The markets were kept off balance the entire the entire week by a continuing onslaught of news. The trading week started Sunday night with the results of the French and Greek elections. French Socialist François Hollande defeated conservative incumbent Nicolas Sarkozy by promising to end austerity policies. The elections in Greece and the accompanying gains by leftist parties left it unable to form a coalition. The economic bailout of Greece is impossible without a functioning government. The Spanish government intervened in the case of Bankia, the country’s largest bank, with 10 billion euro to cover bad loans. This further raised concerns about the state of the European economies.
The week ended with JPMorgan Chase announcing it suffered $2 billion in trading losses in recent weeks and said it could face an additional $1 billion in losses because of market volatility. The stock responded by losing nearly 10% of its market value.
The indexes showed increased intra-day volatility. The SPX ended the week down 15.71 points or down 1.67% at 1,353.29. The Dow Jones Industrial Average closed under 13,000 at 12,820.60 – down 217.67 points or -1.67% The Russell 2000 (RUT) closed at 790.06, loss of 1.78 points – down 0.22%. The NDX lost 21.94 points or 0.83% to close at 2,615.98. The S&P 100(OEX) closed down 1.19% at 615.34. The VIX reflected the negative sentiment or fear in the market, remaining steady and closing at 19.89% – a gain of 4.05%.
Here is a capsule view of last week’s market numbers (N.B. – I have added the OEX -S&P 100 to the table):
| Index | Close | Weekly Change | % Weekly | % YTD | Volatility of Index |
| Dow Jones Industrials (DJIA) | 12,820.60 | -217.67 | -1.67% | 4.94% | 18.34% (VXD) |
| S&P 500 (SPX) | 1,353.39 | -15.71 | -1.15% | 7.62% | 19.89% (VIX) |
| NASDAQ 100 (NDX) | 2,615.98 | -21.94 | -0.83% | 14.85% | 21.79% (VXN) |
| Russell 2000 (RUT) | 790.06 | -1.78 | -0.22% | 6.63% | 25.91% (RVX) |
| S&P 100 (OEX) | 615.34 | -7.39 | -1.19% | 7.80% | 20.56% (VXO) |
| CBOE Volatility Index (VIX) | 19.89 | 0.77 | 4.05% | NA |
This is expiration week. Focus on closing the current expiration cycle and opening new positions. Do not ignore cheap out of the money options. Be aware of the risk in your entire position. The coming week will be heavy on news which can move the market. The main earnings announcement cycle is complete. U.S. Economic announcements will focus on trade consumer spending, manufacturing and housing. News from Europe will continue to be a focus of traders. Continue to be prepared for any “wild card” announcements – i.e. JPMorgan Chase. Be nimble, be careful, be disciplined, and to not allow yourself to be caught unawares.
Remember:
“Chance favors the Prepared Mind.” – Louis Pasteur
This week’s economic news (All times are Eastern Daylight Time.) Dates and times are subject to change):
Monday May 14:
Economic: Nothing Scheduled.
Earnings: BMO: Interoil (IOC), Valspar (VAL); AMC: Agilent (A),Alcan (AL), Groupon (GRPN),
Other: Euro-zone finance ministers meet.
Tuesday May 15:
Economic: ICSC-Goldman Sachs Weekly Retail Store Sales – 7:45, Consumer Price Index – 8:30, Retail Sales – 8:30, Empire State Manufacturing Survey – 8:30, Redbook – 8:55, Treasury International Capital – 9:00, Business Inventories – 10:00, Housing Market Index – 10:00.
Earnings: BMO: Arctic Cat (ACAT), Dick’s Sporting Goods (DKS), Home Depot (HD), Monroe Muffler Brake (MNRO), TJX Companies (TJX), Valspar (VAL)AMC: J. C. Penney (JCP), Ralcorp (RAH), Tumi (TUMI).
Other: Dallas Federal Reserve President Richard Fisher speaks to a business audience at the “Growth DFW” – 1:45.
Wednesday May 16:
Economic: MBA Purchase Applications – 7:00, Housing Starts – 8:30, Industrial Production – 9:15, EIA Petroleum Status Report – 10:30, FOMC Minutes – 2:00.
Earnings: BMO: Abiomed (ABMD), Abercrombie &Fitch (ANF), Barady Corp. (BRC), Deere & Co (DE), Eagle Materials (EXP), Staples (SPLS), Target (TGT); AMC: Cost Plus (CPWM), Jack in the Box (JACK), Limited Brands (LTD), Red Robin (RRGB).
Other: St. Louis Federal Reserve Bank Pres. James Bullard speaks at the Lousiville branch of the Bank on the subject of “The U.S. Economy and Monetary Policy.
Thursday May 17:
Economic: Jobless Claims – 8:30, Bloomberg Consumer Confidence Index – 9:45, Philadelphia Fed Survey – 10:00, E-Commerce Retail Sales – 10:00, Leading indicators – 10:00, EIA Natural Gas Status Report – 10:30.
Earnings: BMO: Advance Auto Parts (AAP), Buckle (BKE), Computer Sciences (CSC), Dollar Tree Stores (DLTR), GameStop (GME), Precision Castparts (PCP), Ross Stores (ROST), Sears Holdings (SHLD), Wal-Mart (WMT), Williams-Sonoma (WSM); AMC: Aeropostale (AR), Saesforce.com (CRM), Gap 9(GPS), Intuit (INTU).
Other: Last day of trading for May options on SPX, NDX, MNX, and RUT. Facebook prices its initial public offering.
Other: Friday May 18:
Economic: None scheduled.
Earnings: BMO: Ann Taylor (ANN), Foot Locker (FL), Hibbett Sports (HIBB).
Other: May options expiration.
Other: IMF Chief Christine Lagarde and World Bank President Robert Zoellick speak about debt at the Bretton Woods conference in Washington.
Monday May 21:
Economic: Chicago Fed National Activity Index – 8:30.
Earnings: BMO: Campbell Soup (CPB), Krispy Kreme Doughnuts (KKD), Tidewater (TDW), Tech Data (TECD), ; AMC: Nordson (NDSN), Urban Outfitters (URBN).
Other: Atlanta Federal Reserve Bank Pres. Dennis Lockhart speaks to the Institute of Regulation and Risk North Asia in Tokyo.
Blue Men and Scalping
Last week we talked a bit about risk – real vs. perceived. Underlying movement vs. the premium the options markets put in the price of options above the intrinsic value – the implied volatility. When the options markets get nervous - they bid up options. When things calm, they offer them out and implied volatility goes down. Simple supply and demand.
But what is a fair price? How do we know if we are paying too much or selling too cheap? There are plenty of models that will determine what the theoretical value is of an option. At the end of the day, they are all pretty much the same and most value options pretty much the same. The real value is in the delta calculation. But that’s a discussion for another time.
First, fair value is different than theoretical value. Theoretical value is what an option model calculates an option to be worth based on a set of inputs. Fair value can be thought of as the price I pay for an option where the theta is exactly offset by scalping the gamma. For those unfamiliar with gamma scalping, it is basically buying or selling the amount of delta the option changes with movement in the underlying.
For example, if we own calls and the market goes up, then the delta increases. Scalping the gamma means we sell deltas to flatten long delta back to 0. As markets move around we would be buying as markets fall and selling as markets rise. If this “scalping” offsets the theta effect of being long the option between purchase and expiration, the option has been purchased at fair value.
Steve Papale is a mentor with DiscoverOptions, the educational arm of OptionVue Systems. Inquiries should call 847-816-6610 or email info@DiscoverOptions.com.