Schaeffer's Trading Floor Blog

Does the Market's 'Fear Gauge' Have a Magic Number?

Whatever metric you use on VIX, view it in shades of gray

by 4/15/2014 7:26 AM
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We must be getting close to a near-term top in the CBOE Volatility Index (VIX). I say that because I see Zero Hedge looking at it or rather, looking at someone else looking at it:

While US equities have spent much of the past several weeks under pressure (the NASDAQ bio tech index has fallen over 21%, the NASDAQ Comp is down over 8% and the S&P 500 is down over 4%), BofAML's Macneil Curry is concerned that the VIX index suggests conditions should deteriorate further before greater signs of a base materialize.

Hey, I actually agree with that! I'd substitute "could" for "should" in that last sentence, but I expressed those same sentiments Sunday night. I'm encouraged, tell me more!

Since 2012 most tradable market lows have come only after the VIX has pushed north of 20%. It is currently only 17%.

OK, I got my hopes up too soon, as that lost me a bit. 2012 seems like an arbitrary end point. We've been in an uptrend for about five years -- why lop off three of them? Or maybe even four of them, as it says "since 2012," which might mean we're talking about just 2013 and the first quarter of 2014.

What's a "tradable market low," anyway? One that preceded a nice bounce? Well, that part is true. But they were all also great times to just get long and hold. "Tradable market low" implies you bought and sold somewhat quickly. The buying part worked ... but the selling part? No way to know without specifics, but I'm guessing lots of money was left on the table.

OK, I'm being picky. No matter what you did when VIX closed above 20 over the last 2.25 years, you did well. My biggest problem with this sort of analysis is that it's looking backwards, selectively and unclearly choosing end points, retro-fitting conclusions, and creating a rule that has no long-term basis for success.

We're in a low-volatility regime now, and have been for the last few years, depending on how you define it. The forever-term mean of VIX is about 20, but in low-volatility regimes, the mean of VIX is probably more like 15. In those times, a VIX of 20 is high, so it's not at all out of bounds to say or imply that it's a good time to look for a market low.

What I also take issue with is making 20 VIX out to be a magical level of some sort. If you consider VIX a contra-tell of sentiment, any higher VIX means you should get more bullish than you are at lower VIX. The market should do better after 17 VIX than it does after 16 VIX, should do better after 18 VIX than after 17 VIX, and so on.

I like using deviations from moving averages or violations of Bollinger Bands as the definition of an "overbought" VIX. But I understand most people just use absolute numbers in VIX and go from there. It's not optimal, in my humble opinion, but it's not disastrous. I'd just suggest that whatever metric you use on VIX, view it in shades of gray. Higher shows more fear than lower. Twenty is just a number in VIX; it's not at all magic.

Why's that an important point? Well, maybe you caught five tradable lows in the last 2.25 years going long when VIX closed above 20. But maybe you missed 10 other pretty good tradable longs that you could have started scaling into when VIX hit 17 or 18 or 19.

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., Cree, Inc., and Starbucks Corporation

Analyzing recent option activity for AMZN, CREE, and SBUX

by 4/14/2014 5:01 PM
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Among the equities attracting attention from options traders lately are online retailer, Inc. (NASDAQ:AMZN), semiconductor manufacturer Cree, Inc. (NASDAQ:CREE), and java giant Starbucks Corporation (NASDAQ:SBUX). Below, we'll look at how options buyers are betting on AMZN, CREE, and SBUX, and how much they are willing to pay to do so.

  •, Inc. (NASDAQ:AMZN) finished 1.3% higher at $315.91, amid rumors of an AMZN smartphone in the works, and after the firm said it sold out of Fire TVs. However, the stock on Friday fell to a near-six-month low, and remains beneath its 10-day moving average, which has pressured AMZN into the red since mid-March. While bearish betting has accelerated of late -- the stock's 10-day put/call volume ratio of 1.05 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits just 17 percentage points from an annual peak -- short-term traders remain bullishly biased. Specifically, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.95 stands higher than just 1% of all other readings from the past year, pointing to a bigger-than-usual call skew among options expiring within three months. Currently, those short-term options are expensive, relatively speaking; the equity's Schaeffer's Volatility Index (SVI) of 45% ranks in the 86th percentile of its 12-month range. Should steepen its year-to-date slide of nearly 21%, a mass exodus of option bulls could translate into contrarian headwinds.

