Schaeffer's Trading Floor Blog

VIX Futures are Rising -- But Are We All That Afraid?

Investor fears were higher as recently as two months ago

by 7/23/2014 7:34 AM
Stocks quoted in this article:

Well, we've now officially retraced our non-cataclysmic declines off the highs. And all we got were some lousy t-shirts, and some worthless CBOE Volatility Index (VIX) calls.

OK, not really.

We did get an overbought VIX signal that may look kind of odd in hindsight. And we got a spike in 10-day realized volatility (RV) in the S&P 500 Index (SPX) -- all the way to double digits!

Yes, 10-day RV "closed" above 10 for two straight trading sessions. July 18 marked the first time 10-day RV went out that high since April 25, so we're talking virtually an entire quarter of single-digit volatility. That's a tough backdrop if you're rooting for a VIX pop. Implied volatility can move separately from RV if expectations going forward change. But over time, it's tough to get anyone to pay up for options when they keep losing money on the trade.

And as Eli Mintz of VIX Central notes, not all RV pops are created equal. In regards to the recent "surge," he tweets:

That's a fair point. Volatility, in theory, is independent of direction. A big range on an up day looks the same as a big range on a down day to a dispassionate calculation such as RV. But, clearly, we react entirely differently. No one's afraid of a string of large up days. We don't react to a 1% pop by purchasing every cheap VIX call in site. But if we go down 1% watch out!

What's more, that RV "pop" looks even less ominous when you consider that it's entirely thanks to Friday's virtual retracement of Thursday's big dip. A trader watching every tick felt a 1.25% dip, then a 1.1% pop on consecutive days. An investor not paying all that much attention felt a 0.1% yawner over two days. Extend your horizon to four days and we haven't moved at all.

So who has a major need for protection after all that? Really, no one, unless you're worried about future volatility. But that's always the case.

And we are collectively less worried now than we've been in quite a while. Here's the VIX futures term structure now vs. two months ago, when VIX itself was at a similar level.

VIX Futures Historical Prices

The market still expects a rising VIX over time, just not nearly to the extent it did as recently as two months ago.

Throughout the bull move, the term structure was a sign of fear and disbelief in the rally. That's still the case -- there's really no particular reason for much of an upslope -- but it's a case that's gotten much weaker over time.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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Earnings on Deck: AT&T Inc., Facebook Inc (FB), and TripAdvisor Inc

Taking a closer look at T, FB, and TRIP ahead of their earnings results

by 7/22/2014 1:53 PM
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Wall Street has had a bevy of notable earnings reports to digest already this week, with more on the horizon over the next several sessions. Tomorrow, quarterly updates are expected from blue chip AT&T Inc. (NYSE:T), social networking site Facebook Inc (NASDAQ:FB), and online travel concern TripAdvisor Inc (NASDAQ:TRIP). Here's a quick look at this trio of names as earnings approach.

  • T will hit the earnings confessional after tomorrow's close, with analysts expecting a profit of 63 cents per share for Ma Bell's second quarter. Over the past eight quarters, AT&T Inc. has bested or matched consensus bottom-line estimates six times, and looking out one week, the shares have averaged a modest post-earnings gain of 0.1%. Although pre-earnings calls have been gaining in popularity on T, today's most active strike is the weekly 8/1 34.50-strike put, which is seeing buy-to-open activity. In other words, these option bears expect the security to retreat more than 4% from its current perch at $35.95, in order to breach the strike price by the close on Friday, Aug. 1.

  • FB's highly anticipated quarterly results will hit the Street after tomorrow's close. Thanks to six bottom-line wins over the past eight quarters, the stock has averaged a single-session post-earnings boon of 7.2%. In fact, in the wake of last year's second-quarter report, the equity surged nearly 30% in the subsequent session. Considering Facebook Inc is enjoying a more than 26% lead on the year, optimism has been running high toward the security. Among the brokerage bunch, specifically, 94% of covering analysts maintain a "buy" or better rating, with not a single "sell" to be found. Plus, the consensus 12-month price target of $78.12 stands at a 13% premium to FB's current price of $69.15, and in territory yet to be charted.

