Schaeffer's Trading Floor Blog

Volatility Pops: The Exception to the Rule

The staggering returns of volatility ETFs are hard to catch

by 10/20/2014 8:29 AM
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This panic about a CBOE Volatility Index (VIX) contagion has gone too far! I hereby graciously accept the position of VIX Czar. OK, so I appointed myself -- there was a power vacuum and I stepped in to fill it.

For my first act, I am going to send an intern out for iced coffee. What's that you say? No interns? What kind of budget does my new cabinet-level department have, zero? OK, it really does have no budget. Oh well.

Anyway, for my first act, I would like to remind everyone that the recently staggering returns in volatility ETFs are way more the exception than the rule. They truly were staggering, though. The iPath S&P 500 VIX Short-Term Futures ETN (VXX) closed at 29.55 on Oct. 8. On Oct.16 it peaked at 44.60, very near the open. That's a 50% pop in basically a week.

The news was even better in the VelocityShares Daily 2x VIX Short-Term ETN (NYSEARCA:TVIX), as you might expect, considering TVIX tracks 2x VXX. It closed at 2.89 on Oct. 8, then peaked at 6.15 on Oct. 16.

If you caught any of that, many congrats. It's moments like these that show why it's extremely risky to sit short on any of these pups. And, that includes shorting on the way up to try to nail a top. But, I'm ordering my unpaid staff to remind everyone that past performance of the last week does not predict future returns.

Even though VIX is way down from its own highs on Oct.15, it's still up about 60% in 2014. VXX, on the other hand, is actually down on the year. It closed 2013 at $42.55. Yes, that's correct. It's still down in 2014 despite a surge in the last week and a year that at the moment has worked quite well for VIX itself. But at least VXX wiped out its losses in 2014, however briefly. TVIX closed out 2013 at $7.50, so it peaked well short.

VXX, as I hope you know, proxies a 30-day VIX future. And, with futures generally in contango and at a premium to VIX itself, that costs it money every day. The script did flip recently as near-term VIX futures went into backwardation, but ironically those ostensibly favorable conditions occurred right as negative market sentiment was peaking. That is, it took pretty extreme and unsustainable negative sentiment to get VXX into a spot where its structure actually worked to its advantage.

VXX didn't exist yet in 2008, but you really need that kind of never-ending volatility pop to keep it heading north.

Anyway, I want to end my first day as VIX Czar with this reminder: VXX -- and TVIX, and its less evil twin, the ProShares Trust Ultra VIX Short-Term Futures ETF (NYSEARCA:UVXY) -- are purely trading vehicles on the long side. If you can catch a move, terrific. But, don't sit with them for any important length of time.

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

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Stocks On the Move: Carnival Corporation, ITT Educational Services, Inc., and Repros Therapeutics Inc

CCL, ESI, and RPRX are moving sharply in Friday's trading

by 10/17/2014 12:22 PM
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U.S. stocks are bouncing back today, as traders cheer a round of solid earnings reports. Among the names making significant moves are cruise operator Carnival Corporation (NYSE:CCL), for-profit education concern ITT Educational Services, Inc. (NYSE:ESI), and drugmaker Repros Therapeutics Inc (NASDAQ:RPRX). Here's a quick look at how CCL, ESI, and RPRX are faring on the charts today.

  • It's been a wild ride for CCL, which dropped nearly 2% out of the gate, due to concerns about a potential Ebola case aboard one of its cruise ships. However, the fears have since subsided, with CCL now 1.5% higher at $35.22. From a longer-term standpoint, the shares of Carnival Corporation have dropped 12.4% year-to-date, and the stock's 14-day Relative Strength Index (RSI) now sits at 32 -- on the cusp of oversold territory. In the options pits, meanwhile, traders have been gambling on more downside for CCL. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 2.55 stands higher than 87% of all other readings from the past year, pointing to a healthier-than-usual appetite for long puts over calls of late.

