Trading Desk

1978 total posts

Chop on this

News Trading Desk Morning Macro News

Morning Macro News

posted by CAPIS on 05/13/2015 at 7:17 am
by CAPIS on 05/13/2015

Happy Wednesday to you all! How fun is this market, eh? SPX continues to show 2120ish resistance, and 2180-2100 value / support. The sideways action continues, and the day-trader is getting pushed and pulled this way and that. The SPX dropped more than I expected on Monday, which was a clear signal that the NFP move higher was not as lovely as all hoped. Tuesday we got another push down to the flat 50 DMA and the monthly PP (the low was also near S2 on ESM5) where selling abated and saw us climb right back to 2100 (which continues to be the ultimate Pivot / Point of Control for the last month… buy anytime below 2100 back to 2100; sell anytime above 2100 back to 2100; wash, rinse, repeat). When will this end? When will the chop no longer cut it? We have the fastest trends (the 5, 10, and 20 DMAs) all within a few points of the medium term trends (50 and 100 DMAs). The 200 DMA is now at 2032ish. The market continues to consolidate “up here” near 2100, and trends get flat as no trend exists. What if no catalyst comes? I think, ultimately, what…

Happy Wednesday to you all! How fun is this market, eh? SPX continues to show 2120ish resistance, and 2180-2100 value / support. The sideways action continues, and the day-trader is getting pushed and pulled this way and that. The SPX dropped more than I expected on Monday, which was a clear signal that the NFP move higher was not as lovely as all hoped. Tuesday we got another push down to the flat 50 DMA and the monthly PP (the low was also near S2 on ESM5) where selling abated and saw us climb right back to 2100 (which continues to be the ultimate Pivot / Point of Control for the last month… buy anytime below 2100 back to 2100; sell anytime above 2100 back to 2100; wash, rinse, repeat). When will this end? When will the chop no longer cut it? We have the fastest trends (the 5, 10, and 20 DMAs) all within a few points of the medium term trends (50 and 100 DMAs). The 200 DMA is now at 2032ish. The market continues to consolidate “up here” near 2100, and trends get flat as no trend exists. What if no catalyst comes? I think, ultimately, what…

Russell 2000 Implied Volatility Near 20-year Lows

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 05/12/2015 at 8:26 am
by CAPIS on 05/12/2015

SPX futures are off 14 points this morning while the USM5 (US Long Bond) has retreated over 10% now since the beginning of February.  Verizon agreed to acquire AOL in a $4.4 billion deal.  Crude oil is climbing while the dollar is weakening.  European names are generally higher.  The German 10-year bond yield is near its highest levels of 2015.  The spot VIX finished 13.85 yesterday.  The VIX futures are all rallying due to the negative equity tone this morning. Goldman put out a piece last week emphasizing that 1-month implied volatility in both the Russell 2000 and Nasdaq-100 are very nearly at 20-year lows.  In the 10-year graph below for the Russell 2000, you can see 1-month IV hit a low in March of this year.  It is still just a mere 3 points off that 12.77 low, sitting at 15.84.  In a relative sense, S&P 500 Index 1-month IV is trading rich to the Russell as you might expect given the 20-year lows for the Russell.  In fact, the 3-month IV spread (Russell vs. S&P) is in the bottom 5% of 10-year readings while also hitting a low in March of this year. On the flip side, both…

SPX futures are off 14 points this morning while the USM5 (US Long Bond) has retreated over 10% now since the beginning of February.  Verizon agreed to acquire AOL in a $4.4 billion deal.  Crude oil is climbing while the dollar is weakening.  European names are generally higher.  The German 10-year bond yield is near its highest levels of 2015.  The spot VIX finished 13.85 yesterday.  The VIX futures are all rallying due to the negative equity tone this morning. Goldman put out a piece last week emphasizing that 1-month implied volatility in both the Russell 2000 and Nasdaq-100 are very nearly at 20-year lows.  In the 10-year graph below for the Russell 2000, you can see 1-month IV hit a low in March of this year.  It is still just a mere 3 points off that 12.77 low, sitting at 15.84.  In a relative sense, S&P 500 Index 1-month IV is trading rich to the Russell as you might expect given the 20-year lows for the Russell.  In fact, the 3-month IV spread (Russell vs. S&P) is in the bottom 5% of 10-year readings while also hitting a low in March of this year. On the flip side, both…

So… now what?

News Trading Desk Morning Macro News

Morning Macro News

posted by CAPIS on 05/11/2015 at 7:24 am
by CAPIS on 05/11/2015

Happy Monday to you all, Friday’s NFP came and went, and stocks jumped the most since March as hiring bounced back in April. The SPX moved higher by +1.35% to close at 2116.10, which is less than 2 points away from its All Time Closing High of 2117.69 from 4/24. It was a “just right” sort of deal where jobs data bolstered investor optimism that economic growth is accelerating, while the pace didn’t warrant a move by the Fed to raise interest rates any time soon. Anyways, the market took its cue and bounced back above the top of the Wedge. I opined on Wednesday and Friday that the market would “hopefully” make its NEW short-term directional move with NFP, and that hopefully this would force the market to continue that way for the next few weeks. Even with Friday’s move higher, I do not exactly feel we established that move yet. As I said on Friday, I really need a move to Close ABOVE 2130 for me to believe a new ST trend “up” is in store. I’m very curious to see how 2120 reacts today / this week, and see if the sideways action continues for our market…

