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Options

What's Trading? BABA


CBOETV – Peter Lusk, senior instructor, CBOE Options Institute, discusses a Feb trade in BABA ahead of before market open earnings on 1/24.

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 – Host Jamie Tyrrell, Group One Trading, discusses buying upside Feb. premium.

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

Investors Prepare for a Wild Stock-Market Ride


Concerns over possible protectionist trade policies under Trump are awakening markets to risk.
 

As President Donald Trump begins his first full week in office, investors are positioning for emerging market stocks to decline and the U.S. stock market’s risk premium to surge.

The trading patterns reflect concerns that Trump may initiate protectionist trade policies and perhaps even trigger a trade war, which could harm nations, including China, that have traditionally made goods for the developed world.

“‘Unsettled’ is our best description of fund managers’ mindset as the new administration takes office. During an extensive series of client meetings in the U.S., Europe, and Asia, it became apparent that investors are confused about how to best position portfolios under a Trump presidency,” David Kostin, Goldman Sachs ’ chief U.S. equity strategist, wrote in a Monday note to clients.

It is hard to know what Trump will or will not do, since what he says one day sometimes changes the next. Investors are responding, at least in part, to the uncertainty by shifting the Trump trading strategy from “micro” to “macro.”

Before Trump took the oath of office on Friday, investors largely bought any stock that they wanted in anticipation of lower corporate taxes. If the administration lowered corporate taxes to 15% from 35%, corporate earnings would increase and stock prices would presumably rise. Now there has been a shift.

The bearish emerging market trades are occurring as investors are buying upside call options on the CBOE Volatility Index, or VIX, reflecting concerns that U.S. stocks may also decline. The VIX tends to increase when stocks falter.

Popular VIX options include February $21 and $22 calls. The strike prices are so far above the VIX’s current level of around 12 that the Standard & Poor’s 500 index would have to plummet for the calls to prove profitable.

The VIX trade neatly captures any upticks in global volatility that could be triggered by shifts in U.S. trade policy. Investors flock to the S&P 500 and VIX anytime world markets seem unstable. The same is true for the iShares MSCI Emerging Markets exchange-traded fund (ticker: EEM), a proxy for emerging markets.

With the iShares ETF around $36, investors are buying February put options in anticipation of a decline. Since the Nov. 8 presidential election, the ETF has fallen about 3%. It began to rally higher on Nov. 14, soon hit resistance around $36, and dropped down again to about $34. It is now trading around $36, and investors are positioning in case the ETF yet again fails to advance beyond that price.

In addition to protectionist trade policies, emerging markets also trade off U.S. interest rates. If the Federal Reserve’s rate-setting committee increases rates at the Jan. 31-Feb. 1 meeting, the ETF could decline.

In anticipation, investors are buying February and March $36 puts either as standalone “shorts” or as parts of “bear spreads.” One investor, for example, recently sold 50,000 February $34 puts and bought 25,000 February $36 puts.

Bottom line: The world is in flux, and volatility seems poised to awaken from its slumber.

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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Macro

Why reflation has room to run


The recent jump in global bond yields represents a reflationary reawakening just a year after deflation and recession fears were dominant. Jean explains why this phase has further to run.

The recent jump in global bond yields represents a reflationary reawakening just a year after deflation and recession fears were dominant. Is this another false dawn? We don’t think so. This is an important psychological shift for investors previously obsessing over downside risks to growth and inflation, typified then by the talk of “secular stagnation” and “liquidity traps.”

The latest trend started in July when bond yields bottomed at record lows. Signs of a global growth pickup stoked the more confident mood, as did Donald Trump’s surprise U.S. presidential victory. We believe this reflationary phase, which central banks have been trying to achieve with years of ultra-easy monetary policy, has further to run.

Wage growth, long missing in the post-crisis expansion, is a crucial part of the reflationary dynamic, as we write in our new Global Macro Outlook Waking up to reflation. U.S. wage gains are feeding higher inflation and solid consumer spending, supporting profits in the face of rising labor costs. We believe companies have scope to tolerate even higher wage inflation in a stronger growth environment, either by hiking product prices or through a modest decrease in profit margins. Our analysis shows that profits can improve even with rising wages—indeed, this is a hallmark of reflationary economic phases, as the chart below shows.

BII_labor_vs_capital_charts_662_v3

Wages and profits can, and typically do, rise together during the reflationary phase of economic expansions. In the U.S., this was the case in the late 1980s, late 1990s and the mid-2000s. The key ingredient? Solid and rising aggregate demand.