  • ESI has skyrocketed 78.3% to $9.99 -- making it the biggest advancer on the Big Board, and sparking a temporary halt -- and peaked at $11.75 in early trading, marking its first foray into double-digit territory since early August. Bolstering the stock, ITT Educational Services, Inc. said it signed up more students than expected in the most recent quarter, suggesting demand for for-profit education providers is on the mend. Prior to today, ESI was flailing on the charts, and still sits 70% lower year-to-date. In fact, the equity has underperformed the broader S&P 500 Index (SPX) by 60 percentage points during the past three months, so it's no surprise that short interest makes up a whopping 82% of the equity's total available float. These bearish bets represent more than seven sessions' worth of pent-up buying demand, at ESI's average pace of trading, so a short-squeeze situation could add fuel to the equity's fire.

  • RPRX, on the other hand, is the biggest Nasdaq loser thus far, down 36% at $6.75. Earlier in the session, the shares touched a two-year nadir of $6.01, due to a regulatory blow for its testosterone treatment. The equity is now sitting on the short-sale restricted (SSR) list, sending bears to the options pits instead. So far today, the stock has seen more than 7,000 puts change hands -- 15 times the norm, and more than seven times the number of RPRX calls exchanged. In light of today's drop, Repros Therapeutics Inc has surrendered 63% in 2014, and could be vulnerable to a reversal in sentiment among the brokerage crowd. Seventy-five percent of the analysts following RPRX maintain "strong buy" opinions, and the consensus 12-month price target of $28.30 stands more than 300% higher than the stock's current price.

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Stocks are soaring today, as traders cheer a round of upbeat quarterly earnings, economic data, and dovish comments from a handful of Fed officials. Among equities in focus, China-based e-commerce concern Alibaba Group Holding Ltd (NYSE:BABA), streaming giant Netflix, Inc. (NASDAQ:NFLX), and semiconductor issue Advanced Micro Devices, Inc. (NYSE:AMD) have all attracted the attention of analysts.

  • BABA is 0.8% higher today after Brean Capital started the shares with a "buy" rating and $110 price target -- representing expected upside of 22.8% to the equity's current perch at $89.59, and a move into territory yet to be charted by the shares. The bullish brokerage note comes on the heels of news BABA has expanded its cloud service in China, and ahead of its inaugural trip into the earnings confessional as a publicly traded company, tentatively slated for the third week of November. Since Alibaba Group Holding Ltd's Sept. 19 IPO, the shares have shed nearly 3.4%, yet option traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have shown a preference for long calls over puts in recent weeks. Specifically, the equity has racked up a call/put volume ratio of 2.03 on this trio of exchanges over the past 10 sessions.

  • It's been a rough week for NFLX, and today, the shares are off 3.6% at $348.56, after Goldman Sachs cut its price target on the equity to $450 from $550. However, the brokerage firm underscored its "buy" rating, echoing the majority of the 29 analysts following the stock. This optimism is echoed in the options pits, where the security sports a 50-day ISE/CBOE/PHLX call/put volume ratio of 1.04, which ranks just 6 percentage points from a 52-week peak. Additionally, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.93 ranks lower than 95% of similar readings taken in the past year, meaning short-term speculators have rarely been as call-skewed toward Netflix, Inc. as they are now.

  • AMD's third-quarter earnings miss and dismal fourth-quarter outlook prompted a wave of bearish brokerage notes, with the most skeptical outlook coming from Bernstein, which cut its price target to $2 from $3, while reiterating its "underperform" rating. Not all brokerage firms took the glass-half-empty approach, as Pacific Crest upgraded the shares to "sector perform" from "underperform," citing new leadership and "prospects in both the embedded and ARM server market in 2015-2016." Wall Street is forgiving, though, with AMD up 3.6% at $2.73, as traders cheer Advanced Micro Devices, Inc.'s restructuring efforts; specifically, a 7% haircut to its workforce. Heading into last night's report, pessimism was pretty easy to find toward a stock that's surrendered 29% of its value year-to-date. Today, however, option bulls have emerged, with buy-to-open activity detected at the equity's November 3 call.

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Analyst Downgrades: Google Inc, Xilinx, Inc., and Travelzoo Inc.

