VIX Index vs. VIX Futures Variations During the Week

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Excerpt from the VIX Expiry webinar with Russell Rhoads, Instructor at the CBOE Options Institute. Russell Rhoads explains the details of the VIX expiration settlement process, including how the VIX Index is calculated.

DATE: Recorded November 29, 2011. After Market Close

CBOE Options Institute: http://www.cboe.com/learnCenter/OptionsInstitute1.aspx

For more educational webinars:http://hamzeianalytics.com/educational_webinars.asp

VIX Index vs. VIX Futures with CBOE Options Institute Instructor Russell Rhoads

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Excerpt from the VIX Expiry webinar with Russell Rhoads, Instructor at the CBOE Options Institute. As background to understanding and trading the VIX (CBOE Volatility Index), Russell Rhoads explains how the VIX Index is calculated and it's relation to the VIX Futures contracts.

DATE: Recorded November 29, 2011. After Market Close

CBOE Options Institute: http://www.cboe.com/learnCenter/OptionsInstitute1.aspx

For more educational webinars:http://hamzeianalytics.com/educational_webinars.asp

VIX Index Expiration Settlement: How Does it Work?

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Excerpt from the VIX Expiry webinar with Russell Rhoads, Instructor at the CBOE Options Institute. Russell Rhoads explains the details of the VIX expiration settlement process, including how the VIX Index is calculated.

DATE: Recorded November 29, 2011. After Market Close

CBOE Options Institute: http://www.cboe.com/learnCenter/OptionsInstitute1.aspx

For more educational webinars:http://hamzeianalytics.com/educational_webinars.asp

Trading Futures during American-style Options Expirations

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Trading Futures during European-style Options Expirations

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HOTS Weekly Options Commentary

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Peter Stolcers

Last week, the market tried to recover from the 350+ point Dow Jones drop on Friday. That first round of earnings featured financial stocks and their big write-downs spooked the market. As I mentioned in last week's commentary, I felt that the market would stabilize this week once a broader mix of earnings were released.

Through the course of the week we caught a performance glimpse from many different groups and sectors. The news was good overall and the guidance was decent. If you strip financial stocks out of the earnings picture, corporations have posted a 3% growth rate. That is much better than the flat earnings growth rate has been projected. The market found its footing and about one third of the companies in the S&P 500 have reported.





Next week is the “grand daddy” of all news weeks. We have an FOMC meeting, the Unemployment Report, and the busiest week of earnings releases. I believe the Fed’s dramatic action during the last meeting will give them a "free pass" this time around. They have made it clear that they are carefully monitoring economic conditions and they will do what it takes to keep us from going into a recession. Many analysts are looking for a .25% rate cut. If they don't get it, I feel the market will be accepting if the news includes dovish rhetoric. The dust will settle for a few days and the market will wait for the Unemployment Report. If we do get a rate cut, we will be off to the races.

Last month's employment figures were much stronger than expected. With the exception of the August number, the market has been able to rally after every Unemployment Report this year. I believe the employment picture is sound and the market will rally after the number.

Microsoft has been a dormant stock for many years and on Friday it staged a major breakout. It is a mega cap stock and it could lead the sector higher if it wakes up. Tech has been relatively strong recently and the sector could lead the market higher if the earnings continue to beat. The QQQQ is still only half of its “tech bubble” peak. Financial stocks are weak and the market needs leadership from the tech sector if it is going to stage a sustained rally. In the chart you can see how well the QQQQ has performed. It is bumping up against the relative high and it is poised to breakout.

These are some of the earnings highlights for the week ahead: ASH, CAN, HUM, K, RSH, SCHN, ATHR, FTI, OSG, SOHU, UHS, VTRX, AMED, AVP, BJS, CRDN, CL, ENR, CMC, FPL, RAIL, GT, HLT, MGM, ODP, PG, TEVA, TRW, X, UA, BWLD, CMG, DWA, FIC, GPRO, IVGN, LNET, MCK, RTI, PCU, WBSN, CCJ, CRS, GRMN, KFT, COL, SPW, RIG, WY, ANDE, ABX, XRAY, FMC, MTW, PHRM, TK, AGU, AZN, BDX, CAM, CVS, DNR, XOM, GTI, IGT, MRO, PCS, OSK, ROK, TBL, UTHR, WMB, CLF, CROX, CYTC, ERTS, GES, OII, WLT, WDC, CVX, EDS, IP, OMG, TLM. I see more good than bad in this list and the numbers should have a positive influence on the market.

We are headed into one of the most bullish periods of the year and I expect a year-end rally. Given all of the news next week, the market will find a catalyst to push it to new highs. End of month buying will also help to support prices.

HOTS Weekly Options Commentary

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Peter Stolcers

Let me start by welcoming many new subscribers this week. I live for set-ups like the week ahead and the opportunities are lining up. I’m glad to have you onboard!