  • TRIP is also slated to report earnings after tomorrow's close. For the company's second quarter, Wall Street is calling for a profit of 61 cents per share -- a 9-cent improvement over TRIP's year-ago results. TripAdvisor Inc has a solid history in the earnings confessional, and has matched or exceeded analysts' profit estimates in seven of the past eight quarters. Not surprisingly, the stock has gone on to average a single-session post-earnings gain of 2.2%, which shoots to 5.7% when going out one week. The brokerage bunch is tilted toward the skeptical side, though, with 53% of analysts doling out a "hold" or "strong sell" suggestion toward the stock. Additionally, the average 12-month price target of $100.61 represents a discount to TRIP's present perch at $104.92. From a contrarian perspective, another well-received earnings report could prompt a round of upgrades and/or price-target hikes, which could help propel the security higher.

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Analyst Update: McDonald's Corporation, Yelp Inc, and Allergan, Inc.

Analysts weighed in on MCD, YELP, and AGN

by 7/22/2014 1:34 PM
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U.S. stocks are notably higher this afternoon, thanks to a batch of solid corporate earnings reports and well-received inflation and housing data. Meanwhile, among the equities in focus are blue chip McDonald's Corporation (NYSE:MCD), online review issue Yelp Inc (NYSE:YELP), and drug maker Allergan, Inc. (NYSE:AGN), which have all attracted analyst attention.

  • MCD was not one of the aforementioned companies strutting off the earnings stage. The company confessed to weaker-than-expected second-quarter earnings and revenue, and projected a decline in same-store sales for July. What's more, McDonald's Corporation -- as well as sector peers like Yum! Brands, Inc. (NYSE:YUM) -- is navigating an expired-meat crisis that started in China, but has now spread to Japan. As a result of its fundamental woes, Janney cut its fair value on MCD to $94 -- a discount to the stock's current price -- and reiterated its tepid "neutral" recommendation. At last check, the shares of MCD were bucking the broad-market trend higher, down 1.5% at $96.11.

  • YELP is 0.6% higher at $68.70, after Macquarie lifted its price target on the stock to $82 from $75. The analysts also underscored their "outperform" rating on the shares, which are struggling to overcome their year-to-date breakeven level. Bullish analyst notes are nothing new for Yelp Inc, though. Twenty-three of the 31 analysts following the stock offer up "buy" or better endorsements, and the average 12-month price target of $83.61 represents expected upside of nearly 22% from YELP's current price.

  • Finally, AGN is 0.5% higher at $171.94, a day after the firm announced plans to cut 1,500 jobs, or 13% of its workforce, in an attempt to fend off a hostile takeover by Valeant Pharmaceuticals International Inc (NYSE:VRX). In light of the news, as well as Allergan, Inc.'s stronger-than-expected second-quarter earnings report, analysts are waxing optimistic on the stock. Ahead of the bell, no fewer than six brokerage firms hiked their price targets on AGN, including BMO (to $230 from $202) and UBS (to $200 from $180).

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Stocks on the Move: Chipotle Mexican Grill, Inc., Crocs, Inc., and Harley-Davidson Inc

CMG, CROX, and HOG are moving sharply in Tuesday's trading

by 7/22/2014 12:42 PM
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U.S. markets are moving higher today, thanks to a round of upbeat earnings and economic reports. Two names that are seeing big moves to the upside in the wake of their quarterly reports are burrito chain Chipotle Mexican Grill, Inc. (NYSE:CMG) and footwear concern Crocs, Inc. (NASDAQ:CROX). Conversely, motorcycle maven Harley-Davidson Inc (NYSE:HOG) has taken a turn for the worse in the wake of its results. Here's a quick roundup of how this trio of names is performing on the charts so far.

