Schaeffer's Trading Floor Blog

Now that the Fed's Out of the Way, What's Next for VIX?

The CBOE Volatility Index (VIX) saw its biggest single-day drop since Groundhog Day

by 3/20/2015 7:56 AM
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They met, they saw, they deleted the word "patience," and the world survived! Now, as opposed to watching data and eventually raising interest rates, the Federal Open Market Committee (FOMC) has shifted to a policy wherein it will watch the data and eventually raise rates. But, they might raise rates modestly later than someone somewhere thought they would, so buy everything!

At least buy it if the market was down the day before. That's the only real pattern to all of this lately. I doubt that can persist forever, so I wouldn't actually play on that pattern. We did get an outsized range move in the S&P 500 Index (SPX). As I noted the other day, the market had priced in about a 1.25% range on Fed Day. In actuality, we nearly doubled that, so traders that bought SPX or SPDR S&P 500 ETF Trust (SPY) options paper to flip into the move likely did well. But that's far from a certainty.

First off, results always vary. It's very tough to max out catching a range. Odds are, if you faded the morning weakness, you started scaling out well before the top, and likely even shorted into it. Which highlights another point: It wasn't much in the way of up and back. Here's how SPY looked on the 5-minute chart from Wednesday's open to midday Thursday:

5-Minute Chart of SPY from Wednesday to Thursday

So, best case scenario, you sat for 4.5 hours, got a news blip, and then had a chance to close. Beyond that it looks close to a wash. What's more, implied volatility itself got crushed. We knew it would decline; it's the same dynamic as if you owned single-stock volatility ahead of earnings. The stock moves and vol dips, and the bet is whether the magnitude of the move was sufficient to offset the vol dip.

Unfortunately, we have to estimate the volatility dip. And I'd suggest that the vol drop on Wednesday after the announcement exceeded market expectations. The CBOE Volatility Index (VIX) dropped 10.8%, the biggest single-day VIX drop since Groundhog Day (the market didn't think Phil would see his shadow).

So now what? Well, we can start worrying about the next meeting! Or the dollar! What about Greece? VIX near 14 seems neither here nor there, though I'm sure someone on TV will tell me it's incredibly cheap. And yes, it's below 10-day realized volatility. But again, I'd like to make an earnings analogy: Before the news, implied vol lifts. After the report, the move itself causes a pop in realized vol, while forward-looking implied vol contracts. Hence, a seeming disparity that has no particular meaning. Options are already looking out for the next vol driver, not the last one.

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

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The Week Ahead: GDP, BlackBerry Limited In the Spotlight

Next week's calendar features the final 4Q gross domestic product (GDP), as well as earnings from BlackBerry Ltd (BBRY) and Lululemon Athletica inc. (LULU)

by 3/19/2015 4:50 PM
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Next week's focus is the final reading on fourth-quarter gross domestic product (GDP), which is slated for release on Friday. Among the companies reporting earnings are mobile device concern BlackBerry Ltd (NASDAQ:BBRY), athletic apparel maker Lululemon Athletica inc. (NASDAQ:LULU), and solar energy firm Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE).

Below is a brief list of some key market events scheduled for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.


  • The week kicks off with existing home sales. There are no notable earnings reports scheduled.


  • The release of new home sales data and the consumer price index (CPI) comprise Tuesday's docket. Slated to report earnings are McCormick (MKC), Sonic (SONC), and Steelcase (SCS).


  • The Energy Information Administration's (EIA) weekly crude inventories report, as well as data on durable goods orders, will hit the Street Wednesday. Apollo Education Group (APOL), Five Below (FIVE), Francesca's (FRAN), Pacific Sunwear (PSUN), Paychex (PAYX), PVH (PVH), Red Hat (RHT), Worthington (WOR), and Yingli Green Energy (YGE) will step into the earnings confessional.



  • Friday's docket includes the final reading on fourth-quarter GDP and the Thomson Reuters/University of Michigan consumer sentiment index. Scheduled to report earnings are BlackBerry (BBRY) and Finish Line (FINL).