This is the calm before the storm. Last week the market rallied on expectations that the Fed will lower rates. The debt market has priced in a 70% probability of a .25% rate cut and the 30% probability of a .50% rate cut. The dismal Unemployment Report dramatically increased rate cut forecasts.

The U.S. dollar hit new 30-year lows against the Canadian dollar and against the Euro this week. We have a huge trade imbalance and a weak dollar forces us to pay more for the goods we import. Translation: a weak dollar is inflationary. Oil has just hit an all-time high. Last week, TSN said that profit margins are being hurt by higher food costs. I've even heard that Italians are boycotting pasta because wheat prices have forced it up 25%. There are countless examples of inflation (tuition, health care, local taxes) that don’t show up in the Fed’s numbers. Tuesday, a “hot” PPI number could add to the excitement.

I believe the Fed will reluctantly lower interest rates by .25% next week. They will lace their rhetoric with inflationary comments to curb future rate cut expectations. The market will have an initial negative reaction.





The earnings releases by LEH, GS and BSC will be much more important. To a degree, the Fed’s actions are priced in. However, no one really knows the earnings impact from the sub-prime/credit crunch debacle. Historically, LEH has made a 2% move after releasing its earnings. The option implied volatilities are pricing in an 8% move in either direction. Lehman releases before the open Tuesday while Goldman Sachs and Bear Stearns will be releasing earnings Thursday, after the Fed's decision. FDX also announces this week and transportation activity measures economic strength. GIS and CAG will shed light on food costs.

Earnings and the Fed’s actions/statements will determine the market's direction for the next month. Quadruple witching will throw gasoline on the fire, accelerating the move. All you can do in these situations is to have your stocks lined up. We will trade relative strength and weakness in a balanced manner.

HOTS Weekly Options Commentary

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Peter Stolcers

Here are the nuts and bolts from this week's action. The sell off was caused by loose credit and poor lending decisions. Defaults had a cascading affect and they started a run on short-term debt instruments. That liquidity crunch culminated when T-bill rates dropped 1% this week. That type of move is almost unprecedented.

The squeeze spilled over to brokerage firms and they raised margin requirements to control risk. Instantly, hedge funds that utilize quantitative analysis were forced to liquidate their holdings. They employ a long/short portfolio strategy where they buy value and sell "fluff". Theoretically, they are market neutral. Many financial institutions view this as a conservative strategy and they allow these hedge funds to leverage up to an 8:1 ratio. When brokerage firms change the rules, the hedge funds have to pare their holdings. That is why we saw so many quality stocks get trashed this week. Companies that just announced earnings and raised guidance were pummeled even though they trade at low P/E's.

The sell off Thursday was exacerbated by option expiration sell programs. Regardless, the market staged an impressive intra day reversal without the help of the Fed. Friday morning before the open, the market was down 25 S&P 500 points in response to overseas declines. As the opening approached, the futures were only down 8 points. Clearly, we were near a short-term low. At 7:15 a.m. CST, the Fed lowered the window discount rate to avert a liquidity crunch and the rally was on.

The Fed’s action allowed financial institutions to pledge securities and borrow cash. This allows companies to meet their short-term obligations without having to dump their holdings at artificially depressed prices. The Fed has not had to use this tool for many years.

There are many other leveraged “conservative” strategies like this and when liquidation is forced, the market is thrown out of whack. The yen-carry trade is a widely-cited example. The most important thing to remember is that the macro business conditions remain intact. The adjustment process needs to run its course before everything can return to normal.




The Fed has conveyed that they are aware of current market forces and they are on alert. Next week the economic releases are very light. Retailers make up the majority of earnings announcements and dismal results are priced in. The market has staged back-to-back late day rallies and I believe it will follow through next week. If it can get above SPY 146, that would be a short-term bullish sign.


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HOTS Weekly Options Commentary

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Peter Stolcers

Monday, the market tried to resume the prior week’s holiday rally. It struggled to add to the gains and by Tuesday morning and it looked like the market had added a third lower high to the technical pattern. If you had connected the tops from each rally you would have seen a downward sloping resistance line. Sears and Home Depot provided a dismal glimpse of retail sales and Moody’s announced that they were about to downgrade sub-prime lenders. Tuesday morning’s decline was exacerbated by a prepared speech that was delivered by the Fed Chairman. By late afternoon, the market was in one of its typical “no-bid” slides. The S&P 500 closed 20 points lower. After sleeping on it, traders realized that the Moody’s news was already “baked in” and that Ben Bernanke did not shed any new light during his speech. Wednesday, the market started off on a nervous note and it rallied strong right into the close. Thursday, the market jumped higher after retail sales beat dismal expectations. Legitimate buying and short covering fueled the market to its largest one day gain in years. Friday, GE posted better-than-expected earnings and the market was able to make new all-time highs.

