Schaeffer's Trading Floor Blog

Trading VIX: The Devil's In the Details

Just because the VIX is low, doesn't mean it's time to buy

by 8/20/2014 7:58 AM
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I've asked a recurring question in these pages over the years: Why do CBOE Volatility Index (VIX) futures always trade in contango?

VIX is a mean-reverting asset. The long-term trend is a flat line. It has its up regimes and down regimes, but at the end of the day, it's not a stock with earnings that grow over time. It's a statistic. Yet, we always see traders anticipate it will lift -- or so it seems.

Volatility Made Simple posts a chart that shows the percentage of days near-month VIX futures are "contangoed," broken down into each absolute VIX level.

They look at whether near-month VIX is in contango (higher than) VIX itself, and whether VIX second month is higher than VIX first month. They go back to March 4, when VIX futures began trading.

And basically, if VIX itself is under 15, there's a near 100% chance that near-month VIX futures are trading at a premium. And there's at least an 80% chance that VIX second month is higher than first month.

In other words, when VIX is "low," VIX futures price in that it's going higher.

Does that make any sense as a permanent pricing structure?

Well, I looked at the numbers, and it really doesn't.

Between the beginning of March 2004 and July 15 of this year, there were 965 trading days where VIX closed under 15. I counted 537 instances when VIX closed higher one calendar month later, 55.65% of the time.

So, in a vacuum, it is right to "guess" that VIX will be higher.

Alas, it's not that simple. That assumes it's simply a binary bet and someone offered you 50-50 odds. But in the real trading world, VIX futures aren't just trading a penny over, they're trading at premiums that can range upwards of $1 or $1.50. So, not only do you need to win on the trade, you need to win by a fair amount.

It's tough to pick an exact number. But, a 10% lift is roughly equal to the $1-$1.50 lift VIX would generally need to get to the price of a one-month future. And even when VIX is under 15, it only lifted that much about 35% of the time.

On the other hand, the risk/reward picture isn't in perfect symmetry. Common sense says you risk more shorting a VIX future at, say, 16, then you do buying it. So, a buy-and-hold for a one-month strategy doesn't necessarily have to work 50% of the time for it to be profitable. If, say, you bought VIX and won the trade 35% of the time, and won an average of $2, while on the other 65% you lost $1, the trade has a modest positive expected gain. I doubt those are the real numbers, it's just a concept.

So, I went out a little more and looked at how often VIX saw 20% gains month-over-month. And that happened 242 times, almost exactly 25%. It does suggest that most of the time it gained at least 10%, it kept going a bit further.

The devil's always going to be in the details, but the numbers suggest that buying near-ish-month VIX futures at a typical premium to cash is a losing trade about two-thirds of the time. But, it's possibly not a terrible trade when viewed through an expected-gains lens. I do suspect it's a loser, though, and I certainly don't see numbers that suggest always pricing in a VIX rally makes any sort of sense.

And remember, this is all "low VIX" data, the time when it feels like everyone looks to "buy" VIX.

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

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Options Check-Up:, inc., Dollar Tree, Inc., and GT Advanced Technologies Inc

Analyzing recent option activity on CRM, DLTR, and GTAT

by 8/20/2014 7:40 AM
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Among the stocks attracting attention from options traders lately are cloud specialist, inc. (NYSE:CRM), discount retailer Dollar Tree, Inc. (NASDAQ:DLTR), and LED specialist GT Advanced Technologies Inc (NASDAQ:GTAT). Below, we'll break down how option buyers are positioning themselves, and how much speculators are willing to pay for their bets on CRM, DLTR, and GTAT.

  • CRM is slated to report its fiscal second-quarter earnings results after Thursday's close, and in the two weeks leading up to the scheduled event, speculators at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 118 puts for each 100 calls. Meanwhile, the resultant put/call volume ratio of 1.18 ranks in the 92nd percentile of its annual range, meaning puts have been bought to open over calls with more rapidity just 8% of the time within the past year. Those looking to place front-month bets on CRM are currently able to do so at a relative bargain, per the equity's Schaeffer's Volatility Index (SVI) of 35%, which ranks lower than 61% of similar readings taken over the last 12 months. On Tuesday, CRM closed at $54.96 -- just fractions of a point below its year-to-date breakeven mark.

