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Options

Volatility 411


CBOETV - Kevin Davitt, Senior Instructor, CBOE Options Institute, discusses Q1 market review, and VIX call spread buying financed by put selling.

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

Nasdaq Market Intelligence Desk - Equity Market Insight March 30, 2017


NASDAQ Composite 0.18% Dow +0.31% S&P 500 +0.36% Russell 2000 +0.45%
NASDAQ Advancers: 1169 / Decliners: 985
Today’s Volume (100day avg): -19%

House Speaker Paul Ryan has made comments suggesting the reformed Healthcare bill might get revived, after failing to bring the bill to a vote last week. President Trump’s tax cut agenda hit a road block last week after the aborted vote, but the renewed chatter has erased the sharp declines equities experienced on Monday. Crude Oil is back above $50/ barrel and on pace for its best 3 day rally of 2017, helping Energy (+0.8%) stocks outpace the broader markets this morning (more in the technical take). Financials are also seeing a strong performance this week, up 1% this morning, as all 71 of the SPDR Bank ETF constituents are higher.

  • On the economic front, US GDP in the 4Q16 was revised up to 2.1% versus expectations of 2%.  And the biggest driver of the economy, consumer spending, was revised to 3.5% from 3%.  The figures support the economy is growing faster than the Fed’s target, and there’s a slight uptick in implied probability we’ll see a total of 4 rate hikes this year (3 more).
  • ConocoPhillips is the strongest performers on the S&P 500, up more than 8.5% on the heels of the news the company plans on unloading some investments in Canada to free up capital for buybacks and debt repayments.
     

Technical Take:

Is Energy finding its footing? 

With less than two sessions left in the quarter, the clear underperformer within equities has been energy with the XLE ETF down (6.5%) QTD.  Since making 52-week highs in mid-December, the XLE has declined in twelve of the prior 15 weeks.  There are signs however the sector could be bottoming from 3.5 months of declines. 

1)      The XLE is on pace for its best weekly performance since early December with a weekly gain of 2.7%. 

2)      The below weekly period chart shows this week’s candlestick is thus far forming a bullish engulfing pattern.  If it can hold around these levels by the close tomorrow, this common bottoming pattern may be an early sign of a reversal in trend.  Confirmation of the pattern requires the first week in April to be positive. 

3)      The location of the bullish engulfing pattern is taking place within 0.5% of the 38.2% Fibonacci Retracement of the entire 2016 uptrend, giving cred to the bottoming theory. 

Along with confirmation next week, bulls want to see the XLE break out of this three-month declining price channel and then get back above the $70.80 - $72 resistance range.  $70.80 equals the 200-day moving average while $72 represents horizontal resistance seen initially in Q4’15 and then throughout the first two months of Q4’16.  Those looking to get in early instead of waiting for confirmation can use this week’s lows as a level to measure risk against. 
 

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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Technical Analysis

Consumer Sector Focus... Stock Picking Matters


Today’s note highlights the continued bifurcation from the Consumer Discretionary and Consumer Staples sectors.  While both groups have modestly outperformed on a market-cap weighted basis in 2017, trends remain mixed and relative leadership is still a question mark with the average Consumer issue underperforming the average S&P 500 issue over the last 3/6/12-months.  The correlation data also reflects dispersion under the surface – stock selection remains an important factor here.  At the group level, CDS remains elevated for retail stocks though it’s worth noting that short interest is extreme for many names and yesterday’s positive move is likely reflective of a near-term covering phase.  Elsewhere, the Homebuilders are breaking out, Hotels remain leadership, and Restaurants are showing signs of improvement.  Casinos continue to turn higher following sharp bear markets and some Media / Broadcasting names are also acting better.

Looking to Consumer Staples, and as we noted in yesterday’s report, while the sector is back to recent highs participation is less impressive with just 54% of constituents in an uptrend vs. 92% last summer.  Longer-term momentum is also tepid, and at the stock level, many names in groups like Food Products, Food Retail, and the Brewers have not participated in the recent risk-off rally.