As I’ve been saying, no matter how ugly this market looks, it has the potential to annihilate short sellers at a moment’s notice. In this week’s chart you can see the strong trend and the temporary consolidation phase we went through the last two months. The big picture looks as bullish as ever. The trend lines are in place and there are multiple breakouts to suggest a continued move. If you simply viewed a daily chart, the market looked like it was ready to rollover. Over the last few weeks I have also pointed out that the volatility has increased. That is normally a precursor to a big breakout. That’s exactly what we got this week and I believe we will see continued strength next week.







From an economic standpoint there are a few big releases (PPI, Capacity Utilization, CPI, Housing Starts, LEI, Philly Fed.), but all eyes will be on the inflation numbers. The Government’s definition of inflation is different from mine. I feel that prices are moving higher in many areas (healthcare, college tuition, gasoline, travel), but those increases are not reflected in their calculations. As long as the market feels that inflation is contained, that’s all that really matters. The market has actually been able to rally off of the last couple of PPI and CPI numbers. I expect the same this week. In fact, I believe that all of the economic releases during the next two weeks will take a back seat to earnings. Earnings and interest rates drive the market and right now interest rates don’t look like they’re going anywhere.

Next week we will get a huge round of earnings releases. Here are some of the stocks that are on deck: ETN, GWW, REDF, AMD, FCX, MER, MOT, NFLX, PCAR, INTC, JNJ, MAN, WFC, YHOO, ABT, JPM, PJC, AOS, UTX, MO, EBAY, PFE, TER, TEX, ALL, JNPR, ME, DHR, HOG, HSY, HON, POOL, RS, TXT, VFC, BAC, BAX, CY, GOOG, IGT, ISRG, MSFT, NUE, BRCM, COF, SNDK, STX, SYK, BIDU, CAT, C, SLB. There are some great plays and some traps that lie ahead.

Strangely, the market is taking comfort in higher oil prices believing that it confirms robust global expansion. Liquidity is creating a supply/demand imbalance in equities. Flush with cash, corporations and private equity firms are aggressively buying shares and they are taking the shares out of circulation. Meanwhile, new funds continue to flow into the market. The macro conditions are in place for a continued rally and as good as things might seem in the U.S., we are the weakest link internationally.

I believe the market rally is legitimate and that earnings and option expiration will overpower any potential weakness in the economic releases. The market has rallied to a point where option related buy programs will be prevalent next week.

HOTS Weekly Options Commentary

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Peter Stolcers

In the last two weeks we've seen a 50 point decline and a 40 point rally in the S&P 500 futures. Earnings season has passed and the market is looking for something it can sink its teeth into. It took seven years for the market to make a new all-time high. Despite a stiff resistance level, it was able to fight-off the first speed bump – a 15% decline in the Shanghai Index. That dark cloud may have passed as traders believe that the selling can be contained to China. However, interest rates were a different story and the market cracked.

Global economic growth is putting upward pressure on interest rates. Last week England raised its rates a quarter-point and this week Switzerland followed suit. That puts upward pressure on our interest rates and the 10-year yield went above 5%. Asset allocation models kicked in and the market went through a discovery phase. Selling pressure tested the “bid” to the market and it determined the appetite for equities amidst rising interest rates. The bulls won this round and the selling never really took hold.

Higher interest rates that result from a strong economy don't conflict with a bullish market. The latest rise in interest rates resulted in and a positively sloped yield curve and that is considered bullish. Wednesday, the Fed released its Beige Book. It is published every six weeks and it is a collection of economic activity from various regions in the US. It showed rising economic activity and moderate inflation. Once the numbers were released, the market rallied more than 15 S&P 500 points. The surge was created by buying, short covering, and expiration related buy programs. Thursday the market followed through on a benign PPI number. I'm writing this report a day earlier than normal so I will take a stab at Friday's action. I believe that the CPI will be in line with expectations. It might even be a little "hot". The market will look past the number and post modest gains. Most of the expiration related fireworks have passed and the afternoon could get quiet. “Merger Monday's” have been bear slayers and the shorts will not get aggressive going into the weekend.

This week the economic numbers are very light. They will be highlighted by housing numbers, leading economic indicators and the Philly Fed. Housing starts and building permits might shed light on that sector. From my perspective the numbers can only be bullish. So much gloom and doom has been factored in to housing that I doubt a bad number will weigh on the market.

Last week LEH and GS posted solid earnings but they failed to light a fire under financial stocks. I believe this sector is a sleeping giant and it may be the source of the next rally. Here are the major companies that will announce earnings next week; BBY, DRI, KMX, FDX, GIS, CC. The electronics, auto and restaurant stocks might shed light on the strength of consumers. However, I'm more interested in FDX and GIS. FedEx’s activity will be used to measure economic growth and General Mills will provide insights on food inflation.





