IB Traders Insight


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Options

What's Trading: ANF


CBOETV – Peter Lusk, Senior Instructor, CBOE Options Institute, details an ANF put trade. 

 

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

Volatility 411



CBOETV – Joe Tigay, Equity Armor Investments, discusses the VIX ahead of jobs data on Friday.

 

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

Lululemon Earnings Will Likely Deliver High Drama


Options trading suggests investors expect a rally. Yet, short interest is extraordinarily high. How to profit.

 

In this listless, low-volatility market environment, investors are starved for excitement.

It’s hardly a stretch to say that Lululemon Athletica (ticker: LULU ) should provide the roller-coaster rush that traders crave.

As the maker of high-priced yoga apparel prepares to report second-quarter earnings after Thursday’s close, investors in the stock and options market are ramming horns about the outcome. This should guarantee a dramatic earnings report.

The stock is up about 50% this year. Yet, short interest has reached an extraordinarily high level as hordes of investors bet the rally will suffer a violent end. Yet, pre-earnings options trading shows some investors are preparing for a rally.

This likely makes Lululemon an exception to a stock market that is increasingly devoid of volatility, which is the life force of markets.

In this environment, investors glom like moths to flames to find stocks poised to experience volatility. It’s tricky though. Sometimes volatility erupts from the least expected places. For instance, few people were likely positioned for Deere’s ( DE ) 15% pop on earnings.

Investors who want to embrace a potentially volatile situation can buy Lululemon September $78.50 calls that expire Friday. This trade expresses a view that Lululemon’s stock will rally on earnings. This trade also represents the belief that recent put buying — remember, puts increase in value when stocks decline — is not a bearish sign. We think investors are buying the puts to secure profits.

With the stock just under $78, Lululemon’s September $78.50 call that expires Friday were offered around $2.65. This short-dated option is a pure play on Thursday’s after-the-close earnings report. Analysts expect Lululemon to earn 38 cents a share on revenue of about $515 million.

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Anyone interested in trading beyond the earnings event can consider buying Lululemon’s December $82.50 call and selling the December $90 call. The spread, which MKM Partners’ Jim Strugger is recommending as a stock-replacement strategy, recently cost $2.40. If the stock is at $90 at expiration, the spread is worth $5.10.

Christian Buss, who follows the stock for Credit Suisse, said his pricing and inventory analysis suggests Lululemon’s long-awaited earnings turnaround is likely underway. He credits the company’s superior pricing strategy, normalized inventory levels, and supply-chain driven margin expansion.

“With shares up 80% from trough levels in November, versus the S&P 500 up 6%, and shares now trading at 30x P/E, the likelihood of a multi-year merchandise margin expansion phase now seems well-embedded in expectations,” he recently advised his investors.

Over the past 52-weeks, Lululemon’s stock has ranged from $43.14 to $81.81. Shares are on the cusp of a new upside trading range, which makes this earnings report arguably more important and volatile than others.

Options trading patterns indicate that investors are expecting a rally. Yet, Lululemon’s short interest is around the highest level of the past year. In mid-August, investors sold short about 18 million shares. If they had to buy back their stock, it would take almost 15 days.

Bottom line: These types of set-ups with bullish options trading patterns and bearish stock positioning often precede volatile stock moves. If you can handle risk, these trades can be immensely rewarding.

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.

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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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Macro

Once again, it's too quiet out there


Russ discusses what's behind the unusually low volatility in the markets, and what could bring an end to the days of calm.
 

The reality of writing a regular blog is that sooner or later you’ll repeat yourself. For the umpteenth time in recent memory, volatility has slouched to a level that should set off at least a few alarm bells. Markets have been eerily calm of late, with the VIX Index, a commonly used measure of U.S. equity volatility, currently in the low teens.

Volatility is not just low in an absolute sense. More importantly, it is too low relative to the factors that have historically driven market volatility. Those include:

Credit market conditions

Credit market conditions have historically had the tightest correlation with market volatility (see the dotted line in the chart below). When credit markets are struggling, indicated by wider spreads, volatility is almost always elevated. High yield spreads have come in dramatically since the January panic, but volatility has declined at an even faster rate. Based on high yield spreads, which have historically explained about 60% of the variation in the VIX, volatility should be closer to 20 (see the arrow in the chart below) than the low teens.

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Economic conditions

Markets are more likely to be calm when economic conditions are improving. In contrast, recessions almost always correlate with down markets and rising volatility. That is why the VIX Index has historically correlated with leading indicators. Since 1990 the level of the Chicago Fed National Activity Index (CFNAI)has explained nearly 25% of the variation in the VIX. While the CFNAI has stabilized, it still suggests that the VIX is roughly 25%-30% too low.

Time of year

I’m hesitant to include this category; investors tend to overestimate the importance of seasonal effects. Most are a function of noisy data rather than well-established phenomenon. That said, as I’ve written about in the past, the one exception appears to be the fall, more specifically September, when markets do tend towards weakness. As stocks sell off, volatility is typically higher. Over the past quarter century the VIX has averaged over 22, the highest of any month, in September.

Other than seasonality, none of the above provides much information on when volatility will revert to something closer to fair value. The best clue is likely to come from a familiar source: the Federal Reserve (Fed). Volatility has leaned towards being undervalued for much of the past five years. To my mind this is largely a function of ultra-accommodative monetary conditions. To the extent the Fed tightens a bit faster than the languid pace discounted by markets, that would likely be a catalyst for some mean reversion in volatility.

When and if that does occur, investors should probably expect at least a 5%-10% correction. Historically, the S&P 500 has declined by around 1.3% for each one point rise in the VIX. Should the VIX over-correct and rise back towards the highs hit in January, investors could be looking at something more nasty. The difference between these two scenarios: the Fed’s willingness to allow monetary policy to revert to something resembling normal.

Russ Koesterich, CFA, is Head of Asset Allocation for BlackRock’s Global Allocation team and is a regular contributor to The Blog.

Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of August 2016 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

©2016 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

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

Chicago PMI Slumps in August


The Chicago Purchasing Managers Index (PMI) dropped to 51.5 in August (Briefing.com consensus 54.5) from 55.8 in July. The demarcation point between expansion and contraction for this report is 50.0.  

The key takeaway from the report is that it suggests the pickup in manufacturing activity in the Chicago Fed region in June and July may have only been a temporary condition, bolstered simply by the need to increase inventory levels.

  • MNI Indicators, which produces the report, wrote that the inventory indicator fell just below 50.0 in August after hitting its highest level in July since October 2015.
  • There was a huge drop in the index for order backlogs, which fell to 41.7 from 56.2.  After a 16-month streak of backlogs being below 50.0, they could only muster a 50+ reading for two months.
  • Other key drags on the business barometer in August were the indexes for new orders (to 53.9 from 59.3) and production (to 52.5 from 54.6), which slipped to their lowest levels since May.
  • The Prices Paid Index dipped to 54.6 from 55.1, implying that there was a moderation in inflationary pressures.
  • The Employment Index rose to 53.7 from 52.2.  MNI Indicators said this was the only component that gained traction during the month.

Briefing.com subscription services provide streaming market commentary and analysis along with a continuous flow of macro analysis, investing ideas and research reports. Please take a Free Trial of these live services on Interactive Brokers! (IB clients may sign up for a free trial in Account Management.)

This article is from Briefing.com and is being posted with Briefing.com's permission. The views expressed in this article are solely those of the author and/or Briefing.com 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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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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