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Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 26 June 2017 at 10:28 GMT

Volatility Update: Wary investors pick up bonds, healthcare stocks

Product Manager, Options Trader, Educator
Denmark
  • Low volatility in the market suggests that investors continue to leverage themselves
  • Bonds and equities adding further gains for the year 
  • Healthcare best-performing equity sector last week, energy under pressure 
  • P/C ratio on E-mini S&P 500 options now at 3.08, up from previous week's 2.99
  • Q2 earnings season around the corner

Healthcare
 Healthcare stocks gained last week on a boost from the Republican 
healthcare proposal in the US Senate. Image: Shutterstock

By Georgio Stoev

Econ 101 suggests that when stocks go up, bonds typically go down — that is, until they don't. Stocks typically gain when the economy improves and corporate profits rise. Rising profits could bring inflation, which is negative for bonds. As inflation rises, a central bank will start raising interest rates to cool the economy. Here's how assets fared for the week June 19-23:

week Source: QuikStrike

Whether it's scepticism about stocks or the prevailing low-interest-rates environment, or both, bonds are gaining. Among the best-performing interest-rate contracts have been the 10-year Ultra (TN) with options (OTN), up 4% year-to-date. Rising bond prices could also suggest that investors are growing wary about the economy and/or stock valuations. So keep an eye on rates and their inverse relationship with equities. Buying bonds could be another way to protect your stock portfolio when a correction takes place.

Sector rotation in place

Stocks also performed well last week, with healthcare leading (we had a call position on Pfizer, but closed it with a gain). The sector is getting a boost from the Republicans' new healthcare plan, which could be passed by the US Senate before July 4. Healthcare stocks, particularly biotech, have come from behind to take the lead as the best-performing segment, in just one week. In the late stages of an economic expansion, sectors like healthcare and consumer goods tend to outperform.

iShares Nasdaq Biotech (IBB) 
red hot health
Source: Saxo Bank

Given the long consolidation (almost a year), we could be in for a treat with this one. Options on IBB are fairly liquid, but if you prefer individual names, you could look at Gilead Sciences (GILD), Amgen (AMGN) some of the largest caps in the group. 

Volatility in energy persists

Crude oil (WTI) slipped for a fifth consecutive week without any signs of strength. Heating oil and gasoline also fell for the week, 2.5% and 1.3% respectively. Open interest and volume both increased for the week in the front month (LOQ7), as well as the December future. 

WTI
Source: QuikStrike (Tradingfloor.com)

Most of the action took place near the money as the underlying traded near $42/barrel. Among the week's most active calls were the 43 strike (LOQ7) and the December 53 calls (LOZ7), increasing by 10,827 and 8,645 contracts. On the put side, we saw puts with 40 and 38 strike prices as the most active. 

The put-to-call ratio fell further, to 0.56 from 0.59 in the previous week, with 350,781 contracts open in the front month against 197,461. As a result, calls are getting bid, while puts are continuing to be offered. The skew picked up a notch, particularly with out-of-the-money calls, but nothing really dramatic. This could suggest that the market does not expect big moves over the next 24 days. 

Call
Source: QuikStrike

Bullish sentiment in indices

The skew seems to be much more relevant in equity indices nowadays, particularly the back expiration. The put-to-call ratio on the E-mini S&P 500 options (ESU7) is now at 3.08, up from 2.99 the previous week.

What does this tell us? It could suggest that investors continue to grow uncertain about current equity valuations and are looking for way to hedge. A P/C ratio of 3 could also be a very bullish near-term contrarian indicator. As puts are being bid, investors could harness good premium by selling either the futures options or the index options on various markets. 

Last week we outlined a naked put strategy involving E-mini Nasdaq 100 Index futures options (NQU7), selling 5,400 puts for 20 points, or $400. We still favour such a high-probability, income strategy.

Trade of the week: We like the recent strength in the biotech sector and feel that prices could continue to rise. So consider this: + 1 Vertical GILD 100 18 AUG 17 67.5/72.5 CALL at $2.70. 

Have a great week.


— Edited by John Acher


Georgio Stoev is futures and options product manager at Saxo Bank  

2y
m7010306 m7010306
Short squeeze guaranteed.
2y
Market Predator Market Predator
Hello Georgio, what is the: "Econ 101", please?

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