Options Market Update February 22, 2016

 
The S&P 500 was able to tack on big gains last week after stabilizing at the end of the previous week. The rally was led early in the week by sectors that had recently struggled to start the year including financials and technology stocks. For the week, the S&P 500 gained 2.84%, the Dow added 2.62% and the Nasdaq added 3.85%.

For the bulls, the rally to start the week was extremely strong, with the S&P 500 gaining over 1.5% on Tuesday and Wednesday. Aiding this week’s rally was manufacturing data, which finally showed signs of improvement, and European and Chinese officials continued pledge of support for their struggling economies. Also, the Federal Reserve members’ tone this week was seen as dovish in general, as was the response to the minutes from the Federal Reserve’s January policy meeting, as committee members “agreed that uncertainty had increased, and many saw these developments as increasing downside risks to the outlook.” This would lead many traders to believe that the Fed will not be hiking rates at the pace once forecasted.

For the bears, it was a challenging week as the market continued to bounce back from January and February lows. However, the bears would also point out that the big advances were on light volume, led by the “junk” of the market such as commodity stocks, and that these types of explosive upside moves often happen in bear markets. The bears also could point to weakening data from Japan and China, Standard & Poor’s’ downgrading of Brazil’s sovereign debt, and soft housing data in the U.S released last week.

Volatility

The Chicago Board of Options Volatility Index (VIX) closed the week at 20.53, lower by 19%. What was interesting about this steep decline was not the size of the decline, but that the VIX continued to decline into the end of the week as the market stopped advancing. The VIX dropped 5% and 7% on Tuesday and Wednesday as the market advanced, which is what I would have expected. However, as the market traded sideways on Thursday and Friday, the VIX lost another 3% and 5%. This leads me to believe the big market players are becoming more comfortable with the market and downside risk, and thus don’t feel the need to own as much protection.

Events for the Week to Come

This upcoming week is full of market-moving catalysts including earnings releases from many retail companies such as Home Depot (HD), Lowe’s (LOW), Macy’s (M) TJX (TJX) and Target (TGT). Earnings season has not been kind to this sector, with Wal-Mart (WMT), Nordstroms (JWN) and VF Corp (VFC) falling last week on earnings misses.

Also this week, the market will be eyeing the meetings of the G-20 finance ministers in China on Thursday and Friday. The market will likely be focused on whether China and other nations could give hints of more stimulus in the future. In addition, the market will be looking to Europe where British Prime Minister David Cameron will likely recommend that Britain remain in the European Union.

What Traders are Saying

This earnings season has produced many dramatic earnings selloffs, so I want to reinforce an old trading rule that I learned on the floor of the Chicago Board of Options Exchange about situations when stocks fall on earnings or other reasons. If a stock took a big fall, whether it’s on earnings or some other news event, you MUST wait AT LEAST three trading days before even thinking about putting on a bullish position.

The rationale behind this theory is that if a large hedge fund or institution owns millions of shares of a stock, they won’t be able to sell out of their entire position in a day or two without causing the stock to fall. Instead, they will take their time parceling it out for a couple days, so that they don’t depress the stock so much that they sell at bad prices.


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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