Solid earnings, steady interest rates at the low end of the 50-year range, global expansion, moderate inflation, full employment and reasonable P/E ratios all point to a stable market. I am firmly in the “buy the dip” camp as long as the market is above SPY 146.

HOTS Weekly Options Commentary

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Peter Stolcers

This has been a bloody week and I suspected that we were in trouble Monday when the market completely discounted the 10% drop in the Shanghai Index. After the muted reaction to that decline, our market finished a little higher. It wasn't until Tuesday that the real fireworks started. Concerns over higher interest rates were fueled by Chairman Bernanke's comments and England's quarter point rate hike. England's increase was largely expected and it should not have caught anyone off guard. Some analysts blamed the sell off on the surprise rate increase by New Zealand. I find that rather amusing given their small GDP and high 8% rate. The true culprit was a lack of news and a round of profit taking after a recent run-up to an all-time high. It took the market seven years to get to this point and heavy resistance should be expected.

Interest rates might be creeping up, but they are still near the low end of the 50-year range. Rates are not increasing because of inflation; they are rising because of global economic expansion. A positively sloped yield curve is good for the market and this rise will correct the current inversion. Corporate earnings have seen double-digit growth for 14 consecutive quarters. As a result, their balance sheets are strong and they are using cash to buy back shares or acquire companies. Last quarter was considered to be weak and earnings rose a healthy 6%. As you can see in the chart, over the last year the market has established a pattern of sharp declines that follow relative highs. The corrections are very short and steep and the recoveries are brisk. I do not see any evidence that the macro environment is changing. I do feel that many analysts have had to raise their interest rate expectations. None are more significant than Pimco's Bill Gross. He has been leading the charge for lower rates and he manages the largest bond fund in the world. This adjustment process creates chaos. I believe the market will get accustom to the "tight light" bias and it will put the relatively low interest rate picture back into perspective. Employment is strong and wages are increasing due to a tight labor market. Companies are profitable and the P/E ratios are reasonable. Inflation is relatively contained. Given these factors I do not see a doomsday scenario unfolding. I do see a market that needs to work off some excess and this is not something to stand in front of.






Next week's big economic numbers are the PPI and CPI. If they continue to show contained inflation, the market will rally. On the earnings front the only stock worth mention is ADBE. Overseas trading and M&A will have a bearing on Monday's open. If the market can get off to a good start and the PPI comes in on target, we could build on Friday's bounce. Option expiration weeks have been bullish and if the market starts grinding higher, buy programs could "goose" it even higher. Conversely, if the market can't sustain a rally next week, there is a chance that the lower support level of SPY 146 will be tested. I expect that level to hold. As long as it does, I will have a "buy the dip" mentality. This is a time to look for stocks with support and to wait for the market to show us that the 'bid' is back.

FOMC and The Morning After

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From our Virtual Trading Room Transcript
May 10, 2007
about 0549 PDT

Jason_Roney> With expiration next week, the monthly patterns suggest further upside by next friday's open. In fact the SP500 is just 1% from the March 2000 all time high close (1527 in the cash). Given the solid uptrend, there's reason to think we'll hit that level sometime next week. But in the short term, the next few days would seem to offer the bear's best chance for downside. As I'll note in the afternoon discussion, there is often a counter-trend move towards the end of the week prior to expiration week. As well, the market tends to struggle with any follow-through on the day after an FOMC meeting. But a look at the daily patterns suggest an even greater probability of short-term pause.

Jason_Roney> Here's some observations: (1) the SP Futures have 7 consecutive closes above the open price. there have been just 10 occurrences over the last 10 years (in 2007, April 23 and Feb 23 were next day - both closed down) and 7 of those closed below the open; (2) the NDX finished higher for the first 6 days of the calendar month. looking back to 1995, this happened just 3 times before and each time the index finished lower; and finally, (3) the Treasury Bond closed below the prior day's low while the SPX finished above the prior day's high. this happened at the March Meeting and resulted in a flat next day's trade with close below the open.

Jason_Roney> The bottom line is that Thursday's action has a higher probability of finishing below the day's open. The overall trend remains solidly higher into expiration but the next 1-2 days offer more downside than upside risk.


Click here to read the complete transcript of Jason's chat.

Click here to read the Trading the SP Gaps by Jason Roney.

Market Timing

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Fari Hamzei
February 9, 2007

Well......the PAUSE we talked about on Wednesday is here today........McClellan Oscillators foretold this move.......with both SPX and NDX putting in outside bar reversals today, we expect additional weakness next week (Feb Options X) till McClellan Oscillators get in to the oversold territory, maybe by Wednesday.

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