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Earnings Preview: Darden Restaurants, Inc., KB Home, and Tiffany & Co.

Analyzing recent option activity on Darden Restaurants, Inc. (DRI), KB Home (KBH), and Tiffany & Co. (TIF)

by 3/19/2015 1:46 PM
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Among the stocks gearing up to report earnings tomorrow morning are Olive Garden parent Darden Restaurants, Inc. (NYSE:DRI), homebuilder KB Home (NYSE:KBH), and luxury jeweler Tiffany & Co. (NYSE:TIF). Below, we'll break down how options traders are positioning themselves, and how much speculators are willing to pay for their bets on DRI, KBH, and TIF.

  • DRI has been a technical juggernaut, with the shares up a staggering 32.3% year-over-year to hit $65.22. In fact, just yesterday the shares hit a record high of $65.75. Despite Darden Restaurants, Inc.'s positive price action, the brokerage bunch is divided on the equity, as 57% of covering analysts rate the stock a "hold" or worse. Additionally, DRI's consensus 12-month price target of $59.83 sits below current trading levels, leaving plenty of room for a round of bullish attention to provide tailwinds. Meanwhile, in the session immediately following its last four earnings reports, DRI has shed an average of 1.2%, but jumped 2.8% after report earnings last March. Near-term options are available for historically middling prices, as the stock's Schaeffer's Volatility Index (SVI) of 27% sits in the 55th percentile of its annual range.

  • KBH is up 16% since notching a two-year low of $11.76 on Jan. 22. Today, however, the shares are down about 2.6% at $13.64, ahead of tomorrow morning's fiscal first-quarter earnings release, swooning in sympathy with sector peer Lennar Corporation (NYSE:LEN). Sentiment in the options pits has been bullish, as KB Home's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 17.90 sits in the 89th percentile of its annual range. Traders hoping for post-earnings upside have history against them -- in the session immediately following its last four earnings reports, KB Home has lost an average of 2.8%, including a massive 16.3% drop in January. Short-term options are in demand, as the equity's 30-day at-the-money (ATM) implied volatility (IV) of 42.2% is in the 92nd percentile of its annual range.

  • On the other hand, TIF has taken a nose dive, down 22.2% since achieving an all-time high of $110.60 on Nov. 25. What's more, the security touched an annual low of $82.75 just last week. Accordingly, bearish sentiment in the options pits has been ramping up, as Tiffany & Co.'s 10-day ISE/CBOE/PHLX put/call volume ratio of 1.37 stands higher than 78% of all equivalent readings taken over the past year. Looking elsewhere, in the session immediately following its last four earnings reports, TIF has increased an average of 3%. Today, TIF's 30-day ATM IV is 0.9% higher at 31.3%, in the 91st percentile of its annual range. At last look, TIF is 0.7% higher at $86.06.

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Analyst Update: Chesapeake Energy Corporation, Potash Corp./Saskatchewan (USA), and Williams-Sonoma, Inc.

Analysts adjusted their ratings on Chesapeake Energy Corporation (CHK), Potash Corp./Saskatchewan (USA) (POT), and Williams-Sonoma, Inc. (WSM)

by 3/19/2015 12:13 PM
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Analysts are weighing in today on natural gas firm Chesapeake Energy Corporation (NYSE:CHK), fertilizer producer Potash Corp./Saskatchewan (USA) (NYSE:POT), and home furnishings retailer Williams-Sonoma, Inc. (NYSE:WSM). Here's a quick look at today's brokerage notes on CHK, POT, and WSM.

  • CHK is down nearly 5% to hit a two-year low of $13.40 after Sterne Agee downgraded the stock to "underperform" from "neutral," citing a bleak outlook on near-term drilling and concerns over capital allocation. Like many of its sector peers, Chesapeake Energy Corporation has struggled recently, with the shares down 31.5% year-to-date. A majority of covering analysts are pessimistic on the equity, with 78% doling out "hold" or worse recommendations. However, CHK's consensus 12-month price target of $19.94 stands at a 47.4% premium to current trading levels, leaving the stock vulnerable to potential price-target reductions.