Happy Monday to you all, Friday’s NFP came and went, and stocks jumped the most since March as hiring bounced back in April. The SPX moved higher by +1.35% to close at 2116.10, which is less than 2 points away from its All Time Closing High of 2117.69 from 4/24. It was a “just right” sort of deal where jobs data bolstered investor optimism that economic growth is accelerating, while the pace didn’t warrant a move by the Fed to raise interest rates any time soon. Anyways, the market took its cue and bounced back above the top of the Wedge. I opined on Wednesday and Friday that the market would “hopefully” make its NEW short-term directional move with NFP, and that hopefully this would force the market to continue that way for the next few weeks. Even with Friday’s move higher, I do not exactly feel we established that move yet. As I said on Friday, I really need a move to Close ABOVE 2130 for me to believe a new ST trend “up” is in store. I’m very curious to see how 2120 reacts today / this week, and see if the sideways action continues for our market…

NFP… Break! (Hopefully)

News Trading Desk Morning Macro News

Morning Macro News

posted by CAPIS on 05/08/2015 at 7:04 am
by CAPIS on 05/08/2015

Happy Friday to you all! Well I wrote Wednesday that I thought NFP would be the catalyst of a new ST trend up or down, but we got a little bit of a possible first look Wednesday with a softer ADP and Yellen warning of high equity valuations. SPX dropped below the lower part of the wedge; closing lower by -0.45% to 2080.15 (and dropping as low as 2067.93 where the 100 DMA is). Thursday we had another slow bleed higher (with some better tech earnings, etc) to close up by 0.38% to 2088 after peaking above 2090, which is the 50 DMA and inside the bottom of the wedge. So now it’s Friday. Now we have NFP and the Unemployment Rate. NOW… will we get a reason to find a trend? With ADP softer it’s ok to presume we’ll get a lower number for NFP as well… what I’m not good at speculating is whether the market will buy or sell it.   Happy Trading and I hope you all have a lovely weekend. Cheers – MC – Per this morning’s Bloomberg Daybook:  (Bloomberg) — European shares rise with a rally in U.K. stocks after surprise election victory for the Conservatives…

Happy Friday to you all! Well I wrote Wednesday that I thought NFP would be the catalyst of a new ST trend up or down, but we got a little bit of a possible first look Wednesday with a softer ADP and Yellen warning of high equity valuations. SPX dropped below the lower part of the wedge; closing lower by -0.45% to 2080.15 (and dropping as low as 2067.93 where the 100 DMA is). Thursday we had another slow bleed higher (with some better tech earnings, etc) to close up by 0.38% to 2088 after peaking above 2090, which is the 50 DMA and inside the bottom of the wedge. So now it’s Friday. Now we have NFP and the Unemployment Rate. NOW… will we get a reason to find a trend? With ADP softer it’s ok to presume we’ll get a lower number for NFP as well… what I’m not good at speculating is whether the market will buy or sell it.   Happy Trading and I hope you all have a lovely weekend. Cheers – MC – Per this morning’s Bloomberg Daybook:  (Bloomberg) — European shares rise with a rally in U.K. stocks after surprise election victory for the Conservatives…

S&P 500 Volatility Surface and the VIX

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 05/07/2015 at 7:39 am
by CAPIS on 05/07/2015

Take a look at the current S&P 500 Index (SPX) volatility surface for the extrapolated 1-month (orange) and 3-month (green) option chain below.  In a nutshell, the image gives you a visual depiction of a core violation of the Black-Schole’s model.  The model assumes that the volatility input for all strikes of a given maturity is constant throughout.  This is obviously not the case given that both lines are not perfectly horizontal.  What occurs in the real world is an obvious skew both in a month-to-month and strike-to-strike basis.  This makes volatility hedging a tricky endeavor.  Rather than assuming that volatility is a constant, traders consider them as variables.  As such, volatility is an added risk and subsequently an additional way to make or lose money.  The Black-Schole’s model isn’t perfect, but the fact that everyone uses a modified version of it is testament that it still is the best thing going. For today we are concerned with the strike-by-strike skew within the same month (generic 1- and 3-month expiry).  As you can see below (and is very typical in the equity world), the implied volatilities across all strikes within the same month when graphed looks like a smile.  The…

Take a look at the current S&P 500 Index (SPX) volatility surface for the extrapolated 1-month (orange) and 3-month (green) option chain below.  In a nutshell, the image gives you a visual depiction of a core violation of the Black-Schole’s model.  The model assumes that the volatility input for all strikes of a given maturity is constant throughout.  This is obviously not the case given that both lines are not perfectly horizontal.  What occurs in the real world is an obvious skew both in a month-to-month and strike-to-strike basis.  This makes volatility hedging a tricky endeavor.  Rather than assuming that volatility is a constant, traders consider them as variables.  As such, volatility is an added risk and subsequently an additional way to make or lose money.  The Black-Schole’s model isn’t perfect, but the fact that everyone uses a modified version of it is testament that it still is the best thing going. For today we are concerned with the strike-by-strike skew within the same month (generic 1- and 3-month expiry).  As you can see below (and is very typical in the equity world), the implied volatilities across all strikes within the same month when graphed looks like a smile.  The…

ADP and Yellen at us.

