Options Market Update

by Jacob Mintz on October 27, 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 staged a major rally last week, as investors were able to look past concerns such as European deflation and Ebola scares, and focus on positive U.S. earnings reports. For the week, the S&P gained 4.12%, the Dow rallied 2.59% and the Nasdaq jumped 5.29%.

For the bulls, it appears that at least for now momentum has swung back to the upside as the S&P 500 is now back within a couple percent of all-time highs. Helping the bull cause was Initial Jobless Claims’ four-week moving average falling to its lowest level since 2000, thirty-year mortgage rates falling to their lowest levels since May 2013 and new home sales coming in at their highest level since 2008.

For the bears, the market carnage of two weeks ago already seems like just another great buying opportunity for the bulls. However, there were several disappointing earnings reports from blue chip companies such as Coca-Cola, IBM, Amazon and Netflix. Also, the Chinese GDP came in below expectations, Italian Consumer Confidence fell to an eight-month low and 25 of Europe’s top banks failed their “stress test.”

Volatility

The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 16.11, lower by 27% from the previous week. I anticipate that volatility/insurance will remain at this elevated level for at least a couple of weeks as investors will be hard pressed to forget the market’s recent drop of nearly 10%.  

While volatility/insurance is still elevated in comparison to recent levels, historically, these prices for protection are quite cheap.

Events for the Week to Come


This week is full of important economic data releases including Consumer Confidence, GDP, Jobless Claims and Consumer Sentiment, as well as the Federal Reserve’s decision on interest rates on Wednesday afternoon. On top of that, we’ll get earnings reports from many of the most important companies in the S&P 500.   

That said, I expect the market will still be focused on Ebola rumors and European and Chinese data points until these concerns pass.  

What Traders are Saying

Any trader or investor who proclaims a definitive stance on the future direction of the market these days should be avoided. No one can predict where this volatile market is headed with any certainty.  

For the past several months, I’ve been expecting the market to make a run at all-time highs into year-end—though that stance has been shaken considerably by the price action of the past several weeks. However, just this past week, we saw how quickly the tone of the market can change, and if the momentum continues I expect this year-end rally to new highs to continue.

On the other hand, many market technicians expect the market to test the lows of just two weeks ago, and some say it would be a positive for the long-term health of this bull market.

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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