Options Market Update

by Jacob Mintz on January 26, 2015

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 U.S. indexes posted their first weekly gain of 2015 following the European Central Bank’s announcement of a stimulus program. For the week, the S&P 500 gained 1.60%, the Dow rallied 0.92% and the Nasdaq jumped 2.66%.

For the bulls, the rough start to 2015 was halted last week and the Dow and S&P 500 are now back within two percent of all-time highs. The week’s rally was aided by the ECB’s announced quantitative easing of 60 billion euros a month through September 2016, which helped propel the German DAX to a new all-time high. 

For the bears, last week’s snapback rally from Monday to Thursday felt much like the recent explosive rallies in 2014. However, there were many negatives for the week as Chinese GDP rose “only” 7.4% in 2014, down from 7.7% in 2013. Also, yields on short-term government bonds of Switzerland, Belgium, Denmark, France, Germany, Japan and the Netherlands are all below zero. Essentially buyers of these bonds are taking a loss, just to hold onto these assets. 

Volatility


The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 16.66. This was a drop of over 20% for the week as the ECB’s announcement was seen as a major event for the week. Now that the event has passed and the market has “digested” the news, the market fears have begun to drop.

At this point, the VIX is trading in the middle of its recent range. If the market can stabilize and daily price swings begin to lessen, I expect the VIX to once again trade below 15. However, if the volatility that has been so consistent in 2015 continues, the VIX will likely once again trade closer to 20.

Events for the Week to Come


This week will be packed with important data releases, earnings reports and likely the potentially largest market moving event, the Federal Reserve’s announcement on interest rates.

On the economic calendar this week are:
Durable Goods
New Home Sales
Consumer Confidence
Consumer Sentiment
GDP

The list of companies reporting earnings this week is extremely large, and includes companies such as:
Microsoft (MSFT)
Apple (AAPL)
Illumina (ILMN)
Alibaba (BABA)
Amazon (AMZN)
Facebook (FB)

What Traders are Saying


While it’s early in earnings season, there is one trend that stands out … the companies that have been beating earnings run, and then run some more. Those that miss, fall, and then fall even more. Take for example a stock like KB Home (KBH), which reported earnings on January 13. After earnings were announced, the stock fell from 17.18 to 13.87, or approximately 20%. This is an extreme move on earnings for a homebuilding stock. But that was not the end of the fall, as the stock closed last week at 12.20, more than 10% lower from the initial selloff. Buying the dips in individual stocks in this environment has been extremely painful this earnings season.

On the other hand, stocks that have beat earnings expectations seem to never pull back. For example, Neflix exploded from 350 to 410 on earnings last week. Where is the stock after that 60-point move? Another 27 points higher. 

This is why paying attention to earnings, and the stock’s reaction after earnings is so important. Every day/night during earnings season, I add to my earnings spreadsheet. That way, when the market has its next quick “spasm” lower, I have my list of stocks I’m interested in getting long … and conversely when the market rips higher, I have my list of stocks I could short.

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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