Options Market Update

by Jacob Mintz on November 24, 2014

This is an excerpt from Cabot Options Trader, your guide to quick profits using puts, calls, spreads, straddles, iron condors and other options trades. Analyst Jacob Mintz explains and recommends diverse investing strategies for big gains with controlled risk.


The three major indexes surged to new highs on Friday after China’s central bank cut interest rates and the European Central Bank hinted at more emergency action. For the week, the S&P 500 gained 1.16%, the Dow rallied 0.99% and the Nasdaq traded higher by 0.52%.

For the bulls, record highs continue nearly every day as the S&P 500 and Dow both made all-time highs for the third consecutive week amid China and Europe’s action and talk about more accommodative economic policy. Also, the Philadelphia Fed reported Business Outlook that came in at its highest reading since December 1993, Existing Home Sales beat expectations and the Bank of Japan called off next year’s tax hike after its recent lousy GDP numbers.

For the bears, this market’s strength is tough to fight as bad economic news around the globe seems to only mean more stimulus. Japan officially entered into a recession when GDP came in at -1.6% vs. expectations of 2.1%, China’s HSBC Manufacturing Index fell to a six-month low and inflation data out of Europe continues to be troubling.  Yet all of these negatives were turned into at least short term positives as central banks continue their efforts to stimulate their economies which in turn sparks the markets higher.

Volatility


The Chicago Board of Options Volatility Index (VIX) closed the week at 12.90. I expect market volatility and virtually all calls and puts to lose value this week as Thanksgiving is traditionally a very slow trading week.  

As a reminder, the markets will be closed on Thursday for Thanksgiving, and close at 1:00 p.m. Eastern on Friday. Also, the Cabot offices will be closed on Friday.

Events for the Week to Come


While there are several important data points to be released such as GDP on Tuesday, I expect this week to be very slow and market volatility to once again be limited. Trading desks will be extremely short staffed as traders begin to travel for the holidays.

What Traders are Saying

While the markets are making new highs each day, there are definitely some potential “issues” forming below the surface and traders are watching them closely.  For example, leadership has recently swung to more defensive sectors such as REITs and defense contractors, while big tech names such as Facebook, Linkedin and the biotechs have been lagging.  

Clearly this could just be normal selling after the market’s remarkable 12% spike in one month. Or it could just be money rotating into sectors that have underperformed. However, it clearly bears watching as it’s somewhat similar to the trading action we saw before the market selloff in October.  

Jacob Mintz is Chief Analyst of Cabot Options Trader, and a professional options trader. He has developed a proprietary risk management system for options trades. 

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