News Trading Desk Morning Macro News

Morning Macro News

posted by CAPIS on 05/06/2015 at 7:16 am
by CAPIS on 05/06/2015

Happy Wednesday! This market continues to do what it’s been doing: finding resistance at 2120 and dropping to levels of value / control (typically in the 2090-2100 area). It kept us in the wedge yesterday as we closed bouncing off the bottom part of it and settling essentially on the flat 50 DMA. Today, truly, I don’t have much to add. We’ll get a first taste of NFP potential with ADP this morning, but all real money is waiting for NFP on Friday to move us up or down with force (I’m looking for a +/- 1% move on the news). When real news gets us moving, then we can talk potential. Until then chop chop chop! On a side note, my Inverted Head and Shoulders pattern I mentioned on the 10-year yield in mid-April near the 1.85 level has worked! We’re now to the 50% retracement level of 2.20ish, as well as testing the 200 DMA (see below 10-year yield chart). It needs to cut through 2.25 and settle above 2.30 to get to 2.40 and continue this pattern. Otherwise I’m looking for it to fail back to the 2.10-2.20 levels. Happy Trading, and good luck! Per this morning’s…

Happy Wednesday! This market continues to do what it’s been doing: finding resistance at 2120 and dropping to levels of value / control (typically in the 2090-2100 area). It kept us in the wedge yesterday as we closed bouncing off the bottom part of it and settling essentially on the flat 50 DMA. Today, truly, I don’t have much to add. We’ll get a first taste of NFP potential with ADP this morning, but all real money is waiting for NFP on Friday to move us up or down with force (I’m looking for a +/- 1% move on the news). When real news gets us moving, then we can talk potential. Until then chop chop chop! On a side note, my Inverted Head and Shoulders pattern I mentioned on the 10-year yield in mid-April near the 1.85 level has worked! We’re now to the 50% retracement level of 2.20ish, as well as testing the 200 DMA (see below 10-year yield chart). It needs to cut through 2.25 and settle above 2.30 to get to 2.40 and continue this pattern. Otherwise I’m looking for it to fail back to the 2.10-2.20 levels. Happy Trading, and good luck! Per this morning’s…

Synthetic Straddles via Delta-Hedging

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 05/05/2015 at 7:52 am
by CAPIS on 05/05/2015

SPX futures are off 3 points to 2106 as the Shanghai Composite Index has dropped roughly 4%.  This is the biggest drop in three months for China.  Crude oil has surpassed $60 in the US for the first time this year.  The spot VIX finished 12.85 yesterday on the slightly positive day for the SPX.  The VIX futurs are all modestly higher in a steepening of the term structure this morning. Synthetic Straddles–  A VIX term structure in the low teens is historically low, compared to the lifetime mean of roughly 20.  The options market seemingly thinks a move is not forthcoming, at least to the downside.  If everyone believed we were headed lower, the VIX would certainly be quite a bit higher. It seems very well positioned for upward momentum, or in the least not much movement in either direction. You can synthetically create many things with options.  Managers who are long only and believe a major move is coming, one way or the other, can get delta-neutral through the use of SPY at-the-money puts and create a synthetic straddle to take advantage of the impending move.  Being delta-neutral on an at the money call (put), means selling (buying) 500…

SPX futures are off 3 points to 2106 as the Shanghai Composite Index has dropped roughly 4%.  This is the biggest drop in three months for China.  Crude oil has surpassed $60 in the US for the first time this year.  The spot VIX finished 12.85 yesterday on the slightly positive day for the SPX.  The VIX futurs are all modestly higher in a steepening of the term structure this morning. Synthetic Straddles–  A VIX term structure in the low teens is historically low, compared to the lifetime mean of roughly 20.  The options market seemingly thinks a move is not forthcoming, at least to the downside.  If everyone believed we were headed lower, the VIX would certainly be quite a bit higher. It seems very well positioned for upward momentum, or in the least not much movement in either direction. You can synthetically create many things with options.  Managers who are long only and believe a major move is coming, one way or the other, can get delta-neutral through the use of SPY at-the-money puts and create a synthetic straddle to take advantage of the impending move.  Being delta-neutral on an at the money call (put), means selling (buying) 500…

Here comes the summer!

News Trading Desk Morning Macro News

Morning Macro News

posted by CAPIS on 05/04/2015 at 8:02 am
by CAPIS on 05/04/2015

Happy Monday Everyone, Well my expectation Friday that we’d hang between 2090 – 2100 worked pretty well for a bit… until the afternoon. R1 held us in check with 2095 and the 20 DMA providing support. Going into the last two hours of the day, though, we saw a buy-stop move above the morning highs to test the 5 & 10 DMAs from below, with ultimately the weekly PP providing the area to value. SPX closed higher by +1.09% to 2108.29 on below average volume; but completely engulfing the Thursday EOM selling candle. We’re through Peak Earnings Season for the SPX, and will now get smaller earnings the next few weeks. With 73% of the S&P 500 names that have reported beating profit projections, it’s no wonder we’re not getting the sell-off so many were looking for. Add to the fact that hiring appears to be increasing a bit and eco should start to turn around with the warmer weather, we have a recipe for a possible REAL move higher. S&P emini Index futures are higher by +5.75 points to 2107.25 on below average volume again; marking overnight highs at R1 / 2108.75. This lines up with where spot R1 is…

