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Options

The RUT Report


CBOETV - Host Angela Miles discusses upside call calendar spreads with Scott Bauer

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, or at www.theocc.com. The information in this program is provided solely for general education and information purposes. No statement within the program should be construed as a recommendation to buy or sell a security or to provide investment advice. The opinions expressed in this program are solely the opinions of the participants, and do not necessarily reflect the opinions of CBOE or any of its subsidiaries or affiliates. You agree that under no circumstances will CBOE or its affiliates, or their respective directors, officers, trading permit holders, employees, and agents, be liable for any loss or damage caused by your reliance on information obtained from the program.

Copyright © 2016 Chicago Board Options Exchange, Incorporated.   All rights reserved.

This video is from CBOE and is being posted with CBOE’s permission. The views expressed in this article are solely those of the author and/or CBOE and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 


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Options

Disney: Profit From Likely Volatile Earnings Report


Goldman Sachs is telling clients to “straddle” the stock in anticipation of earnings

Walt Disney ’s stock is up about 19% since late October, largely on the strength of the latest Star Wars movies, but Goldman Sachs is telling clients the stock’s ability to secure those gains is not clear as earnings approach.

To position for what is likely to be a volatile earnings report, the bank is telling clients to “straddle” the stock in anticipation the stock surges sharply lower – or higher. According to Goldman’s volatility database, Disney’s (ticker: DIS) options are potentially underpricing the Feb. 7 report. In other words, Goldman thinks Disney’s report could cause the stock to move more than 3% priced by the puts and calls.

With the stock at $108.16, Goldman told clients to consider buying the February $108 put and call that expire Feb. 10. The straddle – that is buying a put and call with the same strike price and expiration – cost $4.36. For the straddle to prove profitable, the stock must move more than the $4.36 cost of the trade.

Investors use straddles to speculate on stocks that they think will make a sharp move in reaction to an event yet are unsure about the direction of the move. The strategy is one of the more expensive approaches investors can take in the options market. Why? It entails buying a put and a call. Most investors prefer selling options to collect premiums, or buying options to express directional views. Despite those facts, Goldman has a good track record recommending the straddle strategy to clients when implied volatility seems to be understating outcomes as is now the case with Disney.

To be sure, Goldman is bullish on Disney, rating the stock Buy. But many of the reasons why the bank is bullish – including movies to be released – are six to 12 months away. Still, Drew Borst, who follows Disney for the bank, sees the stock rising 24% over the next year.

Borst expects Disney will report earnings per share of $1.50 for the first quarter, in-line with consensus estimates. To him, the risk is that Disney’s next quarter’s earnings, expected by analysts to be $1.31 a share, will be 12 cents below the consensus as key earnings drivers are some months away.

Investors who agree with Goldman’s description of Disney’s potential trajectory – that is possible short-term volatility followed by a rally fueled by good news six months out – can consider another trade. To monetize Borst’s longer-term view, consider selling Disney’s April $105 puts to buy the stock on a pullback. With the stock at $107.60, the put was bid at $2.48. If the stock advances, you can keep the put premium. If it declines below the strike price at expiration, you buy the stock. The effective purchase price is $102.52 (strike price less premium received).

The key risk – as is always the case with put sales – is that the stock falls far below the put strike price. But that risk seems less likely given that concerns about ESPN’s subscription rates amid a fast-changing media environment are receding.

Steven M. Sears is a Senior Editor and Columnist with Barron's. He is the author of "The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails." Mr. Sears previously reported for Dow Jones Newswires and The Wall Street Journal. He has reported upon most major modern financial events, including the Asian Contagion, the bursting of the Internet Bubble, the Credit Crisis, and Europe's sovereign debt crisis. He also was part of exchange executive teams that modernized the U.S. options market, and introduced electronic trading. Interact with him on Twitter @sm_sears.

Get investing analysis that moves stocks and markets—Subscribe to Barron’s for just $1 a week.

This article is from Barron's and is being posted with Barron’s permission. The views expressed in this article are solely those of the author and/or Barron's and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 


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Options

Volatility 411


CBOETV – Host Dan Deming looks at low realized vol resulting from a range bound market, and VIX Feb calls vs open interest. 

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, or at www.theocc.com. The information in this program is provided solely for general education and information purposes. No statement within the program should be construed as a recommendation to buy or sell a security or to provide investment advice. The opinions expressed in this program are solely the opinions of the participants, and do not necessarily reflect the opinions of CBOE or any of its subsidiaries or affiliates. You agree that under no circumstances will CBOE or its affiliates, or their respective directors, officers, trading permit holders, employees, and agents, be liable for any loss or damage caused by your reliance on information obtained from the program.

