Article / 29 May 2017 at 15:43 GMT

Volatility Update: VIX back below $10 as equities climb — #SaxoStrats

Product Manager, Options Trader, Educator
  • Generally positive economic environment is fuelling bullish investor sentiment
  • VIX fell below 20-day MA, back below $10 at $9.81
  • VIX futures for June delivery closed at $11.94, or an 18% premium to the spot
  • This week we expect recent EURUSD gains to resume and equities to gain
  • Bullish trend is still very much in place

Wall Street's charging bull
 Low interest rates are helping to fuel upbeat investor sentiment 
around the globe. Photo: Shutterstock

By Georgio Stoev

Investor sentiment around the globe remains bullish, fueled by low interest rates and healthy employment. As a reminder, lower interest rates increase the appetite from investors (both business and private) to spend — whether to buy a business, stocks or a home. This in turn tends to boost corporate earnings.

Earnings at S&P 500 companies had another impressive first quarter. According to Zacks Investment Research, 74% the companies compromising the equity benchmark beat earnings estimates, while 66% came ahead of top-line expectations. For the week, the US index closed up 0.90%, while tech-heavy Nasdaq added 1.7%.

The thrill and enthusiasm of taking risk is in the air. Even famous economists are calling for more upside in the market. Last week, Yale economist Robert Shiller suggested that the market could have another 50% upside before it's done. The caveat: Trump's fiscal policy and reduction of corporate and individual tax rates.

Other economists, such as Blu Putnam over at the CME Group, seem a bit more cautious and remind us that the world's largest economy is extremely dependent on low interest rates to service its ever-increasing debt. Click here for the video.

Here's how other products performed:
performance Source: Quikstrike

The highly observed CBOE Volatility Index (VIX) fell below its 20-day moving average, back below $10 at $9.81. At the same time VIX futures for June delivery closed at $11.94, or an 18% premium. Remember the futures settle into VIX spot. The last use "special calculations" on SPX options. Because of the higher premium to spot some traders could short the front month futures, e.g. VXM7. The CBOE Options Institute's Russell Rhoads observes an interesting trade involving VIX options in his weekly blog

Crude oil (CL) also took a tumble following last week's Opec meeting. The cartel decided to extend its current 1.8 million barrels a day production cut until the end of the first quarter of 2018, which the market largely anticipated, so the news was interpreted as disappointing. As expected, the implied volatility in WTI options started to bleed out, which is making options more fairly priced. 

Source: QuikStrike

With 20 days to expiration, the put-to-call ratio remains slightly bullish at 0.68, while the opening of new positions on Friday was mostly on the put side, with the biggest position involving 45 and 42.5 put strikes. The size of these contracts were 101 and 80, respectively.

For the week ahead we expect recent gains in EURUSD to resume and equities to continue higher. The EuroStoxx 50 is starting to look a little heavy, and investors should look at selling some out-of-the-money calls against their European equities. The bullish trend, however, is still very much in place.

Have a great week.

— Edited by John Acher

Georgio Stoev is futures and options product manager at Saxo Bank

djustoe djustoe
So with the improvement in earnings, are companies no longer seen to be overvalued using p.e ratios for example?
Georgio Stoev Georgio Stoev
Despite high valuations, CAPE of SP 500 at 29x, equities can continue to climb. Little bit of exuberance in the late stages of a bull market.


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