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Equities Make Historic Moves Headed into 2019, Close Positive on the Week

Dec 28, 2018

 

 

 

ETF 30D IV 30D IV
Percentile
90D IV 90D IV
Percentile
90D/30D IV 90D/30D IV
Percentile
30D IV-
20D HV
30D IV-20D HV
Percentile
90D IV-
60D HV
90D IV-60D HV
Percentile
SPY 27.23 99.6% 23.27 99.21% 0.85 3.17% -3.1 23.02% -0.88 38.89%
QQQ 32.95 99.6% 28.9 99.21% 0.88 6.94% -5.33 22.62% -4.51 24.6%
IWM 29.79 99.6% 25.96 99.21% 0.87 3.97% -1.31 25.6% -0.11 33.93%
FEZ 23.28 98.41% 21.74 99.21% 0.93 18.45% 2.53 75.4% 2.95 83.33%
EEM 24.58 88.89% 24.31 96.83% 0.99 38.89% 3.51 85.32% -1.07 40.28%

 

Highlights from the past week

We saw something of a 2018 microcosm this week – huge dips, huge rips and lots of volatility. Given the positive week for equities (S&P up 3.5% as of writing) the VIX has receded and is down roughly 20% from its Wednesday high of 36.05. It’s worth noting that bonds have remained bid this week which reflects investors’ uncertainty around the 2019 outlook. Here are some of the risks being discussed as we head into the new year:

  • Trade War – Potential for escalation
  • Fed Policy – The Fed is forecasting two hikes while the market is pricing in none
  • Brexit – What if we get a hard Brexit?
  • US Economy – Slowing growth and whispers about a potential recession

 

Bullish: QQQ Buyer 38,500 Jan 150 – 162 call spreads (ref. 148.74)

Bullish: IWM Buyer 10,000  Jan 4th 137 calls to Sell 30,000 Jan 4th 140 calls (ref. 134.34)

Bullish: JNK Seller 55,000 Mar 29 puts (ref. 33.52)

Bullish: SPX Buyer 12,000 Jan 2515 calls (ref. 2372.74)

Bearish: EEM Buyer 85,000 Jan 32 puts (ref. 39.59)

Bearish: SPX Buyer 13,700 Jan 25th 975 puts (ref. 2426.81)

Bearish: VIX Buyer 50,000 Apr 45 – 70 call spreads (ref. 21.02)

 

The Financial Sector had a unique 2018. Despite the 10-year yield moving higher this year, the 2-10 year spread tightened thanks to the Fed’s four rate hikes. Curiously, the banks failed to participate meaningfully when we rallied and have been rocked during the selloff. It’s been the worst of both worlds for the banks. Given their reasonable valuations (lower P/E ratios relative to broader S&P) there’s a bullish case to be made for the banks should the yield curve steepen. Will 2019 bring more pain for Financials or has a difficult year provided investors with some value?

 

Bullish: C Seller 20,000 Feb 60 calls (closing) to Buy 20,000 Mar 57.5 calls (rolls out and down, ref. 52.12)

Bullish: XLF Buyer 10,000 Jan 4th 23.5 calls (ref. 22.75)

Bearish: XLF Buyer 15,000 Mar 22 puts (ref. 23.63)

Bearish: BAC Seller 93,000 Dec 28th 23.5 calls (ref. 22.75)*

*This premium writing strategy has been going on for months. The trader collects a couple pennies every week by selling short-dated upside calls. On Wednesday, when we rallied 5%, the trader had to buy back these calls for .50 after selling them for .05 earlier on in the day. I mention this because it highlights the risks associated with premium writing.