  • Canaccord Genuity cut its price target on POT by $1 to 36 -- and then lowered it by another $1 to $35 -- following news that the Canadian province of Saskatchewan announced tax changes for potash producers, and after rival Belarus inked a supply contract with China. What's more, the brokerage firm reiterated its "hold" opinion of the security. Today, the shares are down 4.5% to reach $32.20 -- within a point of annual-low territory, and translating into a 8.9% year-to-date drop. Sentiment in the options pits is nearing a pessimistic peak, as Potash Corp./Saskatchewan's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.86 ranks higher than 98% of all equivalent readings taken over the past year.

  • Last night, WSM reported lackluster fourth-quarter revenue and offered weak current-quarter guidance. In response, no fewer than six brokerage firms revised their recommendations on the stock. Drilling down, the largest revisions came from Barrington and Morgan Stanley, with the former hiking its price target to $85 from $80 while reiterating an "outperform" opinion, and the latter raising its price target to $84 from $80 while underscoring an "equal weight" rating. However, BB&T downgraded WSM to "hold" from "buy." Until today's 2.3% dip, Williams-Sonoma, Inc. was trending upwards, with the shares advancing 19.5% year-over-year to reach $79.13. In fact, WSM touched a record high of $84.75 on Tuesday. The brokerage bunch is lukewarm on the equity, as two-thirds of covering analysts have doled out "hold" ratings. Additionally, WSM's consensus 12-month price target of $79.73 stands within a stone's throw of current trading levels.

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Analyst Downgrades: eBay Inc., Transocean Ltd., and Guess?, Inc.

Analysts downwardly revised their ratings on eBay Inc (EBAY), Transocean LTD (RIG), and Guess?, Inc. (GES)

by 3/19/2015 9:40 AM
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Analysts are weighing in today on online auctioneer eBay Inc (NASDAQ:EBAY), offshore drilling concern Transocean LTD (NYSE:RIG), and apparel company Guess?, Inc. (NYSE:GES). Here's a quick roundup of today's bearish brokerage notes on EBAY, RIG, and GES.

  • EBAY is off 1.4% out of the gate at $57.59, after Piper Jaffray cut its outlook on the equity to "underweight" from "neutral," and dropped its price target to $49 from $55, as it expects competition to hurt the company's PayPal unit over the next few years. However, the shares have performed well lately, adding 24.3% since their annual low of $46.34 on Oct. 16 -- and they just hit an all-time high of $60.93 earlier this month. Still, options traders remain skeptical, as eBay Inc's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.66 ranks higher than 80% of readings from the past year. This means puts have been bought to open over calls at a faster-than-normal rate.

  • Cowen and Company and RBC each cut their price targets on RIG by $1, to $12 and $16, respectively, after the company provided a downbeat update on its fleet, which included plans to scrap 16 floaters. This is just the latest fundamental folly for the offshore driller. Today, the security is 4.6% lower at $14.55, which isn't unusual, since Transocean LTD has lost 68% since hitting an annual high of $46.12 on June 23. In the face of these struggles, speculators haven't been afraid to place bearish bets. RIG's 10-day put/call volume ratio at the ISE, CBOE, and PHLX comes in at 5.25 -- an annual high. Elsewhere, not one of the 16 analysts covering the shares deem them worthy of a "buy" rating.

  • GES is up 9.6% this morning at $18.35, after the company posted better-than-expected profits for its fiscal fourth quarter. However, the company outlined an underwhelming 2015, which prompted four brokerage firms to lower their price targets on the stock, including Topeka, which cut its price target to $17 from $18. In the past three months, Guess?, Inc. has underperformed the S&P 500 Index (SPX) by 16 percentage points. Even so, near-term speculators remain call-skewed. Specifically, GES' Schaeffer's put/call open interest ratio (SOIR) of 0.47 is lower than 99% of all readings from the past year, meaning short-term calls have rarely been more popular. A reversal of speculator behavior could weigh on the security going forward.

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