  • CMG rallied to a new record peak of $667.90 earlier in the wake of a strong earnings report and subsequent round of bullish brokerage attention. At last check, the stock was still enjoying a comfortable lead over previous resistance in the $600 area -- up 13.2% to trade at $667.80. From a contrarian perspective, a continued round of price-target hikes could help fuel the equity's fire. At present, the consensus 12-month price target for Chipotle Mexican Grill, Inc. stands at $618.04 -- well below present trading levels.

  • Also enjoying a post-earnings lift is CROX, which was last seen 11.2% higher at $16.50. In addition to the better-than-expected report, traders are also cheering the company's cost-cutting measures, which include a round of layoffs and store closings. This bullish gap has the potential to spark a short-covering rally, considering a healthy 6% of the security's float is sold short, representing more than four sessions' worth of pent-up buying demand. Meanwhile, in the stock's options pits, volume has soared to eight times what is typically seen at this point in the day, with sell-to-close activity detected at the August 14 call.

  • HOG, on the other hand, is having a decidedly different day, with the shares off 6% in the wake of the company's quarterly results. Specifically, Harley-Davidson Inc's second-quarter profit arrived well above expectations, but a downwardly revised full-year shipment forecast has traders hitting the exits. Going forward, the stock could continue to be pressured lower, should any brokerage firms re-evaluate their upbeat rankings. Half of covering analysts maintain a "buy" or better rating toward the equity, with not a single "sell" to be found. Plus, the consensus 12-month price target of $76.21 stands at a stiff 21% premium to the security's current price of $63.05.

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How Apple Inc. (AAPL) Option Players Are Preparing for Earnings

AAPL will unveil its fiscal third-quarter earnings report after tonight's close

by 7/22/2014 11:21 AM
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Tech titan Apple Inc. (NASDAQ:AAPL) will take its turn on the earnings stage after tonight's close, and ahead of the highly anticipated event, the stock was seen 0.4% higher at $94.33. Longer term, AAPL has been doing well since getting an 8.2% single-session post-earnings boost in late April, with the shares up 26% from their April 23 close at $74.96. Not surprisingly, calls have been preferred over puts, and in today's session, the former are outpacing the latter by a nearly 3-to-1 margin.

What's more, traders are showing a preference for short-term contracts, as evidenced by the stock's 30-day at-the-money (ATM) implied volatility (IV), which is up 1.3% today to 28.3%. However, this reading is far from an annual peak of 35.6% reached on Oct. 25, which immediately preceded AAPL's fiscal fourth-quarter earnings report.

Drilling down on specific strikes in both the weekly 7/25 and August series of options, the 95 level has been popular among call players. Specifically, 44,771 contracts currently reside at the weekly 7/25 95-strike call, while 50,310 calls make up open interest at the August 95 strike. For those buying to open the contracts, the goal is for AAPL to rally back above $95 -- and through its 10-day moving average, currently hovering at $94.79 -- by the respective expiration dates. Conversely, for those selling to open the contracts, the expectation is for AAPL to remain south of the strike throughout the options' lifetimes.

Outside of the options pits, sentiment remains bullish toward the iPhone peddler. Short interest, for example, accounts for a low 1.9% of the stock's float, and would take 2.5 days to cover, at AAPL's average daily pace of trading. Meanwhile, 79% of analysts covering the equity maintain a "buy" or "strong buy" rating, and the consensus 12-month price target of $99.57 stands in territory not charted by the stock since September 2012.

Looking back over the past eight quarters, AAPL has had some big single-session post-earnings price swings in both directions, including the previously mentioned 8.2% pop in April, as well as an 8% plunge in January. On average, though, the stock has shed 1.9% in the session subsequent to earnings, which swings to a 0.8% gain when going out one week. For Apple Inc.'s (NASDAQ:AAPL) fiscal third quarter, the consensus estimate is for a per-share profit of $1.23 -- a 16-cent improvement over the company's year-ago results.


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