Tuesday, August 31, 2010

Emerging Markets Bond ETFs Soar

While there have been pockets of strength in emerging markets for equities (see links below), emerging markets bonds have been even stronger performers in 2010, both on an absolute and risk-adjusted basis. In fact, if one compares the chart of emerging markets bonds below, the gap between emerging markets and developed markets looks strikingly similar to what was seen on the equity side in Chart of the Week: Rethinking Geography.

I first wrote about PCY (the PowerShares Emerging Markets Sovereign Debt Portfolio ETF) back in October 2008 in the context of an indicator of the strength of the global economic in general and emerging markets in particular. Since that time, PCY has been an extremely strong performer, gaining 35.6% in 2009 and adding another 13.0% so far in 2010. Along the way, PCY has attracted completion in the form of EMB, the iShares USD Emerging Market Bond ETF, which was up 15.4% in 2009 and is up 11.5% year-to-date in 2010. Of course both PCY and EMB have been able to post these excellent returns with only a fraction of the risk of their equity market counterparts.

For comparison sake, I have also included two international bond ETFs that have a much higher weighting in developed markets than emerging markets. Of these two the more liquid is SPDR Barclays Capital International Treasury Bond ETF (BWX); the S&P/Citigroup International Treasury Bond ETF (IGOV) is a relative newcomer. A shorter duration option in this space is the S&P/Citigroup 1-3 Year International Treasury Bond ETF (ISHG).

It may be a global marketplace, but geography continues to have a strong influence over local and regional risk and reward. Without the sovereign debt problems, zombie banks and housing bubbles, emerging market debt is an attractive place to diversify a portfolio and capture a relatively high yield, such as the 5% or so currently available from PCY.

Related posts:


[source:ETFreplay.com]

Disclosure(s): long PCY at time of writing

Monday, August 30, 2010

More Top Emerging Markets ETFs

Entirely by accident, the theme of the last two charts of the week has been emerging markets. A week ago, in Chart of the Week: Rethinking Geography, I chose to highlight how Asian and European emerging markets ETFs had very similar performance charts, much more so than the relationship between each emerging market and its continent-specific developed market counterpart. Yesterday, in Chart of the Week: Irrepressible Colombia (GXG), I highlighted the 42% returns that the Global X/InterBolsa FTSE Colombia 20 ETF (GXG) has managed to post this year, tops among the geography-based ETFs.

As it turns out, there are four other country ETFs which have posted returns of over 20% this year. In the chart below I have highlighted these single country emerging market ETFs and added a fifth top performer for good measure. Ranked in terms of 2010 performance, these ETFs are for Thailand (THD), Chile (ECH), Malaysia (EWM), Indonesia (IDX) and Turkey (TUR).

On a related note, I had previously made two references to the Claymore/Zacks Country Rotation ETF (CRO) as one option for investors who might be looking for an ETF which took advantage of a third party “strategy-in-a-box” country rotation model. For the record, aftera disappointing run, Claymore Securities is set to close CRO in at the end of next week, with the last day of trading on September 10th.

Even in a flat market, ETFs with 20% annual returns are out there. Sometimes it takes a little creative thinking to find them and get on board in time to capture a large portion of that move.

Related posts:


[source: ETFreplay.com]

Disclosure(s): long GXG, EWM and IDX at time of writing

Sunday, August 29, 2010

Chart of the Week: Irrepressible Colombia (GXG)

While U.S. investors can be forgiven for thinking that stocks have been stuck in a fairly narrow trading range for the last 3 ½ months, those who are scanning the globe for investment ideas are likely to have seen an entirely different investment climate.

A case in point is the Global X/InterBolsa FTSE Colombia 20 ETF (GXG), which has regularly been showing up as one of the top geography-based ETFs in my weekly newsletter. GXG is up 42% in 2010, handily outdistancing the BRIC ETF, EEB, and the popular broad-based emerging markets ETF, EEM, which are down -4.8% and -1.8% year-to-date, respectively.

Whereas BRIC has been a popular emerging markets investment theme for the past few years due to the popularity of Brazil (EWZ), Russia (RSX), India (EPI) and China (FXI), some have suggested that the current decade may turn out to be the decade of so-called frontier ETFs, with countries like Colombia, Indonesia (IDX), Vietnam (VNM), Egypt (EGPT), Turkey (TUR) and South Africa (EZA) among the top performers. These frontier ETFs already have their own catchy acronym, CIVETS, in order to make them easier to recall.

