Schaeffer's Trading Floor Blog

Will Rising Implied Volatility for Oil Spill Over to Stocks?

While SPY volatility stays flat, expectations for a big oil move are ramping up

by 11/25/2014 8:41 AM
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I'm listening to the TeeVee when I hear a feature on oil volatility and anticipation thereof. My first thought is that, yeah, it was volatile for a few months. But that has kind of abated, albeit at lower levels. And the pundit-sphere tends to overstate volatility. Like we noted last week, it's the rare person that comes out and says they expect less volatility going forward -- in anything.

Silly me, they actually have a good point in oil.

United States Oil Fund LP (USO), which is sort of the iPath S&P 500 VIX Short-Term Futures ETN (VXX) in crude (at least, the way it will drift slowly over time amidst what looks like equilibrium), has had a rough four months. It was 39.44 at its 2014 peak in mid-June. It's now about 29, not too far above its lows near 28 a few days ago. USO's 10-day realized volatility is about 25, almost near the 2014 highs of 28, and well above typical levels in the mid-to-high teens.

For the record, 10-day realized volatility in SPDR S&P 500 ETF Trust (SPY) still carries a 3 full, so USO volatility is downright respectable.

If you told me all this and asked me to guess the implied volatility in USO, I'd expect to see it above-average, given that USO itself is near the lows. But I'd also expect to see it at a discount to the current realized volatility. Mean reversion coming up, right? That translates to something like an 18 "VIX" in USO.

Well, I would have lost a mint selling options at or near that volatility. The USO VIX is now about 34.5, essentially the high for the year. That's somewhat enormous, given that volatility here generally stayed around 20-21 and below until early October.

So I stand completely corrected on this topic. The market truly does anticipate some major price action in oil over the next month.

Will it translate over to general equity volatility? Stocks themselves were moving with some reasonable correlation to crude while the recent shakeout was going on. But that ended about a month ago. Crude has stayed in the doldrums, while stocks flipped the script and took out old highs.

As to volatility spilling over, there's not much sign of that just yet. The equity volatility we know is pathetic. Bond volatility has trended lower as well, though not quite as abruptly. Currencies are meh. The only major spot where we see volatility somewhat elevated is gold, which makes some sense in that it ties into crude a bit.

Oil volatility is definitely something to keep on the radar, but not to obsess much over.

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

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Analyst Update: Aruba Networks, Inc., Priceline Group Inc, and Verizon Communications Inc.

Analysts offered their two cents on ARUN, PCLN, and VZ

by 11/24/2014 1:28 PM
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U.S. stocks are flat in early afternoon action, as traders sit on the sidelines amid a holiday-shortened week. Among equities attracting the attention of analysts are tech concern Aruba Networks, Inc. (NASDAQ:ARUN), travel site Priceline Group Inc (NASDAQ:PCLN), and telecom issue Verizon Communications Inc. (NYSE:VZ).

  • ARUN is 1.6% higher at $19.12, paring a portion of Friday's 13.7% post-earnings plunge. In fact, Raymond James waxed optimistic on Aruba Networks, Inc., predicting the company will "grow 17% this fiscal year" -- outpacing expected industry growth -- "while expanding margins at the same time." As such, the brokerage firm upgraded ARUN to "outperform" from "market perform," overshadowing a downgrade to "underperform" from "neutral" at BofA-Merrill Lynch. In the wake of last week's bear gap, ARUN's 14-day Relative Strength Index (RSI) dropped to 31 -- on the cusp of oversold territory, suggesting a short-term rebound may have been in the cards. Meanwhile, most analysts remain devoted to ARUN, as 11 out of 21 maintain "buy" or better opinions.

  • PCLN is 0.4% higher at $1,156.01, after Credit Suisse launched coverage with an "outperform" rating. Priceline Group Inc's sector peers weren't so fortunate, with Orbitz Worldwide, Inc. (NYSE:OWW) and HomeAway, Inc. (NASDAQ:AWAY) earning new "neutral" opinions. On the charts, PCLN is just south of its year-to-date breakeven level, with recent rally attempts stalling in the $1,200 neighborhood -- home to the equity's 40-week moving average. Nevertheless, Wall Street remains upbeat, as 16 out of 17 analysts offer up "buy" or better endorsements. Plus, the consensus 12-month price target of $1,334.60 represents expected upside of 15.4% to the stock's current perch, and stands in territory not explored since mid-March.