Happy Monday Everyone, Well my expectation Friday that we’d hang between 2090 – 2100 worked pretty well for a bit… until the afternoon. R1 held us in check with 2095 and the 20 DMA providing support. Going into the last two hours of the day, though, we saw a buy-stop move above the morning highs to test the 5 & 10 DMAs from below, with ultimately the weekly PP providing the area to value. SPX closed higher by +1.09% to 2108.29 on below average volume; but completely engulfing the Thursday EOM selling candle. We’re through Peak Earnings Season for the SPX, and will now get smaller earnings the next few weeks. With 73% of the S&P 500 names that have reported beating profit projections, it’s no wonder we’re not getting the sell-off so many were looking for. Add to the fact that hiring appears to be increasing a bit and eco should start to turn around with the warmer weather, we have a recipe for a possible REAL move higher. S&P emini Index futures are higher by +5.75 points to 2107.25 on below average volume again; marking overnight highs at R1 / 2108.75. This lines up with where spot R1 is…

Implied Volatility

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 05/04/2015 at 8:00 am
by CAPIS on 05/04/2015

S&P futures are up 6 points to 2107.50.  European names are up after the biggest weekly decline this year.  Manufacturing is up in the region more than estimated.  China’s PMI for April is up less than analysts’ estimated.  The cash VIX finished 12.70 on Friday.  The VIX futures are all lower in parallel fashion by a dime on average given the positive tone. Implied Volatility–  Occasionally, I’ll get an email or two that go something like this, “Why should I be so preoccupied with comparing realized stock volatility to that implied in the options if I’m just doing covered calls?”  Let’s take a step back. Definitively, volatility is simply the one standard deviation move in percentage terms of the underlying stock over a one year period.  Given the inputs in the options pricing formula (interest rates, dividends, time to expiration, stock price, strike, and volatility), the volatility is the biggest unknown and the “art” in pricing options.  The volatility input is the means by which one can artificially increase or decrease the price of the option.  That is why most market-makers quote in volatility and remember at what volatility they bought and sold particular months/strikes. Selling covered calls is essentially…

S&P futures are up 6 points to 2107.50.  European names are up after the biggest weekly decline this year.  Manufacturing is up in the region more than estimated.  China’s PMI for April is up less than analysts’ estimated.  The cash VIX finished 12.70 on Friday.  The VIX futures are all lower in parallel fashion by a dime on average given the positive tone. Implied Volatility–  Occasionally, I’ll get an email or two that go something like this, “Why should I be so preoccupied with comparing realized stock volatility to that implied in the options if I’m just doing covered calls?”  Let’s take a step back. Definitively, volatility is simply the one standard deviation move in percentage terms of the underlying stock over a one year period.  Given the inputs in the options pricing formula (interest rates, dividends, time to expiration, stock price, strike, and volatility), the volatility is the biggest unknown and the “art” in pricing options.  The volatility input is the means by which one can artificially increase or decrease the price of the option.  That is why most market-makers quote in volatility and remember at what volatility they bought and sold particular months/strikes. Selling covered calls is essentially…

May Day

News Trading Desk Morning Macro News

Morning Macro News

posted by CAPIS on 05/01/2015 at 7:21 am
by CAPIS on 05/01/2015

Happy May Day! Most European markets are closed today, and Japan is closed the next 3 business days for Golden Week, so expect this first day of the month to have comparatively low volume trading (especially for the 1st). So after the selling / brush off high made on Monday, April 27th at 2125.92, the SPX has moved to test the 2090-2100 value area, the 20 DMA near 2095, the 50 DMA at 2090… and below! Yesterday saw the SPX fall to the 2090-2100 value area and  stay there most of the day with S2 support. Just after 2:00 pm the market looked lower; breaking below S2 / 2090 / 50 DMA, and dropping to the 2080 level (where the bottom of the wedge I’ve drawn is). It found some support / value down there, and moved up to close down -1.01% to 2085.51. There was, of course, massive Market On Close (MOC) volume with the EOM, and I thought it was interesting that we couldn’t close above the 50 DMA / 2090 support level. So we’ve had a pretty nice sell-off from the new ATH’s on Monday, and it looks like we could get some follow through… but then…

Happy May Day! Most European markets are closed today, and Japan is closed the next 3 business days for Golden Week, so expect this first day of the month to have comparatively low volume trading (especially for the 1st). So after the selling / brush off high made on Monday, April 27th at 2125.92, the SPX has moved to test the 2090-2100 value area, the 20 DMA near 2095, the 50 DMA at 2090… and below! Yesterday saw the SPX fall to the 2090-2100 value area and  stay there most of the day with S2 support. Just after 2:00 pm the market looked lower; breaking below S2 / 2090 / 50 DMA, and dropping to the 2080 level (where the bottom of the wedge I’ve drawn is). It found some support / value down there, and moved up to close down -1.01% to 2085.51. There was, of course, massive Market On Close (MOC) volume with the EOM, and I thought it was interesting that we couldn’t close above the 50 DMA / 2090 support level. So we’ve had a pretty nice sell-off from the new ATH’s on Monday, and it looks like we could get some follow through… but then…