Analysts issued bearish notes on GOOGL, XLNX, and TZOO

by 10/17/2014 9:23 AM
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Analysts are downwardly revising their ratings today on search giant Google Inc (NASDAQ:GOOGL), integrated circuit specialist Xilinx, Inc. (NASDAQ:XLNX), and travel site Travelzoo Inc. (NASDAQ:TZOO). Here's a quick look at today's bearish brokerage notes on GOOGL, XLNX, and TZOO.

  • Following last night's third-quarter results, at least 22 analysts have cut their price targets on GOOGL. Wedbush set the lowest bar for Google Inc by dropping its target all the way to $530 -- south of Thursday's close at $536.92 -- while Topeka Capital and B Riley both bucked the trend by raising their price targets (to $700 and $632, respectively). GOOGL is shrugging off all of this negative attention by adding 0.6% ahead of the bell, with the tech giant looking to pare its 2014 deficit of 4.3%. With the stock's Relative Strength Index (RSI) at a slim 30, it's possible the shares were a little oversold heading into Thursday evening's report.

  • XLNX has also been hammered with price-target cuts on the heels of its quarterly earnings, as seven firms have downwardly revised their forecasts for the stock this morning. Deutsche Bank and Topeka have the lowest expectations for Xilinx, Inc., with both firms dropping their targets to $43. However, Wells Fargo offered a counterpoint to all the cuts by upgrading XLNX to "outperform." On the charts, XLNX is off 16.2% year-to-date to close Thursday at $38.49. Prior to today's flurry of negative notes, the equity's average 12-month price target stood at an ambitious $50.09 -- in territory XLNX hasn't charted since April.

  • Following Thursday's earnings-related slide of more than 10%, Benchmark slashed its price target on TZOO to $12 from $19 -- representing a roughly 10% discount to yesterday's close at $13.33. Travelzoo Inc. has taken it on the chin in 2014, off 37.5% since the start of the year. Accordingly, not a single analyst has deemed TZOO worthy of a "buy" rating, and the stock's short-interest ratio stands at a formidable 8.40 days to cover.

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Analyst Upgrades: AK Steel Holding Corporation, Intuitive Surgical, Inc., and SunEdison Inc

Analysts issued bullish notes on AKS, ISRG, and SUNE

by 10/17/2014 9:01 AM
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Analysts are upwardly revising their ratings today on industrial metals issue AK Steel Holding Corporation (NYSE:AKS), robotic surgery specialist Intuitive Surgical, Inc. (NASDAQ:ISRG), and solar energy concern SunEdison Inc (NYSE:SUNE). Here's a quick look at today's bullish brokerage notes on AKS, ISRG, and SUNE.

  • Nomura raised its rating on AKS to "buy" from "neutral," and simultaneously hiked its price target to $10 from $7. After closing Thursday at $5.76, down nearly 30% for the year, shares of AK Steel Holding Corporation have rallied 4.9% ahead of the open. Most analysts are unimpressed with the technical laggard, as AKS has garnered only three "strong buy" recommendations, compared to seven "holds" and one "strong sell."

  • ISRG scored an upgrade to "outperform" from "market perform" at Leerink Swann, and the firm also bumped up its price target to $560 from $450 -- implying expected upside of 22.7% from the stock's Thursday close at $456.51. Such a move wouldn't be out of the question for Intuitive Surgical, Inc., which has gained nearly 19% year-to-date. However, most brokerage firms expect ISRG to stall out just shy of the $500 century mark, with the equity's average 12-month price target arriving at $495.42. Looking ahead, ISRG is set to report its third-quarter earnings after the market closes next Tuesday, Oct. 21.

  • Cowen upped its opinion on SUNE to "outperform" from "market perform," sending the stock to a pre-market gain of 6.6%. The brokerage firm also raised its target on SunEdison Inc to $24 from $20, compared to the security's closing price of $15.57 last night. The $24 region is a significant one for SUNE, as the stock peaked here in mid-July before embarking on a 36% decline over the ensuing three months. Unlike Cowen, plenty of short sellers are betting on SUNE to extend its losses, with no less than 26.4% of the equity's float dedicated to short interest.

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