Short-Term Peak in S&P 500 Trades Suggests Calm Horizon: Options
By Joseph Ciolli and Michelle F. Davis
(Bloomberg) — After slogging through the worst start to a
year since 2009, traders using futures tied to U.S. equity
volatility are signaling they expect price swings to smooth out
as the first quarter progresses.
They?re reducing purchases of contracts that protect
against losses in the Standard & Poor?s 500 Index over the next
three months, instead electing to focus their hedging efforts on
the next 30 days. The difference in implied volatility between
the two contracts is close to the widest in three years, data
compiled by Bloomberg show.
With the S&P 500 mired in a 3.4 percent drop from its last
record and oil down more than 55 percent from a June high,
investors are focusing their angst on the next few weeks. Philip
Orlando of Federated Investors Inc., who sees the market?s
current chaotic state as temporary, says investors should wait
out the storm.
?The market for the last couple of weeks has been focused
on the negative part of the equation,? said Orlando, who helps
oversee $350 billion as New York-based chief equity strategist
at Federated Investors. ?If folks start focusing on
fundamentals and they actually start to get optimistic again,
stocks could have a nice little run.?
Volatility Gauge
The Chicago Board Options Exchange Volatility Index, a
measure of demand for options on the S&P 500, dropped 6.4
percent on Jan. 16 to close last week at 20.95, snapping a five-
day streak on increases. The measure has climbed 9.1 percent in
2015.
Implied volatility for 30-day contracts closest to the
level of the S&P 500 is 19.4, compared with 17.8 for options
that expire in three months, according to data compiled by
Bloomberg. The gap of 1.5 points is near a three-year high of
2.1 points reached in October.
U.S. equities may get some relief next week in the form of
quantitative easing from the European Central Bank, according to
Joe Quinlan of Bank of America Corp.?s U.S. Trust. ECB President
Mario Draghi is weighing easing plans under which national
central banks would buy bonds issued by their own country,
Spiegel magazine reported on Jan. 16.
?As we get closer to finding that new floor in oil, the
ECB does whatever it takes to convince the markets it?s serious
about QE and earnings outside financials and energy look decent,
I think things can come back together,? Quinlan, chief
investment strategist at U.S. Trust, which oversees about $380
billion, said in a phone interview.
Global Headwinds
Still, the U.S. equity market must overcome oil prices at
an almost six-year low and foreign-exchange market uncertainty
stemming from the Swiss National Bank?s unexpected decision to
give up its minimum exchange rate, sending the franc to a record
high versus the euro. The price of copper also slid to a five-
and-a-half-year low last week.
?Volatility many times creates additional volatility,?
Chad Morganlander, a money manager at St. Louis-based Stifel,
Nicolaus & Co., which oversees about $160 billion, said in a
phone interview. ?The skittishness of the market is valid due
to the massive dislocation in the commodities market, which
indicates that a deceleration of global growth is occurring.?
Even as the U.S. market faces the prospect of continued
global turmoil, earnings are still forecast to grow 0.8 percent
for the fourth quarter of 2014, according to Bloomberg data.
Expected to lead the climb higher are phone companies, which are
forecast to boost profits by 24 percent, and health-care stocks,
with projected earnings growth of 17 percent.
Companies Reporting
Large-cap technology companies including Netflix Inc. and
eBay Inc. will report earnings in the next two days. Microsoft
Corp., Facebook Inc. and Google Inc. will release their
quarterly numbers next week. The sector is forecast to post 8.1
percent earning growth for the last three months of 2014.
Since the start of the bull market, the S&P 500 has gained
an average of 0.52 percent in the second week of quarterly
earnings season. The gauge has risen almost two-thirds of the
time over the five-day period dating back to first-quarter 2009
earnings.
?The only thing that you can guarantee with certainty for
the next couple weeks is continued volatility,? Michael James,
a Los Angeles-based managing director of equity trading at
Wedbush Securities Inc., said in a phone interview. ?But it
will definitely be a welcome surprise if we have a net-positive
week of earnings and guidance next week.?