Put/Call Parity and Hard-to-Borrow

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 04/30/2015 at 8:07 am
by CAPIS on 04/30/2015

You can glean a lot of information from the put/call parity relationship. Put/call parity (illustrated below) must hold true for names to ensure there is no free lunch arbitrage. The relationship also demonstrates one of the most basic rules of options trading:  puts and calls are interchangeable to a market maker. To a market maker, it makes no difference whether you are long (short) puts or calls on the same strike due to delta hedging. What does matter is the net longs (shorts) on any given strike. As seen below, it is easy to synthetically replicate a put with a call or a call with a put. Call = Put + (Stock – Strike) + PV(Interest on the Strike) – PV(Dividends) Sometimes ,however, the equation gets so out of line you wonder what the heck is going on. In training young market makers, I would often point out that if something is way out of line, assume that you are wrong before jumping in and strapping on a bunch of reversals or conversions. Just as you solved for the call above, you can rearrange the equation (given the market price of the puts and calls) and solve for the dividends…

You can glean a lot of information from the put/call parity relationship. Put/call parity (illustrated below) must hold true for names to ensure there is no free lunch arbitrage. The relationship also demonstrates one of the most basic rules of options trading:  puts and calls are interchangeable to a market maker. To a market maker, it makes no difference whether you are long (short) puts or calls on the same strike due to delta hedging. What does matter is the net longs (shorts) on any given strike. As seen below, it is easy to synthetically replicate a put with a call or a call with a put. Call = Put + (Stock – Strike) + PV(Interest on the Strike) – PV(Dividends) Sometimes ,however, the equation gets so out of line you wonder what the heck is going on. In training young market makers, I would often point out that if something is way out of line, assume that you are wrong before jumping in and strapping on a bunch of reversals or conversions. Just as you solved for the call above, you can rearrange the equation (given the market price of the puts and calls) and solve for the dividends…

Volatility Monitor – Synthetic Positions

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 04/29/2015 at 7:33 am
by CAPIS on 04/29/2015

SPX futures are off 8 points to 2104 in concert with European markets this morning.  The Fed will provide details on its monetary policy today.  The dollar is headed for its first monthly loss in nearly a year.  Bloomberg says that 73% of economists believe that the Fed will raise rates in September.  The spot VIX closed 12.41 yesterday.  The VIX futures are all modestly higher in a flattening of the term structure.  Synthetics–    In meeting with institutional portfolio managers, I’m still amazed at the connotation of risk that accompanies the word option.  But maybe it’s the old market-maker in me and my view that simply being long or short the actual stock is the risky part.  Many a manager always seems to preface his actual use of options by stating that, “Our firm is very conservative in what we want to do.  We will routinely buy puts in some of our names.  We will definitely sell some covered calls.  But that’s it.”   I counter with  ‘Would you ever sell naked puts or buy deep calls?’  “No, no.  No naked shorts.  And no speculative call buying.” I’ve touched on this point before, but I think it needs repeating:  anytime you…

SPX futures are off 8 points to 2104 in concert with European markets this morning.  The Fed will provide details on its monetary policy today.  The dollar is headed for its first monthly loss in nearly a year.  Bloomberg says that 73% of economists believe that the Fed will raise rates in September.  The spot VIX closed 12.41 yesterday.  The VIX futures are all modestly higher in a flattening of the term structure.  Synthetics–    In meeting with institutional portfolio managers, I’m still amazed at the connotation of risk that accompanies the word option.  But maybe it’s the old market-maker in me and my view that simply being long or short the actual stock is the risky part.  Many a manager always seems to preface his actual use of options by stating that, “Our firm is very conservative in what we want to do.  We will routinely buy puts in some of our names.  We will definitely sell some covered calls.  But that’s it.”   I counter with  ‘Would you ever sell naked puts or buy deep calls?’  “No, no.  No naked shorts.  And no speculative call buying.” I’ve touched on this point before, but I think it needs repeating:  anytime you…

GDP and FOMC

News Trading Desk Morning Macro News

Morning Macro News

posted by CAPIS on 04/29/2015 at 7:29 am
by CAPIS on 04/29/2015

Happy Wednesday! What an eventful couple days. Yesterday I wrote that Monday candle was a bearish engulfing of Friday’s, leading me to believe that we should see a further decline before the Fed day. I also stated, “For me, I’m looking for this drop to find support in the 2090-2100 levels, which I think we’ll reach down to test going into FOMC tomorrow.” This proved rather succinct as the SPX dropped precipitously from the PDC level going into the 2nd bracket (i.e. the 10:00-10:30 AM timeframe) with news of Iran hitting a US cargo ship. We dropped, in 15 minutes, from PDC to S2 perfectly. S2 was at 2095.08, right where the 20 DMA was for support as well (and, perfectly in the middle of my 2090-2100 range I mentioned). Our Low of Day (LOD) was made there at 2094.89, and we quickly bought the rumor/news from there back to PDC and beyond. The Initial Balance area (the high and low of the first hour trading) was broken to the upside at 11:00 am: confirming the “V” shapped bottom and allowing market makers to lean long. We fiddled around the PP most of the rest of the day; closing higher by…

