Options Market Update

by Jacob Mintz on July 21, 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.


Despite troubling headlines this week coming from Gaza and Ukraine, the three major indexes had solid gains. For the week, the S&P 500 gained 0.54%, the Dow rallied 0.92% and the Nasdaq advanced 0.38%.

For the bulls, the potentially most important indicator last week was how strongly the market was able to shake off Thursday’s selloff and regain nearly all that was lost the day before. Also last week, Jobless Claims hit a nine-week low, Philadelphia Manufacturing Index beat expectations and U.K. unemployment fell to its lowest level since 2008.

For the bears, the renewed volatile situations in Gaza and Ukraine served to remind investors and traders of the potential risks in the global landscape. However, the bulls were able to shrug off this uncertainty on Friday and once again “buy the dip.” On the economic front, the bears could point to University of Michigan Consumer Confidence, which missed estimates, and the S&P 500, which ended its 62-day streak without a 1% move when the index dropped 1.18% on Thursday.

Volatility


The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 12.06, having spiked 32% at the peak of Thursday’s selloff. The fact that traders and investors so aggressively sold market volatility and insurance just 24 hours after some pundits classified Thursday’s headlines as the “perfect storm” shows the bulls’ total lack of fear.  

As usual, my crystal ball is rather cloudy when trying to forecast how these uncertain global situations will play out. However, if you are concerned about your portfolio, as always, I recommend purchasing at-the-money puts in the SPDR S&P 500 ETF (SPY).  Market volatility is still historically very cheap, and thus the cost of insurance against a major downturn is very inexpensive.   

Events for the Week to Come


This week’s economic calendar is extremely light on potentially market-moving data.  Conversely, this week will be one of the heaviest for earnings releases. However, I expect market tone and direction to be largely dominated by rumors and headlines coming from outside the U.S.  

What Traders are Saying

On Tuesday afternoon, I highlighted a large put sale in Michael Kors (KORS) and stated that I would revisit the trade once the puts had expired on Friday.  

KORS had dropped three dollars on Monday, and over six dollars on Tuesday. Near the peak of its selloff on Tuesday afternoon as the stock was trading between 79-81, a large trader started aggressively selling the KORS July 80 Puts for approximately $0.85. The trader sold approximately 28,000 of these puts.     Selling the puts at the 80 strike price, the trader would collect his full premium of $0.85 if KORS closed above 80 on Friday afternoon. That's $0.85 times 28,000—a profit of $2.83 million.If KORS closed below 80 on Friday, the seller of the put would be long 2.8 million shares of KORS as the buyer of the put would likely exercise his right to sell the stock at 80.

Where did KORS close on Friday? 81.06.  

So the trader collected approximately $2.83 million dollars of premium in three trading days.

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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