Friday, October 1, 2010

"Options Offer Clues to Earnings and Beyond"

From the Wall Street Journal:

Trading Points to a Calm Reporting Season but Curmudgeonly Holidays; Not a Quarter 'To Be Sitting on Your Hands'
The options market has a few signals for investors as the fourth quarter gets under way. Chief among them: Don't worry too much about corporate earnings, but keep your eye on the holiday season and thereafter.
By watching options prices, investors can glean bits of information about stock-market volatility and individual stocks' outlook. One important signal comes from the so-called fear gauge, the CBOE Market Volatility Index. The measure, also called the VIX, tracks prices investors are willing to pay for Standard & Poor's 500-share index options, commonly used to guard against drops in stocks.

The VIX has been at relatively muted levels in recent weeks, showing that investors are confident as they look to October. How much of this reflects a bullish stock market's afterglow is up for debate, but investors are kicking off the new quarter with little trepidation.

"Heading into earnings, the demand for protection has fallen for most sectors," Credit Suisse equity derivatives strategist Terry Wilson said, noting that investors aren't rushing for a shield the way they were at midyear.
To be sure, investors feel better about some sectors than others. One way of judging is to compare bullish calls and bearish puts for differences in "implied volatility," which is the market's best guess whether a stock will stage big swings.

A few months out, this approach shows that investors are quite bullish about basic-materials stocks, according to a Credit Suisse analysis of options on several SPDR exchange-traded funds. That won't come as much of a surprise to investors watching the current enthusiasm for commodities, especially gold, silver and copper.

Neither will it surprise that investors seem quite guarded on health-care stocks, which continue to be plagued with political and regulatory uncertainty.

The mood in consumer-discretionary stocks, however, suggests an upbeat view through earnings season followed by the onset of worry right around the holiday season.
Investors have been heartened with strong earnings reports from the likes of athletic-apparel titan Nike Inc. and home-goods retailer Bed Bath & Beyond Inc. Their outlook for earnings season is calm judging by their low appetite for protection.

But, looking further out, three-month protective options on the Consumer Discretionary Select Sector SPDR Fund currently show the most bearish options "skew" among 10 major sector funds....MORE