In terms of economic firepower, don’t expect the CIVETS to displace the BRIC countries, but when it comes to returns, the CIVETS are already off and running. With the best performance of any country ETF so far in 2010, Colombia has been acting like the new lead dog and has earned the spotlight as this week’s chart of the week.

Related posts:


[source: StockCharts.com]

Disclosure(s): long GXG, IDX and VNM at time of writing

Friday, August 27, 2010

Google Fixes Gmail Problems Plaguing VIX and More Newsletter Subscribers

Apologies to all the VIX and More newsletter subscribers who have been victimized by Google’s (GOOG) Gmail glitch that resulted in multiple emails containing Sunday’s subscriber newsletter.

According to Google's technical team and news reports, this glitch was finally resolved yesterday.

I note that a few subscribers have elected to cancel their subscription during this period of Gmail difficulties. To those who have canceled their subscriptions, I want to make four points:

  1. Google and various news reports (see links above) confirm that the problem originated with Google
  2. the multiple emails did not involve any virus (Norton and two other anti-virus programs confirm I am running in a virus-free environment) and thus did not put any subscriber at risk
  3. I elected not to communicate more than once during this period, because I was concerned about starting another chain reaction of recurring emails
  4. anyone who recently canceled their subscription and wishes to re-subscribe may do so here and receive the next 14 days free of charge

Thank you all for your understanding and patience.

Cheers and good trading,

-Bill

Disclosure(s): none

Thursday, August 26, 2010

More Strange Happenings in the VIX Term Structure

Today was a very unusual day in the land of VIX futures. As the VIX futures term structure graphic below shows, the volatility futures moved upward at a rate that was roughly equal across the next eight expiration months.

With the front month VIX futures 45% above the lifetime average in the VIX, one would anticipate that expectations regarding mean reversion would significantly dampen the rise in VIX futures prices in the more distant expirations, much like the pattern I posted about two weeks ago and on many previous occasions. In fact, with the VIX this high, I don’t ever recall seeing the back month VIX futures keeping up with the front month futures in any substantial increase in the VIX.

If you are on the fence about becoming a survivalist and are looking for a sign, look no farther than the VIX futures, which are predicting daily changes in the S&P 500 index of more than 2% at least one out of every three days, starting in October and extending out at least as far as VIX futures are quoted, which is through April 2011. In order to reach their current January valuation, the VIX would have to rise more than six points (23%) in the next 4 ½ months or so. Another way of looking at the expectations for a jump in volatility would be to consider that the current 20-day historical volatility in the SPX would have to double from the current level of 16.70 in order to make these VIX futures predictions pan out.

Between now and then, there are elections, Fed meetings, two earnings reporting seasons and countless economic data reports that will color the way investors look at the world.

With such a large difference between the current situation and how investors are pricing in future volatility, there are many intriguing trading opportunities. Apart from the usual suspects of VIX options, VIX futures and the VXX ETN, don’t forget VXZ, the iPath S&P 500 VIX Mid-Term Futures ETN, which targets VIX futures with a five month maturity, which translates to late January.

[As an aside, note that investors are pricing in lower volatility in December, due to the holiday season, just as had been the case for the August VIX futures, when traders were anticipating a relatively slow market due to the vacation season.]

Related posts:


[source: FutureSource.com]

Disclosure(s): short VIX and VXX at time of writing

Wednesday, August 25, 2010

VXX Weeklys Begin Trading Tomorrow

Thanks to a tweet from Adam Warner of the Daily Options Report for alerting me to the fact that VXX options have just been added to the list of 28 indices, ETFs and stocks on which the CBOE is now trading weekly options, or as the exchange calls them, weeklys.

The VXX ETF and VXX options are two subjects I have covered in considerable detail over the course of the past two years, so rather than repeat myself, I will encourage readers to start with the links to older posts on the subject toward the bottom of this post or refer to the keyword links herein and labels at the very bottom of this post.

Weekly options are the new kid on the block and something I jumped on early and have enjoyed, particularly as someone who has been an aggressive seller of options over the course of the last 1 ½ years. Again, there are links above and below for readers to find some of what I have said on the subject to date.

I should also note, however, that the August issue of Expiring Monthly: The Option Traders Journal (published on Monday) has three articles on weekly options, including a guest article from Vance Harwood of the Six Figure Investing blog. Farther afield, Steven Sears of Barron’s tackles the subject of weeklys in today’s The Striking Price column: The Weeklys Get Stronger.

Below I have included a watch list I set up on Livevol Pro that has this week’s 28 weekly options plus next week’s addition, VXX, sorted by call volume. Note that VXX replaces Dendreon (DNDN) and brings the current breakdown of weeklys to 12 equities, 11 ETFs and 5 indices.