  • Cree, Inc. (NASDAQ:CREE) spent part of the session south of breakeven, but tacked on 0.4% to settle at $54.92. The company will step up to the earnings plate after the close next Tuesday, April 22, and option buyers are picking up bullish bets at an accelerated clip, as the stock's 50-day ISE/CBOE/PHLX call/put volume ratio of 3.28 sits just 2 percentage points from an annual acme. Likewise, the equity's SOIR of 0.41 is higher than just one-tenth of all comparable readings from the past year, suggesting short-term speculators are more call-centered than usual. Right now, the stock's SVI of 58% registers in the 57th percentile of its annual range, implying that CREE's short-term contracts are slightly more expensive than usual right now, from a historical standpoint. Should Cree, Inc. disappoint in the earnings confessional next week, an unwinding of optimism in the options arena could exacerbate selling pressure on the stock, which has shed 12.2% in 2014.

  • Starbucks Corporation (NASDAQ:SBUX) also spent time on both sides of breakeven today, but ultimately resolved to the upside, adding 0.8% to $69.31. The speculative crowd is starting to take note of SBUX's technical struggles -- the stock has shed almost 12% year-to-date -- as its 50-day ISE/CBOE/PHLX put/call volume ratio of 0.80 is just 1 percentage point from a 52-week peak. However, there's still plenty of room on the bearish bandwagon, considering the equity's SOIR of 0.87 rests in the bottom third of its annual range. With Starbucks Corporation earnings around the corner -- the company will report after the close on Thursday, April 24 -- short-term options are growing more expensive. In fact, the stock's SVI of 27% is higher than 60% of all other readings from the past year. As with AMZN and CREE, the lingering optimism in the options pits could leave SBUX vulnerable to a bullish backlash, should the company report lackluster earnings later this month.

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Stocks to Watch Tuesday: MasterCard Inc, F5 Networks, Inc., and Medtronic, Inc.

Analyzing MA, FFIV, and MDT ahead of tomorrow's trading

by 4/14/2014 4:54 PM
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Momentum names that made notable moves on Monday and could continue to do so into Tuesday's session include credit card issuer MasterCard Inc (NYSE:MA), software producer F5 Networks, Inc. (NASDAQ:FFIV), and medical technology expert Medtronic, Inc. (NYSE:MDT). Here is a quick look at these stocks ahead of tomorrow's opening bell.

MasterCard Inc (NYSE:MA)

While MasterCard enjoyed a 3.6% pop to $71.18 today -- after this morning receiving an upgrade to "outperform" from "neutral" at Baird and a "sector perform" initiation at Pacific Crest -- the stock remains 14.8% below its year-to-date flat line. Nevertheless, option traders were quick to respond to MA's positive price action, exchanging two times the average daily amount of contracts, with a three-legged spread in the January 2015 series accounting for a healthy portion of this activity. What's more, calls were in higher demand than puts today, as they have been for the past couple of months. To be specific, MA's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 1.45 ranks in the 86th annual percentile, indicating calls have been bought to open over puts at an accelerated pace during the past 10 weeks. Should MasterCard continue its downward trajectory, these bullish bettors may hit the exits, creating additional pressure on the shares.

F5 Networks, Inc. (NASDAQ:FFIV)

F5 Networks bounced 3.9% higher today to close at $107.05, thanks to an upgrade to "buy" from "hold" at Stifel this morning. Subsequently, FFIV call volume more than doubled the expected daily amount, and outpaced put volume by a 2-to-1 margin. This represents a change of pace from FFIV's recent options trend, as the stock's 10-day ISE/CBOE/PHLX put/call volume ratio of 1.29 ranks higher than all other comparable readings from the past year, signifying an annual-high rate of put buying, relative to call buying, of late. Perhaps today's surge in call activity was created by short sellers picking up options-related insurance against additional upside, considering short interest makes up a lofty 10.4% of FFIV's available float.

Medtronic, Inc. (NYSE:MDT)

Medtronic sunk 1.9% today to close at $58.08, following a Friday evening court decision that temporarily halted sales of the company's aortic heart valve replacement system in the U.S., and two subsequent bearish brokerage notes this morning. (J.P. Morgan Securities downgraded the stock to "neutral" from "overweight," while Deutsche Bank cut its price target by $2 to $68.) It comes as no surprise then that puts were traded at a rate that more than quadrupled the daily norm, with April- and May-dated puts accounting for four of the five most active options of the day.

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Biggest Movers: WebMD Health Corp., bebe stores, inc., and JA Solar Holdings Co., Ltd. (ADR)

WBMD, BEBE, and JASO are moving sharply higher in Monday's trading

by 4/14/2014 3:36 PM
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As we approach the final minutes of the trading day, three of the top movers are online medical information name WebMD Health Corp. (NASDAQ:WBMD), women's apparel name bebe stores, inc. (NASDAQ:BEBE), and renewable energy concern JA Solar Holdings Co., Ltd. (ADR) (NASDAQ:JASO). Here's a quick roundup of how this trio of names is charging up the charts this afternoon.