  • Also taking its turn at the earnings plate on Thursday is DLTR, which unveils its second-quarter results ahead of the opening bell. According to the stock's 10-day ISE/CBOE/PHLX call/put volume ratio of 8.01 -- which ranks in the 96th annual percentile -- option traders have rarely been as bullish toward DLTR as they are now. Front-month options are pricing in average volatility expectations for the equity, as evidenced by Dollar Tree, Inc.'s SVI of 26%, which ranks in the middling 46th percentile of its annual range. On the charts, outside of a late-July M&A-related surge, DLTR has spent the majority of the past few months churning between $54 and $56.50, and finished Tuesday's session at $54.71.

  • GTAT has been a technical powerhouse in 2014, with the shares more than doubling in value on a year-to-date basis. What's more, the stock is maintaining its title of being a strong outperformer in August -- up nearly 33% month-to-date to trade at $18.40. At the ISE, CBOE, and PHLX, though, the stock's 10-day put/call volume ratio of 0.94 ranks just 4 percentage points from a bearish peak. In light of the equity's upward momentum, a portion of this put buying could be protective in nature. Regardless of the reason, now appears to be an opportune time to place bets on GT Advanced Technologies Inc's near-term trajectory. According to the equity's Schaeffer's Volatility Scorecard (SVS) reading of 87, the stock tends to make outsized moves relative to what the options market has priced in.

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U.S. stocks are notably higher this afternoon, as Wall Street applauds encouraging housing data and a relatively tame inflation report. Meanwhile, among the equities in focus are home health care provider Almost Family Inc (NASDAQ:AFAM), discount retailer Family Dollar Stores, Inc. (NYSE:FDO), and smartphone game maker China Mobile Games & Entertainment Group Ltd (NASDAQ:CMGE), which have all attracted analyst attention.

  • AFAM is flirting with a 3% lead at $27.78, after Jefferies upgraded the stock to "buy" from "hold," and hiked its price target by $10 to $33. In addition, the brokerage firm said likely M&A activity could bolster estimated per-share 2015 earnings by 50%. Bullish analyst attention is relatively rare for AFAM, with just one out of six brokerage firms doling out a "strong buy." Sentiment isn't much better outside of the analyst arena, as short interest represents six sessions' worth of pent-up buying demand, at Almost Family Inc's average pace of trading. The stock has outperformed the broader S&P 500 Index (SPX) by more than 23 percentage points during the past two months. Should AFAM extend its uptrend, a short-squeeze situation or more upgrades could add fuel to the equity's fire.

  • FDO is fractionally lower at $79.77, after earlier notching a fresh record peak of $80.10. Activist investor Carl Icahn last night critiqued FDO for "wasting more than $300 million" in breakup fees to Dollar Tree, Inc. (NASDAQ:DLTR), and said had he not fended off CEO Howard Levine's attempts to "neutralize" him, FDO may not have received a competing bid from Dollar General Corp (NYSE:DG). The board drama, as well as little motivation for the stock to go beyond DG's offer of $78.50, has kept Family Dollar Stores, Inc. shares in check today, despite an upgrade to "equal weight" from "underweight" and a price-target hike to $82 from $50 at Barclays.

  • Finally, CMGE is down 1.5% at $14.97 -- erasing yesterday's post-earnings gains -- after Barclays cut its price target to $31 from $34. The shares of China Mobile Games & Entertainment Group Ltd have surrendered more than 40% in 2014, and more negative analyst notes could be on the way. All three brokerage firms following CMGE consider the stock a "buy," and the consensus 12-month price target of $28.33 represents expected upside of nearly 100% from the security's current perch.

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Stocks On the Move: Skilled Healthcare Group, Inc., DepoMed Inc., and Elizabeth Arden, Inc.

SKH, DEPO, and RDEN are moving sharply in Tuesday's trading

by 8/19/2014 1:21 PM
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Heading into the final hours of today's trading, three of the biggest market movers are assisted-living issue Skilled Healthcare Group, Inc. (NYSE:SKH), pharmaceutical stock DepoMed Inc. (NASDAQ:DEPO), and cosmetics concern Elizabeth Arden, Inc. (NASDAQ:RDEN). Here's a quick roundup of how SKH, DEPO, and RDEN are performing on the charts so far.