Happy Wednesday! What an eventful couple days. Yesterday I wrote that Monday candle was a bearish engulfing of Friday’s, leading me to believe that we should see a further decline before the Fed day. I also stated, “For me, I’m looking for this drop to find support in the 2090-2100 levels, which I think we’ll reach down to test going into FOMC tomorrow.” This proved rather succinct as the SPX dropped precipitously from the PDC level going into the 2nd bracket (i.e. the 10:00-10:30 AM timeframe) with news of Iran hitting a US cargo ship. We dropped, in 15 minutes, from PDC to S2 perfectly. S2 was at 2095.08, right where the 20 DMA was for support as well (and, perfectly in the middle of my 2090-2100 range I mentioned). Our Low of Day (LOD) was made there at 2094.89, and we quickly bought the rumor/news from there back to PDC and beyond. The Initial Balance area (the high and low of the first hour trading) was broken to the upside at 11:00 am: confirming the “V” shapped bottom and allowing market makers to lean long. We fiddled around the PP most of the rest of the day; closing higher by…

Failure to break

News Trading Desk Morning Macro News

Morning Macro News

posted by CAPIS on 04/28/2015 at 8:05 am
by CAPIS on 04/28/2015

Happy Tuesday! Pardon my lack of comments yesterday; I had a few trades to get ready for with the last T+3 day of the month to trade, and my daughter kept me up all night. Coffee is a beautiful thing! As I wrote on Friday, “In my humble opinion, we need a big volume break / close above 2120 for this wedge break higher to be confirmed as a ‘new ST upward trend’. Without this, it’s another failed attempt at a breakout, and another place for ST shorties to get more short.”  We did not get this, but we also didn’t get a huge sell-off per se. We peaked above 2120, but a selling tail still existed. Caution was warranted. Monday, we all wake-up to the market printing above the Friday highs / making new highs. SPX opened right at 2120, rose to R2… and slowly made its about face. From R2 we dropped to R1 and PDC for supports, bounced around them for a while, and during lunch made our real new intraday trend lower. SPX sliced through its PP en route to the S1 level where it stayed most of the day. The last hour saw further selling…

Happy Tuesday! Pardon my lack of comments yesterday; I had a few trades to get ready for with the last T+3 day of the month to trade, and my daughter kept me up all night. Coffee is a beautiful thing! As I wrote on Friday, “In my humble opinion, we need a big volume break / close above 2120 for this wedge break higher to be confirmed as a ‘new ST upward trend’. Without this, it’s another failed attempt at a breakout, and another place for ST shorties to get more short.”  We did not get this, but we also didn’t get a huge sell-off per se. We peaked above 2120, but a selling tail still existed. Caution was warranted. Monday, we all wake-up to the market printing above the Friday highs / making new highs. SPX opened right at 2120, rose to R2… and slowly made its about face. From R2 we dropped to R1 and PDC for supports, bounced around them for a while, and during lunch made our real new intraday trend lower. SPX sliced through its PP en route to the S1 level where it stayed most of the day. The last hour saw further selling…

Options – Interest Rate/Dividend Plays

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 04/28/2015 at 8:04 am
by CAPIS on 04/28/2015

SPX futures are off 5 points to 2099.75 even against the backdrop of expecations of no rate change by the Fed.  September is generally the expected first date of any increase.  The value of global equities rose to a record $72.2 trillion yesterday (Bloomberg).  Gold is unchanged and crude oil is slightly lower.  The spot VIX finished 13.12 yesterday.  The VIX futures are in a bit of a flattening move with the front months up a bit more than the later months. Option Sensitivity-  In the very least most people associate options trading with gaining exposure (long or short) to a stock/index/etf/etc.  Delta exposure, as it’s called, to the underlying is the most obvious exposure to be sure.  There are, however, many other exposures that complicate things and make options a bit more exciting than simply being long or short a stock.  Volatility trading is another play that I’ve discussed ad nauseum and will not get into here.  But many people don’t realize that you can put on an interest rate or dividend play using options as well. Put-call parity necessitates that options of the same strike and month trade on the same volatility.  If not, an arb can be…

SPX futures are off 5 points to 2099.75 even against the backdrop of expecations of no rate change by the Fed.  September is generally the expected first date of any increase.  The value of global equities rose to a record $72.2 trillion yesterday (Bloomberg).  Gold is unchanged and crude oil is slightly lower.  The spot VIX finished 13.12 yesterday.  The VIX futures are in a bit of a flattening move with the front months up a bit more than the later months. Option Sensitivity-  In the very least most people associate options trading with gaining exposure (long or short) to a stock/index/etf/etc.  Delta exposure, as it’s called, to the underlying is the most obvious exposure to be sure.  There are, however, many other exposures that complicate things and make options a bit more exciting than simply being long or short a stock.  Volatility trading is another play that I’ve discussed ad nauseum and will not get into here.  But many people don’t realize that you can put on an interest rate or dividend play using options as well. Put-call parity necessitates that options of the same strike and month trade on the same volatility.  If not, an arb can be…

Skew – MDY (S&P 400 MidCap ETF)

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 04/27/2015 at 8:07 am
by CAPIS on 04/27/2015

