Schaeffer's Trading Floor Blog

A $61M Trade on One of the Worst Products Ever Created

A massive put buy on ProShares Trust Ultra VIX Short Term Futures ETF (UVXY) may have influenced iPath S&P 500 VIX Short-Term Futures ETN (VXX)

by 3/25/2015 8:50 AM
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Maybe there was more to Friday's iPath S&P 500 VIX Short-Term Futures ETN (VXX) blip than meets the eye:

The CBOE Volatility Index (VIX) sonar video seems to have disappeared into the ether. But here's the deal -- about the same time as the VXX fireworks, a player bought 120,000 January 2017 9-strike puts in ProShares Trust Ultra VIX Short Term Futures ETF (UVXY) for $5.10.

UVXY is more or less identical to VelocityShares Daily 2x VIX Short Term ETN (TVIX). It tracks two times the VXX, but it's an exchange-traded fund (ETF), whereas TVIX is an exchange-traded note (ETN). Other than that fun time when TVIX stopped creating new shares for a couple weeks and sat above net asset value -- then started creating shares again, and promptly imploded -- they move in unison. And by unison, I mean "drift to zero."

These pups are basically the worst products ever created. VXX drifts lower over time, as we all know. Trackers also tend to drift lower on their own, thanks to compounding. A tracker can actually outperform over a specific time frame if the "trackee" makes a trend move. But since VXX always trends down over the long haul, all that means is that TVIX and UVXY trend down even faster. Throw in the two times leverage, and you have a perfectly horrendous hold. They may explode up in blips, as VXX does occasionally pop. But over time, they will go towards zero.

UVXY is near $15 as I type. So in a vacuum, paying $5.10 for these puts seems nuts. That's a $61.2 million dollar investment. For it to pan out, UVXY will have to go below $3.90 in 22 months. That's more or less three-fourths of its current "value" but I hereby predict the buyer makes a profit.

Back in the here and now, I'm not sure I get the cause and effect between this trade and the VXX action on Friday. Someone (probably multiple someones) filled the UVXY put buy. So they're now long UVXY, which you can convert to a de facto long in VXX. So the "effect," on the margins, should be to knock VXX down. But it was the opposite -- VXX blipped up.

Clearly there was a connection, as it all took place at the same time. Maybe the same party entered the order simultaneously? If so, nice trade by the "locals," though I'm not sure at the end of the day that a VXX short really hedges a LEAPS put sale in UVXY all that well.

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


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Analyst Update: Century Aluminum Company, Freeport-McMoRan Inc., and Zagg Inc.

Analysts adjusted their ratings on Century Aluminum Co (CENX), Freeport-McMoRan Inc (FCX), and Zagg Inc (ZAGG)

by 3/24/2015 11:40 AM
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Analysts are weighing in today on commodity concerns Century Aluminum Co (NASDAQ:CENX) and Freeport-McMoRan Inc (NYSE:FCX), as well as mobile accessories designer Zagg Inc (NASDAQ:ZAGG). Here's a quick look at today's brokerage notes on CENX, FCX, and ZAGG.

  • Morgan Stanley downgraded CENX to "underweight" from "equal weight" and cut its price target by $6 to $12, with the brokerage firm citing "weak demand ... improving supply, [and] a strong dollar" as a few of the headwinds facing the industrial metals group. At last check, the shares of Century Aluminum Co were down 6.2% to hit $13.41, contributing to a 45% year-to-date loss. Accordingly, sentiment in the options pits has been bearish, as CENX's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 6.40 ranks in the 89th percentile of its annual range. Echoing this indicator is the security's Schaeffer's put/call open interest ratio (SOIR) of 1.31, which is the highest such reading taken over the past year. Simply stated, traders have never been this put-skewed over the past 12 months.

  • FCX also saw a price-target cut from Morgan Stanley, with the brokerage firm lowering its target by $5 to $20 while keeping its "equal weight" rating. What's more, Freeport-McMoRan Inc announced today it is decreasing its quarterly dividend by 84%, with the firm saying, "The reduction in the dividend is a prudent measure to strengthen our balance sheet during a period of volatile market conditions." Despite yesterday's rally, FCX has been a technical underperformer, with the shares down 18.2% year-to-date to reach $19.10, including a 1.3% dip today. Options traders are betting on more downside to come, as FCX's 50-day ISE/CBOE/PHLX put/call volume ratio of 1.05 ranks higher than 97% of all equivalent readings taken over the past year.

  • Craig-Hallum downgraded ZAGG to "hold" from "buy," sending the shares down 7.7% to hit $8.70. Zagg Inc has advanced roughly 87.5% year-over-year -- and in a note to clients, Craig-Hallum attributed the move to valuation concerns. Although the stock has been a technical juggernaut, puts have been prominent in the options pits, as ZAGG's 50-day ISE/CBOE/PHLX put/call volume ratio of 0.43 sits in the 84th percentile of its annual range. Meanwhile, the analyst community is divided on the equity, with 40% of covering analysts doling out lukewarm "hold" ratings.