  • SKH is soaring today in the wake of some well-received M&A news -- up 20.7% at $7.42, after earlier tagging a fresh 52-week peak of $7.90. Thanks to this bull gap, shares of SKH are now sitting more than 54% above where they started the year. Heading into the session, sentiment surrounding Skilled Healthcare Group, Inc. was tilted toward the bearish side. Short interest, for example, accounts for a healthy 4.2% of the stock's available float, and would take more than nine sessions to cover, at SKH's average daily pace of trading. Elsewhere, the security's Schaeffer's put/call open interest (SOIR) of 0.81 ranks in the 93rd percentile of its annual range, meaning short-term option speculators have rarely been more put-heavy toward SKH.

  • A favorable court ruling has sent shares of DEPO nearly 9% higher this afternoon. Longer term, the equity has more than doubled on a year-over-year basis, but has recently run into resistance around the $15 mark. In fact, the stock peaked at $15.11 earlier today, before easing back to its current perch at $14.36. In the near term, this area could continue to contain DepoMed Inc.'s rally attempts, as peak call open interest in the front-month series resides at the September 15 strike. Simply stated, this heavy accumulation of call open interest could translate into options-related resistance, as the hedges related to these bets unwind ahead of expiration on Friday, Sept. 19.

  • RDEN is having a terrible day both on and off the charts. Specifically, the stock has plunged 23.8% -- and earlier bottomed at a four-year low of $14.65 -- after disappointing sales from a number of its high-profile-celebrity perfumes caused the company to post its biggest quarterly loss on record. Today's dreary price action is just more of the same for Elizabeth Arden, Inc., which is down almost 58% year-to-date -- and additional losses could be on the horizon. At present, the average 12-month price target for RDEN of $26.60 stands at a steep 78% premium to the stock's current perch at $14.94, leaving the door wide open for a round of price-target cuts in the face of the equity's technical struggles.

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Analyst Downgrades: SolarCity Corp, El Pollo LoCo Holdings Inc, and Sprint Corporation

Analysts downwardly revised their ratings on SCTY, LOCO, and S

by 8/19/2014 9:25 AM
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Analysts are weighing in today on alternative energy issue SolarCity Corp (NASDAQ:SCTY), restaurant operator El Pollo LoCo Holdings Inc (NASDAQ:LOCO), and telecom titan Sprint Corporation (NYSE:S). Here's a quick roundup of today's bearish brokerage notes on SCTY, LOCO, and S.

  • SCTY -- which settled Monday at $72.05 -- is pointed 1% lower ahead of the bell, after Baird downgraded the stock to "neutral" from "outperform." The stock has outperformed the broader S&P 500 Index (SPX) by more than 33 percentage points during the past three months, yet option traders have been purchasing puts over calls at a near-annual-high clip. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.81 stands higher than 94% of all other readings from the past year. However, with SolarCity Corp sitting on a year-to-date gain of 26.8%, it's possible the puts are being purchased by shareholders looking to lock in gains.

  • LOCO is bracing for a 6% drop out of the gate today, after settling at $33.20 on Monday. Analysts are waxing pessimistic on the Wall Street freshman, with Morgan Stanley initiating coverage with an "underweight" rating, and Baird offering a "neutral" rating and tepid $32 price target. Likewise, Stifel and Jefferies both launched coverage with "hold" ratings, and the latter's price target of $30 represents a discount to El Pollo LoCo Holdings Inc's current price. (William Blair was the black sheep, starting LOCO at "outperform.") Since its late-July IPO, the stock has advanced nearly 75%.

  • Finally, S is flirting with breakeven at $5.62, despite a price-target cut to $4 from $7 at Jefferies. Furthermore, the brokerage firm underscored its "underperform" rating on S, which has shed 47.7% in 2014, primarily in the wake of its abandoned bid for T-Mobile US Inc (NYSE:TMUS). Helping to offset today's negative analyst attention, however, is Sprint Corporation's new pricing plan, which goes into effect on Friday.

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