SPX futures are up nearly 5 points to 2116.75 as the Greece v. Eurogroup creditors bailout negotiating decended into name calling on Friday.  All eyes will be on Apple earnings today after the close.  Gold is up nearly a percent while crude is trading flat.  The VIX futures are all lower in a fairly parallel shift of the term structure.  Spot VIX closed 12.29 on Friday. Skew– Elevated skew levels remain entrenched in several indices.  Skew is roughly defined as the degree in volatility points to which downside puts trade in excess of upside calls.  You can see this daily, as a matter of fact, in the Index Collar Tracker below.  The Index Collar Tracker gauges the premium cost for a 5% out-of-the-money put purchase in excess of the 5% out-of-the-money call sale for a three-month term.  It also shows the premium as a percent of the underlying index as well as the exact spread in volatility points.  Often, skew will be represented as a ratio (90% of spot strike/110% of spot strike).  The 90%/110% skew ratio for the S&P MidCap 400 ETF (MDY) is presently over 2, a reading in the top 3% over the past five years (graph below).…

SPX futures are up nearly 5 points to 2116.75 as the Greece v. Eurogroup creditors bailout negotiating decended into name calling on Friday.  All eyes will be on Apple earnings today after the close.  Gold is up nearly a percent while crude is trading flat.  The VIX futures are all lower in a fairly parallel shift of the term structure.  Spot VIX closed 12.29 on Friday. Skew– Elevated skew levels remain entrenched in several indices.  Skew is roughly defined as the degree in volatility points to which downside puts trade in excess of upside calls.  You can see this daily, as a matter of fact, in the Index Collar Tracker below.  The Index Collar Tracker gauges the premium cost for a 5% out-of-the-money put purchase in excess of the 5% out-of-the-money call sale for a three-month term.  It also shows the premium as a percent of the underlying index as well as the exact spread in volatility points.  Often, skew will be represented as a ratio (90% of spot strike/110% of spot strike).  The 90%/110% skew ratio for the S&P MidCap 400 ETF (MDY) is presently over 2, a reading in the top 3% over the past five years (graph below).…

“Wedge” way now?

News Trading Desk Morning Macro News

Morning Macro News

posted by CAPIS on 04/24/2015 at 7:27 am
by CAPIS on 04/24/2015

Happy Friday! Ok. So we broke above the wedge I mentioned the last week or so (lower highs / higher lows), and we tested / made a new All Time High (ATH) on SPX. 50k ESM5 contracts were bought when we broke last week’s 2112 highs as traders leaned long and took out buy-stops on the way up. The new ATH is now 2120.49. Now! After we made those new ATH’s, we immediately turned around and sold off the last hour to close higher by +0.24% to 2112.93. This was pretty much the midpoint for the day. Without this, it’s another failed attempt at a breakout, and another place for ST shorties to get more short. That all said, the Naz did break above it’s March 10, 2000 Closing high of 5048.62 (it closed up 0.41% to 5056.06), which means the Tech Bubble has officially been washed (sort of). This “should” make people feel better as valuations, while high, are no where near the levels from the late 90’s / early aughts. Good luck today and everyone have a super great weekend! Per this morning’s Bloomberg Daybook: (Bloomberg) — European stocks rise as euro-zone finance ministers gather to discuss issues…

Happy Friday! Ok. So we broke above the wedge I mentioned the last week or so (lower highs / higher lows), and we tested / made a new All Time High (ATH) on SPX. 50k ESM5 contracts were bought when we broke last week’s 2112 highs as traders leaned long and took out buy-stops on the way up. The new ATH is now 2120.49. Now! After we made those new ATH’s, we immediately turned around and sold off the last hour to close higher by +0.24% to 2112.93. This was pretty much the midpoint for the day. Without this, it’s another failed attempt at a breakout, and another place for ST shorties to get more short. That all said, the Naz did break above it’s March 10, 2000 Closing high of 5048.62 (it closed up 0.41% to 5056.06), which means the Tech Bubble has officially been washed (sort of). This “should” make people feel better as valuations, while high, are no where near the levels from the late 90’s / early aughts. Good luck today and everyone have a super great weekend! Per this morning’s Bloomberg Daybook: (Bloomberg) — European stocks rise as euro-zone finance ministers gather to discuss issues…

Early Exercise – Puts

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 04/23/2015 at 8:01 am
by CAPIS on 04/23/2015

SPX futures are down 5 points to 2095.25 following European shares lower after a Chinese manufacturing gauge dropped to the lowest in twelve months and the PMI for the euro region unexpectedly slowed.  Initial jobless claims came in slightly higher than expected, 295,000.  Gold and crude are both modestly higher this morning.  The spot VIX finished 12.71 yesterday.  The VIX futures are a mixed bag as the first seven are up slightly and the last two down modestly.  All are under the 20 handle. Early Exercise (Puts)– As a follow up to yesterday’s discussion on call exercises, we discuss when to expect that puts will be exercised.  Just as with the call, a put exercise decision will once again simply be a comparison between costs and benefits.  Put exercises are most easily demonstrated from the market-maker perspective.  If a market-maker is long a deep put, he will hedge his risk by being long stock against it.  Being long stock and long a deep put ties up capital, and has an interest cost (carry) associated with it.  If the market-maker exercises his put, he will no longer have to pay carry on the stock (and put) he once owned.  This is…

