As volatility (fear) moved lower, equities moved higher. To recap the week of June 27 to July 1, here's how a selection of different assets performed:
Source: Saxo Bank
Friday's close (a "hanging man") on bonds typically forms at the top of a bullish trend and could signal a short-term reversal. Option traders could look at an AUG bear put spread 141/139 which is priced at $1.04. This gives us a good risk/reward opportunity.
While the Brexit event is now a matter for the records, investors should still use caution when moving into risky assets such as equities – particularly in Europe. European equities have struggled and will continue to struggle, especially as Brussels tries to sort things out for the European Union.
How are traders positioning themselves post-Brexit
? We can read the market by looking at open interest and volume in options. Using the open interest report from Tradingfloor.com's Tools page, one can access open interest for number of products such as rates, forex, metals, and so on.
For this purpose, we will use the option report on the S&P 500 e-minis.
Looking at options open interest:
By definition, open interest is the total number of contracts that are currently opened. The number will include all opened positions that are not exercised, offset or expired. In the above illustration, on June 30 the number of both out-of-the-money calls and puts grew significantly – up 83% and 97.4% respectively.
A growing OI suggests that traders are becoming more aggressive in bulding larger positions. For instance, the large jump in OI for call options with a strike price of 2,150 could indicate that market participants working with ESU6 (SEP) options are expecting the S&P 500 to move up to that level but not necessarily beyond.
While some traders could be buying to open that strike/expiration, others will be selling to open these contracts. The last could be in a form of a covered call, especially if they are holding the underlying/ES futures and have a moderately bullish view of the market.
For puts, the OI is much more evenly distributed and it's hard to make heads or tails of it. The largest volume for puts is at 2,090 which is very close to where futures are trading during the July 4 light trading session.
As the index nears its 52-week high, it is logical to expect participants using ATM puts to hedge market risk.
US earnings could provide for some more uncertainty. July is the month when publicly traded US companies will report their second quarter corporate earnings.
The bulk of the announcements will come in the second half of July. To highlight a few, we have Wells Fargo on July 15; Netflix on July 18; Amazon on July 28; Facebook on July 27; Microsoft on July 29 and so on.
With implied volatility fairly low, investors could do a number of things to anticipate price movement, to hedge, or to simply make some adjustments in their stock portfolios.
The next round of earnings releases from US corporate giants such as Amazon will give equity investors a sense of where markets may be headed in Q3. Photo: iStock
—Edited by Michael McKenna