter” Lennon-McCartney

 

The intraday movement of the major indices is not for the faint of heart. Bear rallies can rip your face off. Friday is a very good example. The market low to high rally was the largest in over 4 years. The December S&P 500 futures (EZZ5) were up over 0.5% in overnight trading prior to the release of September employment numbers. After the release, one hour before the market open, the market sold off nearly 2.5 %.   The market rallied 2% from the opening until 1 PM ET. The market rallied another 1.4% from noon til the close. The market traded a total of 6% points up, down and then back up. Any trading “mistakes” or miscalculations are magnified by this type of movement. We are back to the point where “employment week” is a volatility event. The behavior of the indexes is much the same as the behavior of individual equities prior to their earnings events. Implied volatility of the options steadily increases until the announcement. The announcement leads to a collapse in option volatility as the underlying searches for a new price level reflecting the news. The indices had a difficult time finding a new price level.

Friday’s price gyrations in the S&P 500 are an indication market uncertainty. Current technical analysis of the SPX is of little help in determining where how long this uncertainty will last.   A retest of August lows puts a solid support level at 1870 with the next support level at 1820. Market breadth is weak and remains on sell signals. Equity only put/call rations are bullish for the second straight week. This is a mixed bag of signals. The VIX remains bearish despite a significant decline – 11.35%. Support level for the VIX is 19.0. The market remains in a bearish, yet volatile, trend. Focus on risk, not rewards. Take profits when available.

Here is an overview of the market behavior last week:

Index 2-Oct Weekly Change % Weekly 2015 YTD Volatility of Index
Dow Jones Industrials (DJIA) 16472.37 157.70 0.97% -7.58% 19.95% (VXD)
S&P 500 (SPX) 1951.36 20.02 1.04% -5.22% 20.94% (VIX)
NASDAQ 100 (NDX) 4271.67 49.01 1.16% 0.77% 23.71% (VXN)
Russell 2000 (RUT) 1115.91 (2.96) -0.26% -7.37% 23.13% (RVX)
S&P 100 (OEX) 862.27 10.37 1.22% -5.08% 22.17% (VXO)
CBOE Volatility Index (VIX) 20.94 (2.68) -11.35% NA  

Data Source: OptionVue7

For the second straight week, market implied volatility showed a minor change. Two weeks it was down a bit; this week it showed minor gains.  The lack of a trend was reflected in the major trades reported by Russell Rhoads of the CBOE. Usually the weekly trades show a bias – bullish or bearish. The past week the trades sowed bullish and bearish biases. The consensus support level for the VIX is at 19.The general consensus among analysts is we remain in a bearish market

 

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

Indexes Ticker 2-Oct 25-Sep Change % Change
CBOE Volatility Index VIX 20.94 23.62 (2.68) -11.35%
VIX October Future (10/21/2015) VXY5 21.075 22.325 (1.250) -5.60%
VIX November Future (11/18/2015) VXX5 20.470 21.675 (1.205) -5.56%
VIX December Future (12/16/2015) VXZ5 20.450 21.350 (0.900) -4.22%
CBOE Short-term Volatility Index VXST 19.35 22.89 (3.54) -15.47%
CBOE 3 Month Volatility Index VXV 22.60 24.40 (1.80) -7.38%
CBOE Mid-term Volatility Index (6 month) VXMT 23.05 23.55 (0.50) -2.12%
VIX of VIX VVIX 95.07 110.54 (15.47) -13.99%
Long VIX ETP’s      
iPath S&P 500 VIX Short Term Futures ETN VXX 24.03 25.09 (1.06) -4.22%
pShares VIX Short Term Futures ETF VIXY 16.02 16.72 (0.70) -4.19%
iPath S&P 500 VIX Mid-Tem Futures ETN VXZ 12.59 12.79 (0.20) -1.56%
Inverse VIX ETP’s      
Daily Inverse VIX Short Term ETN XIV 25.94 25.04 0.90 3.59%
ProShares Short VIX Short Term Future ETF SVXY 50.75 49.09 1.66 3.38%

Data Source: OptionVue7

“Cautious” remains the word. The coming week has very few earnings reports. The biggest event of the week will be the Thursday release by the Fed of the minutes from its last meeting. The strength of the European economy will be foreshadowed by the release of German and Great Britain Industrial Production on Wednesday. Analysts are waiting to see if the current scandal at Volkswagen has a noticeable impact on German industrial production. German will release Merchandise Trade and Retail Sales on Thursday and Friday respectively.

The earnings announcement by Alcoa (AA) is considered the start of the earnings season.   Alcoa’s announcement is on Thursday October 8 after the market closes (AMC.) Earning will announcements will not start coming out in full force until the week after next.   As a result, earnings will not impact the market this week. The talk on the street is earnings expectations have been lowered due to a stronger dollar and weaker world economy. 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. The earnings announcement by Alcoa (AA) is considered the start of the earnings season.   Alcoa’s next announcement is on Thursday October 8 after the market closes.  The volume of earnings announcements will not ramp up until the following week. These earnings announcements will straddle October expiration. Some announcements will occur before this expiration and others will occur after expiration.