Copyright © 2016 Chicago Board Options Exchange, Incorporated.   All rights reserved.

This video is from CBOE and is being posted with CBOE’s permission. The views expressed in this article are solely those of the author and/or CBOE and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Stocks

SMALL CAP RENAISSANCE


Throughout the years I’ve sometimes been accused of waging jihad against small caps as an asset class.  And I’ll admit, I have had a bias toward large caps for a variety of reasons, most recently the growth of the ETF industry and its impact on liquidity.  There are a number of signs from the new Administration and what we believe the current direction of the business cycle, however, that would suggest small caps are ready to continue the days in the sun they enjoyed in 2016.  (The Russell 2000 was up an astounding 21.3% while the S&P was up a mere 11.9%.)  This would be welcome news for a part of the industry that has started to talk about itself the way the American steel industry talked about itself in the late 1970s.  Small caps remain expensive on a forward P/E basis.  But while valuation is a consideration, we believe the main driver of the shift toward small caps will likely be driven by the Trump Administration and its efforts to ease regulations and simplify the corporate tax code.  This is important for as Milton Friedman so aptly pointed out more than forty years ago, the biggest beneficiaries of large and complex government systems are the large companies that have the resources to hire the lobbyists, lawyers, accountants, and consultants to tilt the system in its favor.  We believe there is some correlation between the fact that there are 3.5 million words in the U.S. tax code and the fact that four of the wealthiest 10, and nine of the richest 20, counties in America surround Washington, D.C.  Of course, at this stage of the game one must consider what the Trump Administration will actually get accomplished as something of a wildcard.  Still, we found President-elect’s answer to his trading idea at an Economic Club of New York event interesting  “I would go long energy and short H&R Block,” he said with his characteristic sense of whimsy.  Donald J. Trump is nothing if not direct.

In our view, the sector that stands to benefit most greatly from an easing of the regulatory burdens on businesses is the financials.  A scant eight years after Sarbanes-Oxley was passed, Dodd-Frank was introduced as a means to redress the legitimate outrage engendered by the financial crisis.  The problem, of course, is that large banks became larger and more irreversibly “too big to fail” with the policy mix that was adopted.  Extraordinarily accommodative monetary policy coupled with tight financial regulation led to one of the great ironies of the post crisis world – the wealthiest people and the largest companies benefitted the most.  This may be one reason why the average FICO score of a mortgage written in the United States was 755 last year and the velocity of money has declined by 39% despite more than a quintupling of the Fed’s balance sheet.

In addition to the tailwinds supporting small and mid-cap companies, there may be significant headwinds for large high-profile companies, especially for those who are vendors to the federal government.  It has been sometimes suggested that President-elect Trump may be the second coming of Ronald Reagan.  We are skeptical to the extent to which Gipper was an unapologetic defender of free markets.  Donald Trump is, and was elected to be, a populist.  As we have seen with Boeing, Carrier, Ford, and, most recently, Big Pharma, the new Administration is not going to be shy about expressing its displeasure publicly, as both a consumer and as an advocate of the middle class, with business practices he believes are out of bounds.

To the extent to which one believes that QE was, in the final analysis, deflationary, the renewed focus on fiscal and regulatory easing is likely to increase the prospects for inflation and a renewed sense that there will be a more normal business cycle.  Historically, small cap outperformance has been associated with higher inflation.  The gilded age for the asset class took place from 1976-1982 when inflation was raging.  One theory for why this took place was the fact that small caps could be more nimble in adjusting to rising input costs.  To be fair, it has also been suggested that small caps outperformed because institutional investors could, for the first time, invest in the asset class. 

A risk to the small cap trade may be a revival of the IPO market and an increased supply of equities that would undoubtedly be strengthened by an elimination of the deductibility of interest expense.   At the same time, many of the companies currently being discussed as IPO candidates appear to be likely to skip small cap adolescence completely.  The most widely expected IPO of 2017, Snapchat, for example, is expected to come to market with a market capitalization of $25 billion.


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Stocks

Nasdaq Market Intelligence Desk - Equity Market Insight January 20, 2017


NASDAQ Advancers: 1365 / Decliners: 767

Today’s Volume (100day avg):  +3%

Inauguration Day has taken over the headlines, while all major indices are advancing. More than 70% of the S&P 500 constituents are in the green, but still lower WoW, attempting to not post consecutive weekly declines since early November. Telecoms and Materials are the biggest gainers. OPEC nations’ promise to cut production is on its trajectory, boosting Crude Oil by 2.7% this morning.