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Digital Ally, Inc. (DGLY) Spikes on Earnings Win

Roughly 27% of Digital Ally, Inc.'s (DGLY) float is sold short

by 3/24/2015 11:07 AM
Stocks quoted in this article:

Digital Ally, Inc. (NASDAQ:DGLY) is soaring today, up 26% at $15.83. Also, the stock is back in the black on a year-to-date basis, and on pace for its first close north of $15 since Jan. 5. Taking another step back, shares of the surveillance products maker have nearly doubled in value on an annual basis.

Accounting for today's surge is a strong earnings report that hit the Street last night. Not only did the company swing to a fourth-quarter profit of 5 cents per share (from the prior year's loss of 50 cents), but it also reported a 55% rise in revenue. In fact, a statement from DGLY described the quarter as the "strongest three-month period in the past twelve quarters."

One potential explanation for Digital Ally, Inc's (NASDAQ:DGLY) sharp move on the charts is short-covering activity. Specifically, a lofty 27% of the stock's float is sold short -- though, at DGLY's average trading levels, it would take a little more than one session to buy back all these bearish bets.

Daily Chart of DGLY since January 2015


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Hot Streak Continues for Google Inc. (GOOGL) Amid New Hire

Google Inc (GOOGL) has a new CFO

by 3/24/2015 10:40 AM
Stocks quoted in this article:

Shares of Google Inc (NASDAQ:GOOGL) have been gaining momentum the past few months. Since touching an annual low of $490.91 on Jan. 12, the security has added 17.4%, last seen 1.9% higher at $576.23. The stock appears to be riding atop its 10-week moving average, a trendline that acted as resistance in late 2014 but has seemingly switched roles.

Weekly Chart of GOOGL since October 2014 with 10-Week Moving Average

Even with GOOGL's recent surge, options traders have remained focused on puts. At 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 0.82 is higher than 91% of all similar readings from the past year. In other words, puts have been bought to open over calls at a faster-than-normal rate.

Recently, Google Inc (NASDAQ:GOOGL) has benefited from a string of fundamental developments, and the firm's at it once again today. The company has reportedly hired Ruth Porat, chief financial officer and executive vice president of Morgan Stanley (NYSE:MS), as its CFO. Porat will start at Google on Tuesday, May 26.


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Buzz Stocks: Facebook, Inc., Ocwen Financial Corporation, and Chesapeake Energy Corporation

Today's stocks to watch include Facebook Inc (FB), Ocwen Financial Corp (OCN), and Chesapeake Energy Corporation (CHK)

by 3/24/2015 9:26 AM
Stocks quoted in this article:

Stocks are poised for a start in the black, with investors preparing for a fresh round of economic data, including new home sales. Among the equities in focus are social network Facebook Inc (NASDAQ:FB), financial services provider Ocwen Financial Corp (NYSE:OCN), and natural gas producer Chesapeake Energy Corporation (NYSE:CHK).

  • FB is up 0.4% in pre-market trading amid reports that the company is in negotiations with news publishers to host their content directly on its site. The equity has simply been on fire lately, adding close to 7% in March to close yesterday at $84.43, after touching an all-time high of $84.96 earlier in the day. Analysts are bullish on Facebook Inc, with 28 of 30 covering brokerage firms rating it a "buy" or better. Additionally, FB's average 12-month price target of $92.14 represents a 9% premium to current trading levels.

  • OCN is falling fast in electronic trading, dropping 5.7% after the New York Stock Exchange warned the company it is not in compliance with listing standards. This negative development is overshadowing the company's agreement to sell $25 billion worth of mortgage servicing rights. The security has already had its fair share of technical issues, underperforming the S&P 500 Index (SPX) by over 40 percentage points during the past three months, finishing yesterday at $8.80. Options players have placed bearish bets in response, with Ocwen Financial Corp's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 4.64 ranking higher than 86% of all similar readings from the past year. Elsewhere, short interest accounts for 32% of OCN's float.

  • CHK cut its budget for capital expenditures in 2015 due to falling commodity prices. However, Carl Icahn upped his stake in the firm for the first time in two years -- to 11% from 9.9%. Investors have responded positively, with the shares seeing a 2.6% jump ahead of the opening bell. It's a boost Chesapeake Energy Corporation desperately needs, as it's lost 28% in 2015 to settle yesterday at $14.11. In fact, the shares hit a two-year low last week. In the options pits, speculators have grown more put-skewed than normal, according to the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.85. This reading ranks higher than 83% of all comparable figures from the past year.

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