Related posts:


[source: Livevol Pro]

Disclosure(s): short VXX at time of writing; Livevol is an advertiser on VIX and More

Tuesday, August 24, 2010

Expiring Monthly August 2010 Issue Recap

As last week was options expiration, this means the August issue of Expiring Monthly: The Option Traders Journal was published yesterday and is available for subscribers to download.

This month’s feature section includes three articles on weekly options: a guest article from Vance Harwood of the Six Figure Investing blog; a punchy piece from Adam Warner with the suspiciously familiar title, Weeklys & More Weeklys; and a Wolf Against the World segment in which Adam and Mark Wolfinger debate the merits of weeklies.

I was particularly active for this issue, interviewing Jay Kaeppel on a wide variety of subjects from the VIX to futures to options; reviewing The Complete Guide to Options Selling (2nd edition), by James Cordier and Michael Gross; and launching the first in a series of articles on the VIX futures term structure – a subject on which readers of this blog appear to have more questions than answers.

With six issues of the magazine to reflect on, I must say that the cumulative body of work has exceeded my very high expectations.

I have attached a copy of the Table of Contents for the August issue below for those who may be interested in learning more about the magazine. Subscription information and additional details about the magazine are available at http://www.expiringmonthly.com/.

For more on related subjects, readers are encouraged to check out:


[source: Expiring Monthly]

Disclosure(s): I am one of the founders and owners of Expiring Monthly

Monday, August 23, 2010

Chart of the Week: Rethinking Geography

I have a tendency to look at the world through ETFs and when thinking globally, often in terms of country ETFs. I find that regional ETFs too often dilute some of the trends and ideas I am looking to capture. Further compounding the problem is that I have a tendency to think in terms of emerging markets and developed markets more than, say, broad geographic boundaries such as Europe and Asia.

Even with this bias, I was surprised to see in this week's chart of the week that if one looks at the performance of emerging and developed markets ETFs for both Europe and Asia over the course of the past year, the strong correlation is not between the geographies, but across the emerging/developed distinction. In spite of all the sovereign debt problems in Europe, emerging Europe (GUR) has generally been the top performer of the group, but this performance has been closely matched by emerging Asia (GMF). Not surprisingly, developed markets in Europe (IEV) have been more volatile and slight underperformers when compared to their developed market counterparts in Asia (VPL), but the margin has been a relatively slim one.

For me at least, the key takeaway is that emerging Asia looks a lot more like emerging Europe than developed Asia. Perhaps it is time to start rethinking our investing geography…

Related posts:


[source: ETFreplay.com]

Disclosure(s): none

Friday, August 20, 2010

VXX Implied Volatility Spikes into Expiration

With VIX options expiring on Wednesday and VXX options expiring today (technically tomorrow) in the normal monthly expiration cycle, this is a big week for volatility traders who are comfortable holding options positions into expiration.

One of the things I like about expiration week is the manner in which time and volatility can sometimes become distorted, presenting some interesting trading opportunities.

Looking at the implied volatility of VXX this week, one can see that August IV (red line) was tracking in a fairly tight range of 60-70 from Monday through Wednesday. Yesterday saw a little more noise and some IV spikes into the upper 70s. Today there has been a quantum change in implied volatility, with VXX IV shooting up over 120 and gyrating wildly throughout the session, as the chart below shows. Interestingly, the underlying VXX ETF has not been particularly volatile today. I attribute much of the erratic change in implied volatility to the approach of options expiration.

While VXX options are certainly not for the faint of heart, particularly during expiration, in my opinion these newfangled products are just the place where retail traders are more likely to be able to find an edge than some of the better-known institutional warhorses.

Related posts:


[source: Livevol Pro]

Disclosure(s): short VXX at time of writing; Livevol is an advertiser on VIX and More

Thursday, August 19, 2010

Looking Under the Hood of the Philly Fed Index Report

After mentioning the positive surprise in the July industrial production and July capacity utilization numbers in yesterday’s Industrial Production and Capacity Utilization Since 1988, it is only fair to note that today’s Philly Fed index painted a much uglier picture of the manufacturing landscape.

Officially known as the Philadelphia Fed’s Business Outlook Survey, the Philly Fed index is derived from a monthly survey of manufacturers in the Third Federal Reserve District, which is comprised of Delaware, the southern half of New Jersey and all of Pennsylvania except for about the westernmost quarter of the state. Manufacturers are asked to indicate the direction of change in overall business activity and in the various measures of activity at their plants: employment; working hours; new and unfilled orders; shipments; inventories; delivery times; prices paid; and prices received.