 

·         In case you were wondering, going back to 1981 there have been six Inauguration Days that fell on market trading days.  Of these, 5 were negative:  1981 – (2.09%);  1989 – (0.17%);  1993 (0.43%);  1997 - +0.16; 2005 - (0.65%); 2009 – (4.01%). 

·         Flip this House:  It takes approximately 5 hours to completely turn around the White House to the new occupants: Here’s an article from The Washington Post on today’s activity at the White House

·         And from Infoplease.com: 

o    Except for Washington's first inaugural, when he was sworn in on April 30, 1789, all presidents until 1937 were inaugurated in March in an effort to avoid bad weather. The 20th Amendment to the Constitution (passed in 1933) changed the inaugural date to January 20.

o    George Washington's was the shortest inaugural address at 135 words. (1793)

o    William H. Harrison's was the longest inaugural address at 8,445 words. (1841)

o    Harry Truman's was the first to be televised. (1949)

o    The first ceremony broadcast on the Internet was Bill Clinton's second inauguration. (1997)

o    On the second day of his presidency, Barack Obama was sworn in a second time by Chief Justice John G. Roberts Jr. because, following Roberts's lead, Obama improperly recited the oath.

·         DOE inventory data released yesterday shows a build of 2.4m barrels vs. an expected +100k barrels.  Distillates declined but gasoline had a large 5.9m barrel build for second consecutive week.  That compares/contrasts to API’s data that indicated a 5mbl draw and a huge 9.75mbl build in gasoline.  However traders are focused on OPEC productions and early indications from the Saudi and some others suggests the planned cuts are on track.  WTI is up 2.5% this morning and Brent is up 2%. 

Technical Take:

As Donald Trump readies to be sworn in as the 45th president of the United States of America, the US Dollar is strengthening vs. both the euro and the Japanese Yen.  What’s unusual is that the inversely correlated gold miners ETF (GDX) is surprisingly trading up 1% in today’s session.  The irony is that gold miners were one of the worst performing groups immediately following Trump’s election victory with the GDX declining over 22% over the ensuing four weeks.  In late December it bottomed with a weekly hammer candlestick pattern which was the start of five consecutive weekly gains.  Today as America affirms its election results, gold miners are showing relative strength while bucking their inverse correlation to two major world currencies.  Although 2016 was a wild and turbulent year for the GDX, it finished with an annual gain of 53%.  So far in 2017 the GDX is leading most sectors and industries with a 10% gain.  More recently in January 2017 the GDX broke above its 4-month declining trend line.  It has also made two upside gaps, both of which were filled intraday but managed to hold the line on a closing basis.  The more recent gap line at $22.84 was tested earlier today for the third consecutive session, and buyers once again stepped up to lift it higher.  A move above this month’s highs, $23.56, should signal a resumption of the strong uptrend already seen in 2017 and might suggest the US Dollar is due for a longer period of consolidation. 

 

Nasdaq's Market Intelligence Desk (MID) Team includes: 

Michael Sokoll, CFA is a Senior Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.

Jeffrey LaRocque is a Director on the Market Intelligence Desk (MID) at Nasdaq, covering U.S. equities with over 10 years of experience having learned market structure while working on institutional trading desks and as a stock surveillance analyst. Jeff's diverse professional knowledge includes IPOs, Technical Analysis and Options Trading.

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Brian Joyce, CMT has 16 years of trading desk experience. Prior to joining Nasdaq Brian executed equity orders and provided trading ideas to institutional clients. He also contributed technical analysis to a fundamental research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Airline companies among others understand the trading in their stock. Brian is a Chartered Market Technician.

This article is from Nasdaq and is being posted with Nasdaq’s permission. The views expressed in this article are solely those of the author and/or Nasdaq and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 


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Disclosures

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The material (including articles and commentary) provided on IB Traders' Insight is offered for informational purposes only. The posted material is NOT a recommendation by Interactive Brokers (IB) that you or your clients should contract for the services of or invest with any of the independent advisors or hedge funds or others who may post on IB Traders' Insight or invest with any advisors or hedge funds. The advisors, hedge funds and other analysts who may post on IB Traders' Insight are independent of IB and IB does not make any representations or warranties concerning the past or future performance of these advisors, hedge funds and others or the accuracy of the information they provide. Interactive Brokers does not conduct a "suitability review" to make sure the trading of any advisor or hedge fund or other party is suitable for you.

Securities or other financial instruments mentioned in the material posted are not suitable for all investors. The material posted does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before making any investment or trade, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice. Past performance is no guarantee of future results.

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