Options Market Update April 4, 2016

After Federal Reserve Chair Janet Yellen signaled that she is not in a rush to hike interest rates on Tuesday, the market raced higher, and closed up on the week for the sixth in seven. For the week, the S&P 500 added 1.64%, the Dow gained 1.58% and the Nasdaq advanced by 2.95%.

For the bulls, virtually everything went right this week as Janet Yellen said that the Fed must “proceed cautiously,” 215,000 jobs were created in March, which was slightly more than expected, and the S&P 500 closed at its highs for 2016. In addition, Pending Home Sales, Consumer Confidence and Manufacturing data all beat expectations. Also, it appears that the relationship between oil and the stock market may have finally decoupled, as the Unites States Oil Fund (USO) lost 7.26% for the week, and the S&P 500 gained 1.64%.

For the bears, it was a challenging week. Every dip continued to get bought, including on Friday, when the S&P 500 was indicated lower by more than 0.5% but finished the day higher by 0.63%. However, the bears will point out that oil is again selling off, European banks such as Deutsche Bank and Credit Suisse continue to flounder, and the bulls may be getting too comfortable buying even the smallest of dips, based on the belief that central banks will provide never-ending stimulus.


The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 13.10, lower by 11%. The volatility buying bull in me would say that rarely does the VIX stay at such depressed levels for long, and that the risk/reward at such cheap prices is skewed towards buying volatility vs. selling. However, the volatility seller in me would point out that the market is very strong, dips continue to get bought aggressively, and the 20-day realized volatility in the S&P 500 has now dropped to 9, which means the VIX at 13 is actually quite expensive.

Events for the Week to Come

This upcoming week will be light on economic data, but full on Federal Reserve member speeches. In total, eight members of the Federal Reserve will give public speeches this week, including Janet Yellen on Thursday evening. On Wednesday afternoon, the market will be interested in the release of the FOMC Minutes, which will give traders a look into the Federal Reserve’s previous meeting. With the recent “open revolt” among voting members about the path of interest rates, this will undoubtedly be an interesting week for the bond market.

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