For the bulls, the previous week’s selloff was another opportunity to buy the dip, as the S&P 500 is now back within 2% of all-time highs. Helping the bull cause this week was continued merger and acquisition activity, more talk of accommodative monetary policy in Europe and many emerging markets stabilizing.
For the bears, it was a challenging week because many stocks that had appeared to be on the precipice of a significant decline bounced back. However, the weakness in oil and commodity stocks continues to worry many; put buying in stocks such as Chesapeake (CHK) and others warns of potential defaults in these sectors. Also, the swift declines in stocks that disappoint on earnings or other results continue to show the intense selling pressures below the market’s surface.
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 15.47, lower by 23% for the week. As I wrote late last week, expect calls/puts to be under intense pressure this week because traders will not want to be stuck owning heavily decaying options. That said, if the decay goes too far on Wednesday, there could be potential for extremely underpriced options—and good risk/reward buying opportunities.
Events for the Week to Come
Please note that the market will be closed for Thanksgiving on Thursday, and the Cabot office will be closed on Friday.
I expect the market to be quiet this week ahead of the Thanksgiving holiday as traders begin to travel. That said, several important economic data points will be released this week, including GDP, Consumer Confidence and multiple housing reports.
What Traders are Saying
As I had expected, volatility was hit very hard into the end of last week. The VIX, which had been over 20 at the end of the previous week, closed last week at 15.47, and is likely to be lower again today. I was actively searching for volatility selling opportunities last week, but nothing really jumped out at me.
The stocks I found with high volatility were high for good reason; these stocks were recently hit on earnings and can’t seem to find a bottom, such as commodities and retailers. The stocks with low volatility were stocks that most of us would be comfortable owning, such as Facebook, Amazon and Disney.
The options market makes very few mistakes. Rarely do we see high volatility in stocks like Pfizer (PFE) or Altria Group (MO) because these stocks offer big dividends, and are likely to find buyers if their prices drop. Conversely, a biotech stock like Valeant (VRX), which is whipping around 10 to 20 dollars a day, will have its options priced to reflect that risk.
The real rewarding opportunity to sell overpriced volatility is finding stocks whose options prices are temporarily mispriced. The couple of hours or days when there’s a mispricing are the times when it makes best sense to execute a buy-write, naked put or other volatility-selling strategies. However, being patient and waiting for those opportunities is always a challenge. I will continue to look for these opportunities this week.
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