The results of these surveys are used to create a regional ‘diffusion index,’ which is essentially the percentage of respondents who see an increase in activity minus the percentage of respondents who see a decrease. Respondents are asked to evaluate both current activity (current month versus last month) and their expectations for future activity (six months from now versus current month.)

The number that hits the headlines is a composite ‘general activity’ index covering all aspects of current activity. Today that number was -7.7, down from +5.1 in July. The number that rarely is reported is the future ‘general activity’ index, which fell from +25.0 to +19.6. (see press release and summary of returns table for additional details)

The chart below captures 15 years of both the current and future general activity data, with recessionary periods shaded in gray.


I also like to look at some of the component data. Three of my favorites are new orders for a glimpse into the future, shipments for a sense of the current level of economic activity and employment, particularly given the heightened sensitivity to this issue and the need for wages to help repair the consumer balance sheet. The chart below captures all three of these components of the general activity index in the same format (percentage of respondents reporting an increase in activity minus those reporting a decrease.)


The chart shows that while new orders have slipped from July to August, manufacturers in the Philadelphia area are still optimistic about an increase in orders six months from now and are even more optimistic this month than last month, reversing a declining trend. Shipments have also showed a decline from July to August, but again, respondents are optimistic about the situation six months from now.

What really got my attention was the employment diffusion index, which shows relatively flat current employment from May to the present, but fairly significant declining expectations about employment six months from now. In fact, expectations are now for a slight decline in employment six months from now – the first time that manufacturers have been expecting a net decline in employment in over a year.

Related posts:

[source: Federal Reserve Bank of Philadelphia]

Disclosure(s): none

Wednesday, August 18, 2010

Industrial Production and Capacity Utilization Since 1988

After a streak of some lean economic data, the bulls were rewarded with a positive surprise in both the July industrial production and July capacity utilization numbers yesterday, both of which exceeded expectations and topped the June levels.

The chart below captures both measures of manufacturing activity going back to 1988 and shows that manufacturing appears to be continuing as one of the strengths of the recovery. While the chart captures monthly changes, it is important to point out that total industrial production in July was 7.7% above July 2009 levels, with utilities up 8.2% during the year, followed by 7.7% gains in manufacturing and a 7.5% advance in mining. Just as impressive, capacity utilization has increased in 12 of the past 13 months, gaining 0.7% in July after a flat June.

Related posts:


[source: Federal Reserve]

Disclosure(s): none

Monday, August 16, 2010

Three Books for Approaching Behavioral Finance

In my recent travels I plucked two behavioral finance books out of airport bookstores. Apparently Blink has triggered a new title and jacket aesthetic, as both of these books look as if they could have been companion volumes.

The quickest read of the bunch, Sway: The Irresistable Pull of Irrational Behavior (Ori Brafman and Rom Brafman), can easily be polished off in a three-hour flight. Frankly, this is the book’s main attraction, but also its weakness. Here is an entertaining read that provides a vignette-centric approach to illuminating the decision-making shortfalls humans are prone to making. Theories and conclusions are loosely woven around the vignettes to provide structure and coherence, yet most of these are self-explanatory from the examples. Sway has the readability of Freakonomics and is just as likely to be consumed in one sitting, but ultimately does little more than whet the appetite for anyone with an interest in getting to the full menu of behavioral finance. As an hors d'oeuvre, however, it is most enjoyable.

At first glance, Nudge: Improving Decisions About Health, Wealth and Happiness (Richard Thaler and Cass Sunstein), looks to be an only slightly heartier meal. In fact, Nudge retains the readability of Sway, but is much more comprehensive, better organized and yet has the heft of an academic introduction to behavioral finance. Nudge will probably require an overseas flight to digest, and is better suited for savoring over the course of multiple sittings.

In another league entirely is the encyclopedic Choices, Values, and Frames (Daniel Kahneman and Amos Tversky), which is a comprehensive collection of articles that represent the definitive thinking on much of the field of behavioral finance, which Kahneman and Tversky were instrumental in establishing. One could argue that Choices, Values, and Frames was the book which was largely responsible for Kahneman being awarded the Nobel Prize following Tversky’s death. This book is a densely packed buffet of ideas that is probably best consumed in small chunks over the course of weeks or months. It is not necessarily an easy read, but the ideas and research that went into it and the reflection and rethinking of the investment world that come out of it make it one of the most influential books in the realm of finance and investments.

