This Week’s Options Trading News: The VIX “Fear Gauge” Surges
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Options Trading Investors Send the VIX Surging
(Wall Street Journal)
Last Thursday when the markets plunged on the negative economic outlook from the US’s Federal Reserve, options trading investors sent the Chicago Board Options Exchange Market Volatility Index, or VIX, rising for the forth session in a row to close at its highest level in a month.
Specifically, the VIX rose as much as 18% late on Thursday and closed up 11% at 41.35 – its first close above the 40 level in about one month and 33% higher since the start of the month. Meanwhile the Standard & Poor’s 500 stock index fell 3.2% to 1129.56.
However, the spike in volatility has created opportunities for options trading investors who had placed hedges with VIX options or had placed bets on volatility to cash in their profits. In fact, Thursday’s biggest options trades were to close profitable positions that benefited from the day’s VIX spike.
Options trading investors also were closing out large and protective options trading positions in emerging-market stocks. For example: iShares MSCI Emerging Markets (EEM) ETF fell 7% to $34.95 – hitting a two-year low. In addition, options trading investors were liquidating options in the iShares MSCI Taiwan Index ETF – sending it down 6.1% to $11.83.
Its also worth noting that there has been very anxious VIX readings since Standard & Poor’s Ratings Services downgraded the US credit rating on August 5. Moreover and right after the rating downgrade, the VIX surged to 48 in what was the second biggest one day gain on record and has not dropped below 30 since then.
Options Trading Investors Will Be Able to Trade the VIX 20 Minutes Earlier
(Wall Street Journal)
Starting on Monday, options trading investors will be given more time to trade the the VIX. Specifically, futures contracts on the VIX will begin to trade 20 minutes earlier starting at 8:00 AM EDT rather than at 8:20 AM.
The change will allow options trading investors to tinker with their volatility trading positions right before the stock market opens. Trading will continue until 4:15 PM as usual.
Back in 2010, the CBOE had moved VIX futures trading earlier from 9:30 AM EDT to 8:20 AM.
Four Hot ETF Options Trading Ideas
(InvestorPlace)
For the month of August, nearly one-third of all trading volume involved exchanged-traded funds or so-called ETFs. Hence, it makes sense to come up with an options trading strategy that involves ETFs. Four potentially profitable ETF options trading strategies would include the following:
Buy XLF Puts and SKF Calls. With American and European banks in trouble, buying puts on the Financial Select Sector SPDR (NYSE: XLF) ETF or buying calls on the Proshares UltraShort Financials (NYSE: SKF) could pay off. Moreover, its worth noting that bank earnings will come out in mid-October and most analysts expect them to be weak while forecasts for the fourth quarter along with 2012 will also likely be weaker than current expectations.
VXX Bear Call Spread. Options trading investors who believe that the worst volatility is over with and will continue to diminish could bet that the iPath S&P 500 Short-Term Futures ETN (NYSE: VXX) will begin to fall. Hence, selling out-of-the-money October or November call spreads on the VXX could be a profitable bet.
Buy XLP Calls. Irrespective of the economy, consumers will continue to buy consumer products and household items. The Consumer Staples Select Sector SPDR (NYSE: XLP) ETF holds stocks like Coca-Cola (NYSE: KO), Costco (NASDAQ: COST), Kraft Foods (NYSE: KFT), Philip Morris (NYSE: PM), Procter & Gamble (NYSE: PG) and Wal-Mart (NYSE: WMT) and has been moving sideways for weeks. Buying calls on the XLP could be a profitable trade should there be a breakout in the near future.
QQQ Bull Put Spread. The PowerShares QQQ Trust Series 1 (NASDAQ: QQQ) ETF has had a run-up but of the three big index-related ETFs (DIA, SPY and QQQ), the QQQ is the only one that is trading above its 200-day simple moving average. Hence, there is a good chance that the QQQ will see some pullback. Options trading investors could profit on a pullback by selling October 51/53 Bull Put Spreads, specifically selling the October 53 put and then buying the October 51 put, for 30 cents or better.
Options Trading Investors Get Bearish on General Electric (NYSE: GE)
(Bloomberg)
Options trading investors have become the most bearish on General Electric (NYSE: GE) in 14 years, betting that the company’s streak of quarterly earnings increases will not continue in the wake of Europe’s debt crisis and slumping global economic growth.
Specifically, the ratio of puts on GE shares versus calls has climbed 15% since July 12 to 1.31 and had reached 1.33 on September 15 – the highest level since October 1997. Its also the third-highest put-to-call ratio among Dow Jones Industrial Average companies with competitors United Technologies and Honeywell International having more calls than puts.
GE has been trading at the $15 level and has fallen roughly 29% from its February 17 high as the Standard & Poor’s 500 Index dropped only 15%. Moreover, seven of the ten GE options trading contracts with the largest increase in ownership over the past week were puts.
Its worth noting that GE expects to receive 60% of its sales from outside the US for 2011 while the industrial segment has remained weak. Moreover, GE Capital is also a liability for the company. Hence, options trading investors are betting that the company will be susceptible to falling consumer spending and along with decreased industrial demand for its products.
