Options Market Update February 1, 2016

 
Even with the three major indexes’ gain of over 2% on Friday, the month of January was historically bad, as the Dow had its worst 10-day start to a year since 1897. For the week, the S&P gained 1.75%, the Dow rallied 2.32% and the Nasdaq added 0.50%.

For the bulls, it was another volatile week as Monday and Wednesday each saw losses of over 1%. Yet the bulls were able to close the S&P 500 on the highs of the week—over 1,000 Dow points from the January lows. Helping the market was oil stabilizing and rallying from a low of $26 a barrel to a close at $33.50 on Friday. Also, the Bank of Japan surprisingly cut interest rates into negative territory, which may have spurred Friday’s big rally, and new home sales easily beat expectations.

For the bears, even though the market was able to stabilize, calls for a much further decline continue to gain voices. And there was plenty to point to on the bearish front: U.S. GDP grew by only 0.7% in the fourth quarter, Japan’s stimulus plans of the past several years don’t seem to be working and China’s Shanghai Index lost 22.50% in January. Also, former market leaders such as Netflix (NFLX) and Apple (AAPL) lost 21% and 7.52% respectively in January.

Volatility

The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 20.20, lower by 9.5% for the week. This was the lowest close for the fear index since early in January. I would expect the downside to the VIX to be limited to the 17–20 range for the next several weeks as traders will likely look to add protection on any market rallies. This is one of the reasons I added our QQQ put position on Friday, as I believe the downside to owning these puts is fairly limited in the short term.

Events for the Week to Come


Earnings season rolls on this week with reports from companies such as Google (GOOG), Dow Chemical (DOW), Pfizer (PFE) and Exxon Mobil (XOM). This is also a big week for economic data releases with the Jobs Report for the month of January released on Friday. That said, the market could continue to be held hostage to the price of oil and data out of China, which could trump U.S. earnings and economic data—though it was interesting to see the market surge to weekly highs on Friday even as oil lost a bit of ground. I’ll continue to monitor the correlation between oil/financials/markets.

What Traders are Saying


Watching the market and listening to traders trying to time bullish and bearish positions in the month of January reminded me of Charlie Brown trying to kick the football, only to have it pulled out from him at the last second by his friend Lucy. Traders’ opinions on the market were fluctuating from bullish to bearish based on every half a percent move in the S&P 500—which often happened every 10 minutes. One minute the world was ending, the next minute the bottom was in. These wild swings in sentiment were happening 10 times a day.
 
There will be a time to make money. For 99% of traders, January wasn’t it. As famed investor Jesse Livermore once said, “Play the market only when all factors are in your favor. No person can play the market all the time and win.” I would argue a market like January fits this quote perfectly. There was literally no edge in investing actively in January. The market could look great one day, you add a bullish position, and by the time you awoke, China could be down 6%, which would pull the U.S. market lower by 1%–2%. That is a zero edge environment, and not one that is likely to be a profitable. Hopefully, February will bring more stability and opportunity.


This is an excerpt from Cabot Options Trader, which features the most profitable investment strategies in any market. It’s 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.

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