Related posts:

Disclosure(s): none

Sunday, August 15, 2010

Chart of the Week: 10-Year Treasury Note Yields From 1990

The speed with which the yield on the 10-Year U.S. Treasury Note dropped from just over 4.00% in early April to just 2.68% as of Friday’s close is astonishing – and points to how the bond market is evaluating the prospects for deflation, recession and a prolonged economic malaise, or worse.

This week’s chart of the week captures the history of the yield on the benchmark 10-Year U.S. Treasury Note since 1990, when it was hovering in the vicinity of 9%. For additional context I have also included a gray area chart of the S&P 500 index. More often than not, yields on the long bond are positively correlated with equities, but this relationship can decouple, sometimes for an extended period of time.

Those who are interested in the history of the yield curve and may wish to experiment with an interactive tool with yield curve data going back to 1977 may wish to click through to Fidelity’s Historical Yield Curve page.

Related posts:


[source: StockCharts.com]

Disclosure(s): none

Friday, August 13, 2010

Retail Sales Since 1992

The chart below looks at retail sales (seasonally adjusted, including food services) going back to 1992 and updates a similar chart from February, Chart of the Week: Retail Sales Recovering.

The February headline no longer applies six months later, as retail sales fell on a month-over-month basis in both May and June, though data released today show a 0.4% uptick in July that translates into a year-over-year advance of 5.6%, as shown in the red line in the chart below.

When all is said and done, it will be the consumer who decides whether the economy grows, shrinks or maintains a holding pattern over the course of the next year or so. For now at least, consumers appears to be holding their cards close to the vest. Whether any of those are trump cards remains to be seen…

For more on related subjects, readers are encouraged to check out:


[source: Census Bureau]

Disclosure(s): none

Thursday, August 12, 2010

Surfing for Weekly Buy-Write Trades

One half hour into today’s trading, I would expect to see some evidence that the recent spike in volatility in stocks is subsiding. That seems to be the case, as the VIX opened at 27.21 and is now just over 26.00.

Before volatility falls any farther, I will be looking at some possible or buy-write (covered call) trades with the new weekly options that are expiring tomorrow.

When I screen for buy-write candidates, I generally start with a screen for the highest implied volatility stocks, ETFs and indices, then qualify these on liquidity terms, examine the proximity of the current price relative to the various strike prices, then review the charts for some of the finalists and add some sort of secret sauce at the end to come up with trades that fit my objectives.

In the graphic below, I have included all of the weekly options in which the underlying has an implied volatility is at least 30. The list has 18 candidates and prominently atop that list is the triple ETF pair for the financial sector: FAS and FAZ. Going down the list, Ford (F) and Bank of America (BAC) show excellent liquidity, while Apple (AAPL) is hovering just under an important round number and strike.

Enterprising souls may even consider buy-writes on both FAS and FAZ.

Volatility is up and the end of the week is nearing. Anyone looking at a buy-write strategy should take a close look at earnings for today and tomorrow which may impact the market, as well as a number of economic reports due out tomorrow morning, most notably the July retail sales data.

For more on related subjects, readers are encouraged to check out:


[source: Livevol Pro]

Disclosure(s): short VIX at time of writing; Livevol is an advertiser on VIX and More

Wednesday, August 11, 2010

Today’s Jump in the VIX Futures Term Structure

When we see a large VIX spike, I invariably see a similar spike in emails with the theme of “Are we there yet?” Naturally, investors want to know how far the VIX is likely to move, when the markets should be expected to reverse and whether they should trade with the rising VIX or against it.

These are all great questions and for the most part, the answers are not as simple as just plugging the current data into a spreadsheet and having it spit out something like another 2.16 points, 1.5 days and ‘start fading the VIX 45 minutes after tomorrow’s open…’

What is possible is to look at prior VIX spikes and understand some statistical tendencies. The more difficult part is to put VIX spikes in an overall context and answer questions such as whether the market had been trending up or trending down, whether the proximate cause of the selloff in stocks is geopolitical, macroeconomic, technical or whatever. (See Forces Acting on the VIX for a laundry list of potential influences on volatility.) Combining the art of context with the science of statistics, we are now on the doorstep of the dark art of forecasting volatility.

The best place to start when evaluating the current state of volatility is with the market’s expectations of future volatility and the best place to gather this information is in the form of VIX futures (or perhaps SPX implied volatility). The graphic below shows how market expectations of future VIX values have changed from yesterday’s close (dashed blue line) to about 1 hour and 40 minutes into today’s session (solid red line.) While it certainly has felt like a huge move, with the VIX up 17%, the 10.1% move in the front month (August) VIX futures still leaves us well below where investors believe the VIX will be in September and October.

