Options Market Update November 9, 2015

The October Jobs Report blew away expectations, as 271,000 jobs were created in the month of October and wages grew 2.5%—the best gain in one month since July 2009. While that’s great news for the economy, it may not be great news for the stock market, as the Federal Reserve may begin to hike interest rates in December. The market initially sold off on this news but then rebounded, and for the week, the S&P 500 gained 0.95%, the Dow added 1.40% and the Nasdaq advanced 1.85%.

For the bulls, the steady advance continued, and the S&P 500 is now up six straight weeks—its longest winning streak of the year. Also, the Jobs Report of 271,000 new jobs in October easily beat the 190,000 jobs expected, and the Unemployment Rate is now at 5%. In addition, Auto Sales continue to blow away expectations, and merger and acquisition activity remains robust.

For the bears, it was another challenging week, as nearly every intraday dip was quickly bought. However, Friday’s big Jobs Report raised the likelihood of an interest rate hike in December from 20% just a few weeks ago, to nearly 80%. The odds of future hikes in early 2016 have also grown significantly. In addition, China’s exports declined for a fourth straight month, as signs continue to show that Chinese and world economies are slowing. Along the same lines, the CEO of the world’s largest shipping line, which handles approximately 15% of all consumer goods transported by sea, said that global growth is slowing down and trade is currently significantly weaker than forecasts.


The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 14.33, marginally lower for the week. This continues the trend of a lower VIX, which saw its biggest monthly decline ever in the month of October.

As the price of puts has declined along with the VIX, my scanner has been picking up on more and more strangle purchases. I highlighted this activity in last Monday’s Market Update, and the action continued this week. While these aren’t outright downside bets, as the trader is buying both puts and calls, I certainly wouldn’t characterize the activity as bullish. That said, the traders who have mostly been buying December strangles are clearly looking for a big move for the market in either direction in the coming months.

Events for the Week to Come

While the last several weeks have been extremely busy with earnings and economic data, this week is likely to be quiet. Most of the major companies have reported earnings and the Jobs data is behind us. Also, the bond market will be closed on Wednesday, and in general, when the bond market is closed, the stock market becomes very quiet.

That said, we will hear public speeches from at least six Federal Reserve members this week. The market will be looking to get their reaction to the Jobs Report and what that means for the future of interest rates.

What Trader are Saying

I received a question regarding activist investors this week. The question essentially was “In your experience, do activist investors help share value over the long term? And do activist investors ever use options when building positions?”

The first question would be difficult for me to answer, as it would involve a tremendous amount of research to go back and study every time an activist is involved in a company.

The second question is very easy for me to answer: yes, activists use options. In recent years, everyone from Bill Ackman to Carl Icahn and even Warren Buffett has used options to initiate positions in stocks. They use options for the same reasons you and I do. Options are a low cost tool to gain exposure to a stock or the market.

For example, when I see a trader buy 28,000 Tyson Foods (TSN) Calls, I can say with a fairly high degree of certainty that the trader isn’t a “soccer mom in Iowa.” These are top hedge funds and investors in the world risking tens of millions of dollars.

Famed short seller Jim Chanos is another trader known for using options when shorting stocks. As we know, puts are a much more cost-effective way of shorting, as the margin for outright shorting shares of a stock is significantly greater than the premium for buying puts. For instance, on Friday, Chanos spoke of a potential “pairs trade” in which he would possibly go long JD.com (JD) and short Alibaba (BABA). Theoretically, he could execute such a trade by buying puts on BABA and buying JD calls.

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