SPX futures are down 5 points to 2095.25 following European shares lower after a Chinese manufacturing gauge dropped to the lowest in twelve months and the PMI for the euro region unexpectedly slowed.  Initial jobless claims came in slightly higher than expected, 295,000.  Gold and crude are both modestly higher this morning.  The spot VIX finished 12.71 yesterday.  The VIX futures are a mixed bag as the first seven are up slightly and the last two down modestly.  All are under the 20 handle. Early Exercise (Puts)– As a follow up to yesterday’s discussion on call exercises, we discuss when to expect that puts will be exercised.  Just as with the call, a put exercise decision will once again simply be a comparison between costs and benefits.  Put exercises are most easily demonstrated from the market-maker perspective.  If a market-maker is long a deep put, he will hedge his risk by being long stock against it.  Being long stock and long a deep put ties up capital, and has an interest cost (carry) associated with it.  If the market-maker exercises his put, he will no longer have to pay carry on the stock (and put) he once owned.  This is…

“Wedge” way will we go?

News Trading Desk Morning Macro News

Morning Macro News

posted by CAPIS on 04/22/2015 at 7:51 am
by CAPIS on 04/22/2015

Good Morning, The SPX has worked itself into a nice looking wedge the last two months, as I mentioned Monday, as you can see in my “SPX Current” chart below. We’re almost through Peak Earnings Season, so I’m eagerly awaiting the moment it pops out of it, with volume, either up or down. As Mr. Miyagi would say, “Patience, Daniel san!” I truly don’t have much to add like I normally do. Monday we gained back almost all of Friday’s drop; bouncing off the flat 20 & 50 DMA’s, as the market continues to go sideways in a process of making higher lows and lower highs (a wedge, if you will). You can draw this wedge on your chart in any way you like, as it tells the same story: the market is looking for direction. It needs a catalyst. Nothing has happened yet. There’s no major eco today, again, so I’m looking for further tests of the downside to find support at either S2 @ 2085.18, or a test of the lower part of the wedge (where the 20 & 50 DMAs are) near 2080. Hopefully you’re long near 2040, hedged to the downside, and waiting. Put some Christopher…

Good Morning, The SPX has worked itself into a nice looking wedge the last two months, as I mentioned Monday, as you can see in my “SPX Current” chart below. We’re almost through Peak Earnings Season, so I’m eagerly awaiting the moment it pops out of it, with volume, either up or down. As Mr. Miyagi would say, “Patience, Daniel san!” I truly don’t have much to add like I normally do. Monday we gained back almost all of Friday’s drop; bouncing off the flat 20 & 50 DMA’s, as the market continues to go sideways in a process of making higher lows and lower highs (a wedge, if you will). You can draw this wedge on your chart in any way you like, as it tells the same story: the market is looking for direction. It needs a catalyst. Nothing has happened yet. There’s no major eco today, again, so I’m looking for further tests of the downside to find support at either S2 @ 2085.18, or a test of the lower part of the wedge (where the 20 & 50 DMAs are) near 2080. Hopefully you’re long near 2040, hedged to the downside, and waiting. Put some Christopher…

Early Exercise – Calls

News Trading Desk Volatility Monitor

Volatility Monitor

posted by CAPIS on 04/22/2015 at 7:15 am
by CAPIS on 04/22/2015

SPX futures are off nearly 4 points to 2087.25 as Europe is setting the tone with its first decline in three days.  The Stoxx Europe 600 is off .4% while the Nikkei 225 is over 20,000 for the first time since 2000.  Both oil and gold are slightly lower.  The BOE officials have unanimously voted to leave the UK’s main interest rate unchanged.  The spot VIX finished 13.25 yesterday.  The VIX futures are all higher modestly on the negative equity tone. Early Exercise (Calls)–  I’ve heard many portfolio managers voice concern about early assignment after writing call options on a position that he/she has no intention of selling.  In fact, the mere possibility of assignment has even precluded some from writing calls.  To be sure, when options are sold the right to exercise is entirely in the hands of the owner of the option.  However, any rational owner of a call option would never exercise his right to call the stock prior to expiration but for one exception:  a dividend* (and only the day before ex-div). Like most things, we could say that you would only exercise a call when the benefits are greater than the costs.  A dividend is…

SPX futures are off nearly 4 points to 2087.25 as Europe is setting the tone with its first decline in three days.  The Stoxx Europe 600 is off .4% while the Nikkei 225 is over 20,000 for the first time since 2000.  Both oil and gold are slightly lower.  The BOE officials have unanimously voted to leave the UK’s main interest rate unchanged.  The spot VIX finished 13.25 yesterday.  The VIX futures are all higher modestly on the negative equity tone. Early Exercise (Calls)–  I’ve heard many portfolio managers voice concern about early assignment after writing call options on a position that he/she has no intention of selling.  In fact, the mere possibility of assignment has even precluded some from writing calls.  To be sure, when options are sold the right to exercise is entirely in the hands of the owner of the option.  However, any rational owner of a call option would never exercise his right to call the stock prior to expiration but for one exception:  a dividend* (and only the day before ex-div). Like most things, we could say that you would only exercise a call when the benefits are greater than the costs.  A dividend is…

Subscribe to Stay Informed

Stay informed by subscribing to information that matters to you. We'll email you when we post new content you want to see.