The other important point to note, particularly if you are relatively new to VIX futures and want to understand them in the context of how they influence the VIX ETNs (VXX, XXV and VXZ), is that the VIX futures moves are not proportional. In fact, the front month typically moves much farther in percentage terms than the second month does, the second month moves more than the third month, and so on. One look at VIX Futures: The One Picture to Remember should drive that point home rather forcefully. The reason why front month futures are more sensitive to changes in the VIX than back month futures has to do with mean reversion. Simply stated, any one day movement in the VIX should do very little to change one’s view of where the VIX will be six or seven months out. On the other hand, with VIX August futures and options set to expire one week from today, the ripple effect from today’s action is certain to be felt in terms of how investors are looking at stocks – and volatility – one week from now. This also gets at the essence of the difference between VXX and VXZ as well as the slope of the term structure (whether it be in contango or backwardation) in the front months versus the back months.

For more on related subjects, readers are encouraged to check out:


[source: FutureSource.com]

Disclosure(s): short VIX and VXX at time of writing

Tuesday, August 10, 2010

What a Difference a Weekly Makes

Last week I made my first trade using weekly options. Part of the reason I am so excited about weeklys is that I would not have made the trade had only standard monthly options been available.

Last Monday, after the markets had jumped more than 2%, I was of the opinion that we would have choppy trading on Tuesday through Thursday, as investors chose to sit on the sidelines in advance of Friday’s nonfarm payrolls report.

My trade of choice was a short straddle and my preferred underlying was IWM, the iShares Russell 2000 Index ETF. When I looked at the available options, the weeklys almost jumped off of the page, with superb liquidity and much higher implied volatility. As the intent of my trade was to take maximum advantage of time decay (theta), choosing the weeklys were a no-brainer.

A look at the chart below shows the difference in IV between the IWM weekly options that expire this Friday (red line) and the standard monthly options that expire the following week (yellow line.) All things being equal (and they never are) the higher implied volatility of the shorter-dated weeklys translates into substantially higher time decay.

So…if you are comfortable trading options that are toward the end of the expiration cycle, take a close look at the weeklys. If you are not comfortable doing this (controlling gamma risk is critical), then perhaps future posts on weekly options will assist in this regard.

For more on related subjects, readers are encouraged to check out:


[source: Livevol Pro]

Disclosure(s): long IWM at time of writing; Livevol is an advertiser on VIX and More

Monday, August 9, 2010

Weekly Options Gain Momentum

Up until a couple of weeks ago, it was almost impossible to find anyone who thought it was worthwhile to mention weekly options: options that have the same terms as standard monthly options, except that they expire on every Friday other than the third Friday of the month (which is when standard monthly options expire.)

For those who find the definition above a little too sparse, the CBOE has an excellent FAQ for weeklys; the Options Industry Council (OIC) also has a weekly options FAQ for those who wish to learn a little more about these products.

Some of my fellow bloggers have already taken up the cause of weekly options and have shared some of their initial thinking on the subject:

Before anyone gets too excited about new products, one of the first questions is invariably about liquidity and market depth. Rest assured, there is already substantial liquidity and market depth in the weekly options being offered. In the table below, I have calculated today’s volume in weekly options and standard options for the two at-the-money strikes for all the weeklys listed by the CBOE. Note that for the most part, the weekly options volumes are running at about one third to one half of the rate of the standard monthly options. In the case of IWM and DNDN, today’s weekly volume exceeded the volume in the monthly options.

For the record, I made my first weekly option trade last week and I was excited because it was a trade I never would have made unless it was near the end of an expiration cycle – a time frame many options traders avoid, but I like to embrace. Given the increasing popularity of weekly options and new end-of-cycle trading opportunities, I would recommend that anyone who has not already done so to spend some time with Jeff Augen’s excellent Trading Options at Expiration, where many of Jeff’s ideas can now be applied on a weekly basis.

I will have a lot to say about weeklys (blame the CBOE for the spelling choice) going forward. In the meantime, readers looking to learn more about these products should start with the CBOE Weekly Options splash page.


[source: CBOE, Livevol Pro]

Disclosure(s): long IWM at time of writing; both the CBOE and Livevol are advertisers on VIX and More

Sunday, August 8, 2010

Chart of the Week: July Nonfarm Payrolls

Any week the employment report is on the schedule, the big story is likely to be the nonfarm payrolls and this week was no exception.

While the census employment cycle has lately skewed the headline number, the private payroll data, hours worked and average hourly earnings indicate that there are continued signs of improvement, small though they may be.

The chart of the week graphic below tracks the headline net monthly nonfarm payroll change (blue and red columns) as well as the unemployment rate (red and black line) going back to 1999.