 

“Average” Discretionary Stock Lags…

 

Consumer Staples Near The Old Highs, But Move Is Narrower

 

“SIN” Working

 

Strategas Research Partners' Institutional Investor-ranked Research Team works to identify the major themes with broad implications for global financial markets. Strategas covers the broad investment landscape, with published reports discussing Investment Strategy, Economics, Washington Policy, Quantitative and Fixed Income research. The team's thematic and macro-driven approach relies on empirical data as well as fundamental and technical research to provide readers with an integrated investment strategy for a variety of time horizons.

This article is from Strategas Research Partners and is being posted with Strategas Research Partners’ permission. The views expressed in this article are solely those of the author and/or Strategas Research Partners 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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Futures

Market Movers: 2017 Brexit Update


Watch today's Market Mover with Jim and Scott as they discuss using Gold options around Great Britain's ongoing exit from the European Union.
 

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This video is from CME Group and is being posted with CME Group’s permission. The views expressed in this video are solely those of the author and/or CME Group and IB is not endorsing or recommending any investment or trading discussed in the video. 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

Netflix Is Now Facing a Very Big Market Moment


Investors seem unsure about how to trade Netflix ahead of earnings but we’re fans of the following trades.
 

By all measures, Netflix is back in the market’s sweet spot.

The stock (ticker: NFLX) is up about 15% this year, compared with a 6% total return for the Standard & Poor’s 500 index. Though the stock, as always, trades with an astronomical valuation – about 73 times forward earnings – many investors are wildly enthusiastic about the stock.

Yet, the options market, which is usually so good at divining the future, seems to be hesitating ahead of the company’s April earnings. Netflix’s options are priced as if the stock will move 8%, up or down, on the April 17 release of first-quarter earnings. For six of the past eight quarters, the stock has moved more than 8%.

Though Goldman Sachs is telling clients to “straddle” Netflix – essentially buying a put and call with identical expirations and strike prices that match the stock price – to take advantage of depressed options pricing, we think investors should consider a more aggressive trade.

https://si.wsj.net/public/resources/images/ON-CB552_nflx03_G_20170329144741.png

With the stock at $145.86, investors can sell Netflix’s April $142 put for $4.55 and buy the April $146 call for $6.10. For a net cost of $1.55, investors gain exposure to any rally above $147.55. They are also positioned to buy Netflix at an effective price of $140.55.

Extremely aggressive traders can consider selling the April $145 put for $5.85, rather than the April $142 put. The $145 strike sharply lowers the trade’s net cost – 25 cents compared with $1.55 – while expressing extreme confidence in an earnings rally, and unbridled desire to buy the stock just below $145.

Regardless of which put is sold, the risk reversal – that is selling a put and buying a call with the same expiration but different strike prices – positions investors to buy the stock on a pullback, and participate in a rally. The trade’s risk is that the stock falls far below the put’s strike price, forcing investors to buy the stock at an unfavorable price, or to pay top dollar to cover the short put. We think the risk is worth it, provided investors can hold the stock for several years if the put is exercised.

Goldman’s strategy is more conservative. The straddle takes advantage of the apparent mispricing, and exposes investors to a rally, or a decline, provided the move exceeds the total trading cost. Though many investors like the idea of making money off nondirectional moves – and it is indeed one of Goldman’s favored approaches when pricing seems depressed ahead of major stock-moving events – straddles are often tough trades if the equity does not behave as expected.

History, however, supports the straddle approach. Since 1996, Goldman has found that buying the closest-listed at-the-money straddle when it costs less than the earnings move five days ahead of the event and closing the day after has produced an average return on a premium of 24% with a 56% hit rate, compared with a 2% return with a 35% success rate for all stocks ahead of earnings.

To be sure, both trades effectively recommend that investors stake positions as the stock dances at the top of its recent trading range. Over the past 52-weeks, the stock has ranged from $84.50 to $147.70.

Prudence perhaps dictates hedging, or taking some profits, but a review of the investment landscape reveals an extraordinary level of support among some members of the investment community.

One analyst has told clients that “If Jesus were a stock, he’d be Netflix. You either believe or you don’t.”

Others talk about Netflix, and they are likely correct, as if it is evolving into a giant entertainment “powerhouse.” In 2016, five of the top 10 shows searched for globally were Netflix originals.

Bottom line: Netflix’s earnings report will be one of April’s major market events. You can trade it, or fade it, and we’ve given you two viable ways to do just that.

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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