Options Market Update

by Jacob Mintz on March 30, 2015

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 bulls’ attempt to push the S&P 500 to all-time highs stalled this week, as intense selling pressure hit the market hard on Wednesday. For the week, the S&P 500 lost 2.23%, the Dow fell by 2.29% and the Nasdaq dropped 2.69%.

For the bulls, it was a challenging week as selling moved the three major indexes back to virtually unchanged for 2015. However, merger and acquisition activity remained strong (Kraft Foods was bought out), New Home Sales data beat expectations and eurozone PMI rose to its highest levels since 2011.

For the bears, Wednesday’s dramatic de-risking in the Semiconductor ETF (SMH) and Bio-technology ETF (IBB) could signal wide spread selling to come. Also, fourth-quarter GDP, Durable Goods and Richmond Fed all missed expectations.  

Volatility

The Chicago Board of Options Exchange Volatility Index finished the week at 15.07, or higher by 15.75%. This seems extremely low after seeing market leaders such as the SMH and IBB fall approximately 7% between Monday and Thursday.  

That said, I’d interpret this mild level of concern as bullish because traders are not yet reaching to buy protection. However, this complacency can flip extremely quickly if the market looks like it’s on the verge of a real selloff.

Events for the Week Ahead

The upcoming week, while shortened because of Good Friday, will be packed with economic data and Federal Reserve member speeches. On Friday, we will get the Jobs Report for March.  

February’s outstanding jobs data sparked the recent rally in the dollar and much discussion about a sooner-than-expected rate rise. If I were to speculate, the market would prefer for this month’s number to not be as strong as last month’s, as that will give the Fed more “leeway” in its timetable to raise rates.

What Traders are Saying

These days, the list of concerns in the market never seems to end. A Greek exit from the eurozone is still a worry, Ukraine/Russia fighting doesn’t seem to be going away, currencies are moving violently, China’s economy is possibly slowing down too fast, Saudia Arabia is now launching air strikes in Yemen, the SMH and IBB are moving violently, and great Jobs Reports are now seen as a negative for the market. And my list could be even longer.

The point of my list above is not to scare you. The point is to show you that there are always going to be worries in the world and the market. Yet even with all of these worries, the market is still within a couple of percent of all-time highs, and the VIX is near a historically depressed level.  

There will be a time when the market gets overwhelmed by headlines or risks, and drops more than 3%-5%. When that happens, rather than buying dips, we’ll be shorting more aggressively. But we aren’t there yet. 

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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