Options Market Update


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.

The S&P 500 climbed to new highs last week as the bond market’s recent volatility lessened, and a weaker dollar helped ease traders’ concerns. For the week, the S&P 500 added 0.31%, the Dow rallied by 0.45% and the Nasdaq gained 0.89%.

For the bulls, the worries of the last several weeks have at least temporarily abated as the S&P 500 is once again at all new all-time high. Helping the bull case this week were three large mergers as Verizon bought AOL, Williams Co. agreed to buy Williams Partners and Danaher purchased Pall Corp. Also European GDP rose 1% year over year.

For the bears, it was another tough week as the dip turned out to be just another buying opportunity for the bulls. However, Consumer Confidence missed expectations, earnings from the major retailers have been disappointing even as gasoline prices has been relatively low, and Industrial Production fell short of estimates.


The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 12.38, once again nearing recent lows. However, if the market does not take another tumble this week, I expect the VIX and option premiums across all indexes and stocks to get hit ahead of the Memorial Day Weekend. For this reason, I recommend not buying too many calls or puts this week.

Events for the Week to Come

This week should be very quiet as earnings season is virtually over, and economic data releases are extremely limited in the coming days—with the release of the Federal Reserve’s Minutes on Wednesday the possible exception. It will be interesting to see how the Federal Reserve interprets the extremely mixed economic data so far in 2015, and what it could mean for interest rates.

What Traders are Saying

Late last week we got a look inside what many of the top hedge fund managers own in their portfolios. These 13F filings with the SEC give the little guy a peek at top holdings of the best and brightest money managers in the world. Note however, that while these funds are required to disclose their long positions, they are not required to disclose their short positions, which could offset or hedge the long positions that are reported.  

Some large positions were added this past quarter; for example, Jana Partners raised its stake in Hertz Global by 20% to 41.8 million shares and David Einhorn’s Greenlight Capital bought a $355 million position in General Motors.

We can also see how top hedge funds disagree on stocks. For example, activist fund ValueAct, bought an additional 12 million shares of Halliburton, bringing the firm’s stake to 33 million shares, but several other large hedge funds liquidated their positions in Halliburton.

One interesting takeaway from the 13F filings came from David Tepper’s Appaloosa Management. Two of Tepper’s three biggest positions are call options in the S&P 500 ETF (SPY) and the Powershares QQQ Trust (QQQ). As of March 31, Tepper’s call options in the SPY represented a notional equivalent of $1.1 billion and QQQ calls represented $438 million.

This is clearly a big leveraged bet for more upside for the market, but we don’t know which calls Tepper bought. Are they in-the-money, at-the-money or out-of-the-money? And we don’t know which expiration cycles he purchased.     

As I’ve noted, with the market chopping around at all-time highs, but not yet convincingly breaking out above, I’ve been picking up on a fair amount of stock replacement strategies. For example, traders have been selling their stock positions, but buying calls. This reduces capital at risk, while maintaining upside potential. This may be what Tepper was doing with his large call activity last quarter.

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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