Options Market Update

by Jacob Mintz on October 20, 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.



Amid extreme volatility, and the start of earnings season, the Dow finished lower for the fourth straight week. For the week, the S&P 500 lost 1.02%, the Dow fell by 0.99% and the Nasdaq dropped 0.42%.

For the bulls, the opening of trading on Wednesday and Thursday was extremely dicey as S&P futures pointed to a drop of approximately 2%. However, the market was able to withstand the selling pressure as Initial Jobless Claims came in at the lowest levels since 2000, gasoline prices fell to their lowest price since 2011, Consumer Confidence had its best reading since 2007 and the Russell 2000 finished the week higher by 2.8%.

For the bears, the S&P 500 fell below its 200-day moving average and below its August lows. At the lows on Wednesday, the aggressive drop put the S&P down as much as 9.8% from its all-time high set four weeks ago. The price action sparked a rush for safety and the 10-year briefly dipped below 2%. Also, European equities had an ugly week as their major indexes fell aggressively, including the Greek index, which fell by 5.7% on Wednesday.  

Volatility


The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 21.99, having traded above 30 on Wednesday—the highest levels in this “fear index” since 2011.

The indexes moved at alarming speed in both directions all week. It's extremely hard to day trade in this type of volatility. On a day like Wednesday, it was virtually impossible to trade, as “slow and steady” stocks like Walmart and JPMorgan seemed to move at the speed of high-flying illiquid stocks.  

While I believe this volatility will continue in the short term, I also expect the everyday extreme moves will begin to slow down and lessen over time.

Events for the Week to Come

This week, approximately 20% of companies in the S&P 500 will release earnings. While the results will likely be important for your individual stock holdings, it’s likely that the market will be focused on recent external issues and rumors including:  

European deflation is now a growing concern as Germany, which has been the steady economy in the European Union, has been reporting disappointing economic data.

Rumors of new Ebola cases have become a constant in the market. So much so that two to five times a day for the past week a new rumor dropped the S&P 500 approximately half a percent within minutes.  

The various members of the Federal Reserve have spoken publicly recently, sending mixed messages. This ongoing confusion about the direction of interest rates has been moving the markets.

What Traders are Saying


Several times last week, the markets seemed on the verge of a much more significant drop as the speed at which the indexes were dropping was concerning. But the three major indexes only lost around 1% for the week after Friday’s large rally.  

Several traders I spoke to last week pointed to the extreme levels of fear on Wednesday and Thursday as measured by the spike in the VIX, as well as 950 stocks hitting new lows on the NYSE and Nasdaq. The traders pointed out that the extreme level of bearishness could be a sign of a bottom being put in. On the flip side, many traders pointed out that it would be “healthy” for the market to once again test the lows of last week.  

We have seen this type of bearish price action a couple of times in the past couple of years as “in the moment” the market appears to be under too much pressure to regain its bullish trajectory. Yet, every time for the past several years, though technicians say they don’t expect a quick bounce back, we’ve seen just that.  

As many Cabot analysts have been advising, this is likely a good time to take a defensive stance. However, keep an eye on the companies that report strong earnings results in the coming weeks and be prepared to put some money to work in these strong stocks once the market’s tone turns positive.

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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