  • Finally, VZ has shed 1.7% to linger near $49.35 -- and is in danger of ending south of $50 for the first time this month -- after a downgrade to "neutral" at Citigroup. The negative note is relatively rare for Verizon Communications Inc., which boasts 17 "strong buys" and two "buy" ratings, compared to five lukewarm "holds" and not a single "sell." Echoing that optimism, option buyers have been upping the bullish ante on VZ, even though the Dow component has lagged the blue-chip barometer in 2014. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day call/put volume ratio of 5.24 sits just 1 percentage point from a 12-month peak. In other words, option traders have picked up VZ calls over puts at a near-annual-high clip during the past two weeks.

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U.S. stocks are extending their record-setting run today, as Wall Street continues to applaud overseas stimulus measures. Among the names making significant moves are 3-D printer maker 3D Systems Corporation (NYSE:DDD), fertilizer firm Potash Corp./Saskatchewan (USA) (NYSE:POT), and alternative energy issue Trina Solar Limited (ADR) (NYSE:TSL). Here's a quick look at how DDD, POT, and TSL are faring on the charts today.

  • DDD is 3.1% higher at $36.21, on news the firm will buy Cimatron Ltd. (NASDAQ:CIMT) for about $97 million. From a longer-term perspective, 3D Systems Corporation remains 60% lower year-to-date, and has underperformed the broader S&P 500 Index (SPX) by more than 36 percentage points during the past three months. As such, it's no surprise to find short interest represents more than 35% of DDD's total available float, though some of those skeptics may be picking up options hedges. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 2.22 stands higher than 86% of all other readings from the past year, pointing to a healthier-than-usual appetite for long calls over puts of late.

  • POT is down 4.8% at $34.84, on reports that Russian rival Uralkali is preparing to restart operations at half its damaged mine. Last week, news that production at the mine was halted sent POT and most of its sector peers soaring, though the equity's rally was stifled in the $37 region -- where the security sat before an early July bear gap. Prior to today's retreat, the stock's 14-day Relative Strength Index (RSI) soared to 72 -- in overbought territory, suggesting a pullback may have been in the short-term cards. In the options pits, Potash Corp./Saskatchewan's (USA) short-term contracts are flying off the shelves, as the equity's 30-day at-the-money implied volatility has popped 9.7% to 23.1%, and overall options volume is running at three times the average intraday pace. While bears are seemingly buying to open the weekly 11/28 34.50-strike put, it looks like bulls are purchasing to open weekly 11/28 35-strike calls.

  • TSL is 6.4% lower at $10.23, after the company reduced its full-year solar module shipment guidance. The post-earnings reaction is likely music to options traders' ears, as speculators were upping the bearish ante ahead of this morning's report. The stock is now sitting on a 25% year-to-date loss, and could be vulnerable to downgrades and price-target cuts, should bullish analysts jump ship. Currently, four out of six brokerage firms offer up "strong buy" opinions of Trina Solar Ltd. (ADR), and the consensus 12-month price target of $18.31 represents expected upside of 79% to the stock's perch.

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Analyst Downgrades: Barrick Gold Corporation (USA), Keurig Green Mountain Inc, and Pandora Media Inc

Analysts downwardly revised their ratings on ABX, GMCR, and P

by 11/24/2014 9:28 AM
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Analysts are weighing in today on precious metals producer Barrick Gold Corporation (USA) (NYSE:ABX), coffee concern Keurig Green Mountain Inc (NASDAQ:GMCR), and Internet radio issue Pandora Media Inc (NYSE:P). Here's a quick roundup of today's bearish brokerage notes on ABX, GMCR, and P.