It is worth observing that even without the fluctuations caused by the census employment situation, it is not unusual for the net payroll changes to see a significant degree of monthly noise in the short term and/or exhibit some pattern of starts and stops over the longer term as the economy lurches forward into a more coherent recovery mode.

Finally, it is important to note that in order for the employment situation to cease being a drag on the economy, merely breaking even on payrolls from month to month is not enough. Most estimates indicate that 100,000 – 125,000 new jobs need to be created each month just to accommodate the demographics of a growing labor force.

For more on related subjects, readers are encouraged to check out:


[source: Bureau of Labor Statistics]

Disclosure(s): none

Friday, August 6, 2010

Thoughts on VECO After a 13% Fall

Less than two weeks ago, high flier Veeco Instruments (VECO) crushed second quarter earnings and revenue estimates and also raised forward guidance. In the wake of the strong earnings report, analysts at two firms, UBS and Merrill Lynch/BofA, raised their target stock price for VECO to $60 and $65, respectively.

VECO closed at 45.52 on Wednesday, up 2% from the pre-earnings price. Yesterday, however, the stock fell 13% to 39.61 in a move that was attributed to a report in a Taiwanese newspaper that flat-panel display manufacturers would be cutting back on LED orders.

While some analysts debated whether the market may have overreacted to this report, we were fortunate enough to have an earnings report from Rubicon Technology (RBCN), an important supplier to LED chip manufacturers, right after the market closed.

As was the case with Veeco, Rubicon beat on both earnings and revenues and also issued upside guidance. Rubicon’s President and CEO Raja Parvez had only positive things to say about demand in the LED market:

“Demand continues to be very strong from the LED market as the adoption of LED back lighting for medium to large displays such as LED LCD televisions, desktop monitors and Notebook and Netbook computers continue at a rapid pace and general lighting applications for LED continue to advance.” [see Seeking Alpha conference call transcript for more details]

In after hours trading, Rubicon was up 1.5%, while Veeco added 0.6% on low volume.

After today’s big loss, Veeco is now 29% off of its 52-week high, which was established in late April. While I generally do not trade much after hours, I did use today’s selloff and the Rubicon earnings report as an opportunity to pick up some VECO shares.

Normally after a stock is hammered and I think the selloff is overdone, I like to sell puts that are at the money and figure that if the premium is high enough, I will win whether the stock reverses course and rallies or continues to struggle, with the result that I am assigned the stock. Thanks in part to the big spike in implied volatility (see chart below) VECO’s August 40 puts, which have 14 days until expiration, were last quoted at 2.20 – 2.35. An investor could sell the puts and have a cost basis below 37.50 should they end up in the money. Alternatively, one could buy the stock and sell the August 40 calls (1.80 – 1.95) and get a 4.7% yield for two weeks of effort.

Valuation should not be a deterrent here. Right now VECO is valued at 9.0 times 2010 consensus earnings and only 8.2 times anticipated earnings for 2011.

Whether one favors stocks or options, there are a lot of interesting opportunities springing up in VECO in particular and in the LED space (including CREE and AIXG) in general.

For more on related subjects, readers are encouraged to check out:


[source: Livevol Pro]

Disclosure(s): long VECO at time of writing; Livevol is an advertiser on VIX and More

Thursday, August 5, 2010

Economic Data Trends in Advance of Nonfarm Payrolls

A little over a month ago, in Trends in Economic Data Relative to Expectations, I first posted a slightly different version of the chart below on the blog. The chart turned out to be a surprise hit, so this time around I am updating the data (a proprietary methodology in which I evaluate the performance of key economic data releases relative to consensus expectations) as well as adding the S&P 500 index as a beige area graphic.

In terms of takeaways, deteriorating employment and consumer data continue to drag down the economic recovery. Manufacturing, which was an area of strength early in the year, has more recently become a source of weakness. In terms of strength, I continue to be surprised that the aggregated construction and housing numbers are better than consensus estimates.

For additional details on the data included in each grouping, refer to the link above.

For more on related subjects, readers are encouraged to check out:


Disclosure(s): none

Wednesday, August 4, 2010

Record Call Activity in VXX

The iPath S&P 500 VIX Short-Term Futures ETN (VXX) saw record call volume yesterday, with over 49,000 call contracts traded (compared to 93,000 VIX calls.)

VXX calls are active once again today with 25,000 contracts traded in the first two hours, compared to only 1,500 puts.

VXX call buyers have yet to demonstrate that they are the ‘smart money’ when it comes to predicting the future of volatility, but this fact is obviously is not dissuading at the moment.