The limited earnings announcements this week include: Pepsico, Yum! Brands, Global Payments, Constellation Brands, RPM Int’l, Ruby Tuesday, Domino’s Pizza, Helen of Troy, International Speedway, and Alcoa. It is time to lay groundwork for the next earnings cycle. I will be putting on some earnings trades this week for my DiscoverOptions live trade sessions. These will be the first in the series. I will be starting with calendars. This will be an ongoing process of learning what does and does not work. I will perform a forensic audit on a losing trade to see if an alternative strategy would have worked better.

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 the previous 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
Any jerk can have short-term earnings. You squeeze, squeeze, squeeze,

and the company sinks five years later. – Jack Welch

 

Monday October 5:

 

Economic: Gallup US Consumer Spending Measure – 8:30, PMI Services Index – 9:45, Labor Market Conditions Index – 10:00, ISM Non-Manufacturing Index – 10:00, TD Ameritrade IMX, 12:30 PM.

 

International Economic: EMI PMI Composite – 4:00 AM.

 

 

Optionable Earnings: None meeting criteria.

 

Tuesday October 6:

 

Economic: International trade – 8:30, Gallup US ECI – 8:30, Redbook – 8:55.

 

International Economic: Germany Manufacturer’s Orders – 2:00, Bank of Japan Announcement.

 

Other:   San Francisco Federal Reserve Bank John Williams outlook speech, in San Francisco – 3:30 PM.

 

Optionable Earnings:

Symbol Company Name Oct 2 Close IV30 B/A
YUM Yum! Brands, Inc. $79.87 37.31 AMC

 

 

 

Wednesday October 7:

 

Economic: MBA Mortgage Applications – 7:00, Gallup US Job Creation Job Index- 8:30, EIA Petroleum Status Report – 10:30.

 

International Economic: Germany Industrial Production – 2:00 AM, Great Britain Industrial Production – 4:30 AM, China PMI Composite – 9:45 PM.

 

Other:

 

Optionable Earnings:

Symbol Company Name Oct 2 Close IV30 B/A
STZ Constellation Brands, Inc. $127.70 27.84 BMO
MON Monsanto Company $85.78 32.59 BMO
GPN Global Payments Inc $116.54 34.97 AMC

 

 

 

Thursday October 8:

 

FOMC Minutes – 2:00.

 

Economic: Chain Store Sales, Weekly Jobless Claims – 8:30, Bloomberg Consumer Comfort Index – 9:45, EIA Natural Gas Report – 10:30.

 

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

 

Other: Minneapolis Fed President Narayana Kocherlakota welcoming remarks at event in Mankato, Minnesota – 1:00 PM, San Francisco Federal Reserve Bank John Williams outlook speech, in Spokane, Washington – 3:30 PM.

 

Optionable Earnings:

Symbol Company Name Oct 2 Close IV30 B/A
DPZ Domino’s Pizza, Inc. $105.33 37.28 BMO
AA Alcoa Inc $9.52 53.03 AMC

 

 

Friday October 9:

 

Economic: Import and Export Price – 8:30, Wholesale Trade – 10:00, Baker-Hughes Rig Count – 1:00.

 

International Economic:  Germany Retail Sales – 2:00 AM, EMU PPI – 5:00.

 

Other: Chicago Federal Reserve Bank President Charles Evans speech on monetary policy, in Milwaukee – 1:30.

 

Optionable Earnings: None meeting criteria.

 

 

Monday October 12:

 

US Holiday – Columbus Day – All Markets closed.

 

International Economic: EMU PMI Composite – 4:00 AM.

 

Other: Chicago Federal Reserve Bank President Charles Evans speech on monetary policy, in Chicago -10:30, Federal Reserve Gov. Lael Brainard speech on the economic outlook to NABE, in Washington – 4:30 PM.

 

Optionable Earnings: None meeting criteria.

 

Tuesday October 13:

 

Economic: Industrial NFIB Small Business Optimism Index – 6:00 AM, Redbook – 8:55.

 

International Economic: No major announcements.

 

Other:   St Louis Federal Reserve Bank President James Bullard speech on the economy and monetary policy, to NABE, in Washington – 8:00 AM.

 

Optionable Earnings:

Symbol Company Name Oct 2 Close IV30 B/A
ASML ASML Holding NV (ADR) $85.97 41.59 BMO
FAST Fastenal Company $35.50 35.58 BMO
JPM JPMorgan Chase & Co. $61.42 27.94 BMO
CSX CSX Corporation $27.03 30.91 AMC
INTC Intel Corporation $30.00 29.50 AMC
LLTC Linear Technology Corporation $39.96 41.93 AMC

 

 

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