Options Traders Setup for More Volatile Market Action 

Options Traders Setup for More Volatile Market Action 

Options Traders Setup for More Volatile Market Action

$VXX, $CBOE, $SPY

For the 2nd time this year, volatility has come back into the markets, and traders in the stock options market are betting ongoing market gyrations are not about to let up any time soon.

People are betting action could come from either direction.

This year’s volatility is a departure from Y 2017 when the VIX (fear factor) saw a multi-decade low. But this years, the S&P 500 Index is on pace for its most volatile year since Y 2015.

Trade-related tensions between the US and China, weakness in the tech sector, worries about slowing global growth and concerns about a hawkish Fed driving toward higher interest rates has taken a toll on US stocks for the past 6+ weeks and the S&P 500 Index has shed all its gains on the year.

Just now, concerns about the outcome of a meeting between US President Donald Trump and Chinese President Xi Jinping at next week’s G-20 Summit and how it might affect the outlook for US-China trade relations is the latest concern on options traders’ minds.

Unlike in Y 2017, when US stocks consistently traded higher, options traders expect stocks to vacillate in here. We have had very positive market conditions for the last 7 years, not there is a transition to more normal market conditions.

For the last 6+ weeks, the Cboe Volatility Index (VIX), Wall Street’s “fear gauge,” has held above 20, a mark associated with heightened expectation for near-term stock market volatility.

We here at HeffX-LTN expect the VIX to stay closer to the 20 than to 10 for now.

Speculative positions in volatility futures backs our overall view.

Asset managers or institutional players, leveraged funds and other traders, who together are described as the ‘buy-side,’ are now net Long 11,441 contracts, according to US Commodity Futures Trading Commission (CFTC) positioning data through 13 November. That is a big change from early October when they were net short almost 90,000 contracts.

Since the beginning  of October, traders in the equity options market have shown a healthy appetite for defensive contracts on broad market indexes. And the demand for defensive contracts on the S&P 500 has been huge.

Clearly there was a lot of hedging (insuring) with Puts, and Calls are also in demand.

An index Put option gives the holder the right to sell the value of an underlying index at a fixed level in the future, thereby offering protection against declines in the index. Calls convey the opposite right.

Calls are in demand because there is risk for a large up move and a down move now, more so than normal, because of tariffs, especially around the G-20 Summit.

With investors setting up positions for coming stock swings, the number of open options contracts on S&P 500 Index and its tracking fund, known as the SPDR S&P 500 ETF Trust , has risen to the high-end of their respective 2-year ranges, according to data from options analytics firm Trade Alert.

For S&P 500 options, implied volatility (options-based measure of how much stocks are expected to vacillate) shows a noticeable spike contracts expiring on 7 December, the 1st weekly expiration after the conclusion of the G-20 Summit, according to data we have seen.

Traders do not know whether a meeting between US President Donald Trump and Chinese President Xi Jinping at the G-20 Summit will sooth or inflame tensions further between the 2 countries.

For now, traders are insuring their thoughtful bets with Put and Call options. Volatility in markets means a lot of money is being made by some.

Symbol Last Trade Date Change Open High Low Volume
VXX 38.42 21 November 2018 -0.92 38.48 38.99 37.88 32,959,900
HeffX-LTN Analysis for VXX: Overall Short Intermediate Long
Bullish (0.31) Neutral (0.06) Bullish (0.39) Bullish (0.47)

Stay tuned…

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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