  • Raymond James weighed in on a number of mining issues, including ABX, where the brokerage firm cut its price target to $17 from $18, and underscored its "market perform" rating. On the charts, the shares are down more than 27% year-to-date, and have seen a recent rebound contained by their descending 40-day moving average. Not surprisingly, the brokerage crowd is pretty united in its skeptical stance toward Barrick Gold Corporation (USA). Specifically, 15 of the 17 analysts following the security have assigned it a "hold" or "strong sell" recommendation, mirroring the recent pessimism noted in ABX's options pits. On Friday, ABX settled at $12.85.

  • GMCR was started with a "neutral" rating at Longbow Research, despite the stock more than doubling in value year-over-year to trade at $140.37. Late last week, though, the equity plummeted below its previously supportive 40-day moving average, following a disappointing current-quarter forecast. This pullback is likely being cheered in the options pits, as Keurig Green Mountain Inc's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.94 sits above 73% of other readings taken in the last year. However, it's possible some of these bearish positions may have been initiated by shareholders seeking a pre-earnings hedge -- a smart move, given the post-event sell-off.

  • Finally, P saw its price target slashed by $10 to $35 at Pacific Crest -- though the brokerage firm reiterated its "outperform" rating. Technically speaking, it's been a tough year for Pandora Media Inc, which has lost 27% of its value to rest at $19.40. In fact, during the past three months, the stock has lagged the broader S&P 500 Index (SPX) by 30 percentage points. Inexplicably, 72% of analysts covering the shares maintain a "buy" or better assessment, compared to six "holds" and one "strong sell." Plus, P's consensus 12-month price target of $30.61 stands about 58% above current trading levels. In other words, the equity is at risk of getting hit with additional price-target reductions and/or downgrades.

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Buzz Stocks: Tesla Motors Inc (TSLA), Lions Gate Entertainment Corp. (USA), and Starz

Today's stocks to watch in the news include TSLA, LGF, and STRZA

by 11/24/2014 9:17 AM
Stocks quoted in this article:

U.S. stocks are set to kick off a holiday-shortened week with modest gains. Among the equities in focus are electric vehicle maker Tesla Motors Inc (NASDAQ:TSLA), as well as media companies Lions Gate Entertainment Corp. (USA) (NYSE:LGF) and Starz (NASDAQ:STRZA).

  • TSLA is pointed 1% higher ahead of the bell, after CEO Elon Musk said the firm is in talks to collaborate with Germany's BMW on "battery technology or charging stations." On the charts, TSLA has added 61.4% in 2014, with pullbacks contained by its 200-day moving average. More recently, the shares finished Friday at $242.78 -- just below their bearishly crossed 10-week and 20-week trendlines -- and have underperformed the S&P 500 Index (SPX) by about 13 percentage points during the past three months. As such, Tesla Motors Inc's short-term options crowd has grown increasingly pessimistic, as the equity's Schaeffer's put/call open interest ratio (SOIR) of 1.58 stands higher than 98% of all other readings from the past year -- implying that near-term traders have rarely been more put-heavy.

  • LGF is set to surrender 3.2%, after the latest "The Hunger Games" installment fell short of forecasts at the box office. While the movie raked in an estimated $123 million in the U.S. and Canada its opening weekend -- marking the biggest domestic debut of the year -- the numbers lagged the two series predecessors. The shares of Lions Gate Entertainment Corp. (USA) dropped 5% on Friday, settling at $33.25, amid early signs of weakness for the movie. The stock is now trading south of its 10-day and 20-day moving averages for the first time since Oct. 20. Should LGF extend its pullback, a flood of bearish brokerage attention could exacerbate selling pressure, as all nine covering analysts maintain "buy" or better opinions. Plus, the average 12-month price target of $39.69 stands in uncharted territory for the stock.

  • Finally, LGF is also making headlines as a potential suitor for STRZA. According to The New York Post, Starz is looking to sell itself for $5 billion, with LGF and CBS Corporation (NYSE:CBS) emerging as the most likely buyers. Against this backdrop, STRZA is poised to pop 10.3% at the opening bell, and could explore all-time highs north of $35. The equity has already added 10.1% in 2014, and today's jump could spook a few shorts into hitting the exits. Short interest represents nearly eight sessions' worth of pent-up buying demand, at STRZA's average pace of trading -- plenty of fuel for a short squeeze to push the security even higher.

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