Looking at the VIX futures, the second month futures are trading at 3.30 point higher than the front month, continuing the trend of 21 consecutive trading days with at least an 8% premium for the second month over the front month VIX futures. Call it the “contango rip tide” if you will.

I mentioned the surge of interest in VXX calls a little over a week ago in VXX Calls Attracting Interest and wondered aloud whether “there is a little desperation in the air that may be triggering some revenge trades in VXX.”

It is certainly not difficult to make the case for a rise in volatility from current levels, but with negative roll yield, time decay and other factors, that doesn’t necessarily mean VXX calls will be profitable trades if this turns out to be the case.
For more on related subjects, readers are encouraged to check out:


[source: Livevol Pro]

Disclosure(s): neutral position on VXX via options at time of writing; Livevol is an advertiser on VIX and More

Tuesday, August 3, 2010

Wheat and the Commodity ETF Space

Anyone with even a passing interest in commodities has no doubt taken notice that the worst drought in Russia in at least 50 years, coupled with climatological excesses around the globe which have created a substantial disruption in the supply of agricultural commodities, most notably in wheat.

The graphic below from ETFreplay.com summarizes some of the impact on selected commodity ETFs and ETNs over the course of the past week. Note that JJG, the iPath Dow Jones-UBS Grains Total Return Sub-Index ETN, is up 9% in the past week and broader commodity and agricultural ETFs such as RJA and DBC have also been lifted significantly by the surge in agricultural futures prices.

In addition to JJG, investors looking for a grain-specific ETF/ETN may also wish to check out GRU, the ELEMENTS MLCX Grains Index Total Return ETN. As noted last Friday, investors can also take a long position in grains by shorting the ELEMENTS S&P Commodity Trends Indicator ETN (LSC), where 36.8% of the ETN is currently short grains.

For more on related subjects, readers are encouraged to check out:


[source: ETFreplay.com]

Disclosure(s): long JJF and short LSC at time of writing

Monday, August 2, 2010

XXV Has Arrived!

For day traders, the launch of triple ETFs ushered in a new era of highly liquid trading vehicles with narrow bid-ask spreads and exceptionally high intraday volatility. When FINRA (Financial Industry Regulatory Authority) implemented more stringent margin requirements for leveraged ETFs back on December 1, 2009, some of the luster came off of these products, particularly for the day trading crowd.

With the launch of the fully marginable iPath S&P 500 VIX Short-Term Futures ETN (VXX) earlier in 2009, I thought it was just a matter of time before VXX became part of that elite group of nitroglycerin-fueled fueled rocket pairs that were led by FAS and FAZ and supported by TNA and TZA. Sure enough, interest in VXX surged in December 2009 and by January the ETN was eclipsing the daily volume of all but FAS and FAZ.

One of the factors that held back VXX as a day trading vehicle was the absence of an inverse pair that would make it easier to go long and short volatility without having to short VXX and deal with “availability to short” issues.

Today, just two weeks into its life, XXV (the Barclays ETN+ Inverse S&P 500 VIX Short-Term Futures ETN) is proof that VXX now has a viable inverse counterpart, with bid-ask spreads and liquidity that make it an attractive day trading vehicle. XXV traded 715,872 shares today, reaching that volume level in one third the time it took to attract the same interest. VXX took almost four months to reach one million shares in a single session; my guess is that XXV hits that mark before the week is through.

While XXV will likely prove to be more attractive to many investors than shorting VXX, it should be noted that in its first two weeks, XXV has underperformed a comparable short VXX position in all but one trading session.

For more on related subjects, readers are encouraged to check out:


[source: StockCharts.com]

Disclosure(s): neutral position on VXX via options at time of writing

Sunday, August 1, 2010

Chart of the Week: Transports Leading…

For this week’s chart of the week, I have elected to shine some light on the Dow Jones Transportation Average (DJTA), which is revered by Dow Theory adherents, yet often underappreciated by a larger group of investors.

Since the March 2009 bottom, high relative strength readings in the transports have tended to precede significant bull moves in the broader markets. Rather than spell out how the transports might be a leading market indicator, I have chosen to use the chart below to show the performance of the DJTA over the course of the last thirty years and encourage readers to dig deeper. In my experience, the transports are generally an excellent proxy for the health of broader economy. Given the way the markets have recently reacted to earnings from FedEx (FDX) and have done so similarly for UPS, Union Pacific (UNP), Ryder (R) and others in the past, it appears as if I have a fair amount of company.

For more on related subjects, readers are encouraged to check out:


[source: StockCharts.com]

Disclosure(s): none

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