The lack of stronger wage growth was a root cause behind fears of the U.S. economy’s fragility and the downside risks to inflation. Thus, it would be misleading to think that rising wages have a direct link with subsequent economic downturns. Economic cycles do not die of old age, as the Federal Reserve has repeatedly noted. In this case, we see no reason to believe that the seeds of reflation will sow the expansion’s demise just now. Most recessions can be explained by a sudden hit to aggregate demand, either due to some external, financial or policy-related shock.

This U.S. profit-wages dynamic has the potential to broaden and go more global. Any uptick in U.S. capital investment or productivity kick would give companies even more flexibility to lift wages. Elsewhere, this virtuous cycle is starting to take shape. In Europe, the slack created by the 2007-08 and 2011-12 crises is slowly being taken out. Labor market reforms have expanded the workforce in Japan, helping explain why wage growth remains limited even with the country’s unemployment rate at three-decade lows. A better synchronized global recovery would make this bout of reflation more powerful.

Global structural challenges do remain, particularly the record debt levels across the world. Combined with low growth and aging population, this is likely to hold down long-term bond yields in Europe and Japan. With financial markets much more tightly integrated globally, these external forces should limit how high U.S. yields can rise. And even in the U.S., where household debt levels have been reduced, leverage remains higher than at the start of previous tightening cycle. This implies any given increase in policy interest rates is likely to have a bigger economic impact than was the case pre-crisis.

There are risks to our outlook. U.S. President Donald Trump has raised hopes for looser fiscal stimulus, but the makeup of any changes is key. His approach to trade and foreign policy could present risks. Unexpectedly rapid U.S. dollar appreciation could cause emerging-market instability with global spillovers.

But we believe a moderate rise in the dollar is more likely, and the support for profit margins from better wages, spending and nominal growth reinforces our broadly positive view on risk assets and equities in particular. This has been far from a typical recovery: Healing the post-crisis economic wounds has meant U.S. businesses and consumers took longer to regain confidence and animal spirits. These now seem to be revving up.

The revival of animal spirits may start to drive more investors out the risk spectrum, reinforcing our expectation that there’s potential for a risk appetite recovery. Finally, modestly higher bond yields support our view that the rotation into value and momentum shares away from low-volatility equities likely isn’t over. Read more market insights in my full Global Macro Outlook.

Jean Boivin, PhD, is head of economic and markets research at the BlackRock Investment Institute. He is a regular contributor to The Blog.

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 January 2017 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.

©2017 BlackRock, Inc. All rights reserved. BLACKROCK is the registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

USR-11410

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

Financials Drive 4Q16 S&P Earnings Growth


It’s still early in reporting season, but early results indicate that Financials were likely the largest single contributor to S&P 500 earnings growth during the fourth quarter of 2016. With only about 10% of S&P 500 firms having reports results—and using consensus expectations for the remaining 90%—we calculate that overall index earnings likely grew by about $19 billion, or 7.6% year-on-year, driven by a nearly 18% improvement in results for firms in the Financial sector (XLF). Just as importantly, Energy (XLE) was no longer the large drag on S&P earnings that it has been for the last two years (Figure 1).

 

Revenue Up

Sales growth also appears to be picking up. Revenue probably grew about 5.2% year-on-year in Q4 (5.3% excluding the impact of Energy), which is an improvement on growth figures in recent quarters in the three percent range. The biggest contributor to overall index revenue growth came from the Consumer Discretionary sector (XLY), which saw a healthy 7.6% gain year-on-year, worth $33 billion. No sector likely saw sales decline, but Industrials (XLI) had the slowest growth at 2.8% (Figure 2).

Trading Surprises

Stock prices tend to move when companies post significant “surprises” in an earnings report, so one way some investors play earnings season is to buy sectors where early upside surprises have been the largest (and avoid those that have been negative) on the theory that surprises tend to cluster. In other words, if several of the early-reporting companies in a given sector deliver sizable upside surprises, other companies in that sector may also be experiencing such favorable conditions that they too will handily beat estimates.

So far the Materials (XLB) sector has seen the biggest upside surprises, equivalent to a 22% improvement over consensus expectations. However, the caveat is that most of the upside came from Monsanto (MON). Meanwhile surprises in the Consumer Discretionary sector have been more widespread, and overall amount to a 7.1% “beat” of consensus forecasts.

Reprinted with permission from AltaVista Research
For more information go to www.etfresearchcenter.com
T 646.435.0569 | E info@altavista-research.com

About AltaVista

A better approach to ETFs. AltaVista’s ETF reports and ratings are built on a fundamentally-driven analysis of each fund’s underlying constituents, with the aim of helping investors make better fund selections based on forward-looking measures of investment merit.

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