  • At last check, WBMD was up 15% at $43.32, bringing the stock into positive territory on a year-to-date basis. Driving the price action was the company's announcement that quarterly earnings were on pace to top an earlier projection, thanks to rising sales. Today's rally may prompt an exit among short sellers, as nearly one-quarter of the stock's float is sold short. What's more, it would take close to eight trading days (at the stock's average daily volume) to cover all existing shorted shares.

  • An upgrade at Janney to "buy" from "neutral" and a projection of impending annualized profitability have helped drive BEBE shares up 16% to $6.74. The stock now boasts a year-to-date gain of more than 25%, and has outperformed the broader S&P 500 Index (SPX) by more than 10 percentage points during the last three months. Today's vote of confidence notwithstanding, BEBE has been largely ignored by Wall Street. Just two analysts follow the stock, respectively awarding one "strong buy" and a single "hold" rating.

  • Finally, JASO is flirting with double-digit territory, as a 7.3% gain has lifted the shares to $10.00, bringing its year-over-year return to more than 125%. Buyers are descending upon JASO after the company upped its estimate for shipments in the first quarter. Options players have been slanted toward the bullish camp, as evidenced by the stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 14.35. In other words, more than 14 calls have been bought to open during the last two weeks for every put. Ranking in the 67th annual percentile, this ratio suggests demand for calls (relative to puts) has recently accelerated.

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Earnings on Deck: Intel Corporation, The Coca-Cola Company, and Johnson & Johnson

Previewing INTC, KO, and JNJ ahead of their upcoming earnings reports

by 4/14/2014 2:36 PM
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Blue chips are heading to the earnings confessional this week, with tech concern Intel Corporation (NASDAQ:INTC), beverage behemoth The Coca-Cola Company (NYSE:KO), and health care conglomerate Johnson & Johnson (NYSE:JNJ) slated to report. Here's a quick look at these names as earnings approach.

  • Intel Corporation (NASDAQ:INTC) will report first-quarter earnings after the close tomorrow. The company has matched or topped analysts' per-share profit projections in six of the past eight quarters, yet Wall Street remains wary. Seventeen out of 29 covering analysts rank INTC a "hold" or worse, and the average 12-month price target of $25.42 represents a discount to the stock's current perch of $26.64. In the same vein, the stock's 10-day put/call volume ratio of 1.13 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands just 4 percentage points from an annual high. In other words, option buyers have picked up INTC puts over calls at a much faster-than-usual clip during the past two weeks. Likewise, short interest represents seven sessions' worth of pent-up buying demand, at the security's average pace of trading. Another solid earnings showing from Intel tomorrow could translate into upbeat analyst notes, a mass exodus of option bears, and/or a short-squeeze situation -- all potential contrarian catalysts to the upside.

  • The Coca-Cola Company (NYSE:KO) will unveil its first-quarter figures before the open tomorrow. The firm has matched or exceeded the Street's bottom-line estimates in each of the past eight quarters, averaging a one-week post-earnings gain of 0.3%. Despite its solid earnings history, KO's short-term option players are more put-heavy than usual right now, as the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.05 stands higher than 73% of comparable readings from the past year. However, despite Coca-Cola's earnings on the horizon, its short-term options remain relatively affordable. The security's Schaeffer's Volatility Index (SVI) of 14% sits just 5 percentage points from a 12-month nadir, suggesting short-term options are attractively priced right now, from a historical perspective. In afternoon trading, KO is 0.3% higher at $38.74, but remains 6.3% lower year-to-date.

  • Finally, Johnson & Johnson (NYSE:JNJ) is scheduled to report first-quarter earnings ahead of the bell tomorrow. The blue chip has topped bottom-line estimates in each of the past eight quarters, averaging a gain of 0.7% in the week after reporting. Ahead of tomorrow's earnings report, the speculative crowd has been growing more bearish, as the stock's 10-day ISE/CBOE/PHLX put/call volume ratio of 1.08 sits in the top quartile of its annual range. Analysts, meanwhile, are split when it comes to JNJ. Nine brokerage firms have doled out "buy" or better endorsements, with another six offering up tepid "hold" ratings. Just today, Jefferies downgraded the stock to "hold" from "buy," a session after Johnson & Johnson said it won't develop an anti-wrinkle cream to rival Allergan, Inc.'s (NYSE:AGN) Botox. At last check, JNJ is fractionally higher at $96.93.

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