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IB Traders' Insight

Global market commentary from IBG traders and market participants.

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2014-04-25 04:10:59

Posted by
IB European Trade Desk
Contributor

Stocks

Market update: United Kingdom

  • PEARSON (UK): Pearson First-Quarter Sales Decline 6% as Pound Strengthens. Pearson Plc, the publisher of the Financial Times newspaper, said first-quarter sales dropped 6 percent, in line with company expectations, as the British pound strengthened against the U.S. dollar. London-based Pearson said it still expects adjusted earnings per share of 62 pence to 67 pence in 2014. The company said its profits are heavily weighted to the second half and first-half adjusted operating profit and adjusted earnings per share will be lower this year than in 2013. Pearson, which earns about 60 percent of revenue in the U.S., has blamed lower freshman enrollments and bookstore purchases for reducing earnings in the country. Pearson has also been reorganizing to speed growth in emerging markets and digital services as a slowdown in some large textbook markets restrains profit. “Pearson has had a solid start to the year, in line with our expectations” Chief Executive Officer John Fallon said in a statement today. “Our major programme of restructuring and investment is on-track and will drive a leaner, more cash- generative, faster-growing business from 2015.” The company in February said it wouldn’t emerge from a difficult transition period until 2015 after earnings plunged on weak demand in U.S. higher education and restructuring costs. Pearson, which spent about 176 million pounds reorganizing last year, forecast in January that net restructuring expenses will be about 50 million pounds in 2014 and it will invest about 50 million pounds to expand digital operations and businesses in emerging markets.Pearson shares fell 6 pence to 1,050 pence in London yesterday, giving the company a market value of about 8.6 billion pounds. Its shares have declined 21.7 percent this year. The company also said in January that trading conditions will remain challenging this year, with declining college enrollments in North America, its largest market. Business in the U.K. will also also be hurt by curriculum changes affecting schools. Bloomberg LP, the parent of Bloomberg News, competes with the Financial Times in providing financial news and information. In December, Pearson agreed to buy Grupo Multi, an English- language training company in Brazil, for about 440 million pounds to accelerate growth in its education business.
  • BARCLAYS (UK): Barclays Plc will pay $280 million to resolve Federal Housing Finance Agency claims that the London-based bank violated U.S. securities laws in connection with private-label mortgage-backed securities sold to Fannie Mae and Freddie Mac. The agreement announced by the FHFA in a statement today, calls for Barclays to pay $227 million to Freddie Mac and $53 million to Fannie Mae for loans sold from 2005 to 2007. The settlement is the 13th related to the 18 lawsuits FHFA filed in 2011. The FHFA, which placed Fannie Mae and Freddie Mac into conservatorship in 2008, sued Barclays and more than a dozen other banks, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., over mortgage securities sold to the mortgage- finance firms. The agency claimed that loans backing securities sold to Fannie Mae and Freddie Mac were riskier than promised, leading to losses.
2014-04-25 04:09:34

Posted by
IB European Trade Desk
Contributor

Stocks

Market update: Switzerland

  • SWISS AGMs 25.4.14 (CH): Forbo, Helvetia, Kuoni  hold AGMs.
2014-04-25 04:07:31

Posted by
IB European Trade Desk
Contributor

Stocks

Market update: Germany

  • DEUTSCHE BANK (DE):  Deutsche Bank May Seek EU5b Capital Increase, Handelsblatt Says. Increasingly doubtful if last year’s capital increase is sufficient to meet demands by investors, regulators in the long term, Handelsblatt reports in an extract from an article to be published today, citing unidentified insiders. Co-CEOs Anshu Jain and Juergen Fitschen are considering capital increase either before “summer break” or in 4Q; no final decision yet * New equity may be required to set aside funds for legal risks. Co. is also in talks with regulators over correct valuation of risky assets. Deutsche may also need funds to seize growth opportunities in investment banking.
2014-04-24 12:56:56

Posted by
Andrew Wilkinson
Chief Market Analyst
Interactive Brokers
Contributor

Options

Chesapeake draws large bull call spread

A bullish energy option trader just paid 40-cents to buy a 33,000-lot call spread expiring in October, and appears to be gearing up for a 20% surge in the share price of Chesapeake Energy Corp. (Ticker: CHK) in that time period. Shares are almost 1% higher on the day at $29.30. The trader bought 33,000 call options at the Oct 35.0 strike at 49-cents and sold the same amount of higher strike 40.0 calls at 9-cents. The trade is put on at a net cost of 40-cents implying a breakeven at expiration of $35.40 for shares of Chesapeake. The option play appears to be without any share component at this point and looks set to benefit from a directional view according to the trader’s outlook. The trade, net of commission, costs the investor $1.32 million to place and has a maximum potential gain of $15.18 million should shares reach the upper strike some 36% above today’s trading price by expiration. Given the magnitude of Thursday’s option’s play, dealers have bumped up the uncertainty surrounding the stock’s potential future movements with implied volatility surging by 10.23% to 47.5%. Overall options volume of 96,200 contracts on the day compares to overall open interest before today of 422,000 lots.

Chart – Chesapeake higher as news of bullish option play circulates    

2014-04-24 12:01:21

Posted by
Andrew Wilkinson
Chief Market Analyst
Interactive Brokers
Contributor

Options

Bulls jump on Japanese ETF

Despite the fact that there are more than 250,000 call options held by investors at the June 11.0 strike in the iShares MSCI Japan ETF (Ticker: EWJ), it’s hard to sneak a trade of 50,000 contracts past onlookers without someone noticing. Shares in the Japanese index fund are lower by 0.6% Thursday trading at $11.06. However, one sizable investor appears to have paid 33-cents to buy the in-the-money bullish contracts expiring in two months’ time. There are two possible motivations as investors await more stimulus from Tokyo. First, the recent correction in global stocks has been less kind to Japan. The chart below shows that this fund has not only underperformed the Nikkei 225 index, but also that stocks in general have not been greeted with the same enthusiasm as US stocks in the rebound phase. This investor is possibly hoping that more monetary largesse from the Bank of Japan will further weaken the yen and aid stocks. You can see just how close to the lower range shares in either case are trading. The call option purchase appears to be a play on a significant reversal in fortunes for Japanese stocks.  

Chart – Japanese stocks have performed badly during the recent bearish phase

2014-04-24 11:55:29

Posted by
Waverly Advisors, LLC
Technical/Quantitative Market Research
Contributor

Stocks

Waverly Advisors Midday Update

Global Equity markets and commodity movers:

Equities

Singapore stocks (+0.9%), Spike: 2.0σ, Related tickers: EWS

Rates and Currencies

Aust Dollar / Japanese Yen (-0.5%), Spike: -1.3σ, Related tickers: AUD, JPY, AUDJPY, FXA, FXY

Commodities

Copper futures (+2.1%), Spike: 2.6σ, Related tickers: HG, JJC

Wheat futures (+2.0%), Spike: 1.1σ, Related tickers: W

This list highlights large standard deviation moves using Waverly Advisors’ SigmaSpikes™ indicator—markets that are making significant moves today on a volatility-adjusted basis.

For more information about Waverly Advisors please click http://bit.ly/1mj1Toa.

2014-04-24 10:03:39

Posted by
Andrew Wilkinson
Chief Market Analyst
Interactive Brokers
Contributor

Macro

US Durable Goods Orders

Orders for longer-lasting goods rose in March by 2.6% and beat a nearby consensus forecast. The gain was broad-based with all sectors showing increasing output. The ex-transport measure showed a rise of orders of 2.0%, which is the fastest pace of order growth since January 2013. Within the transport measure the pacesetter was commercial aircraft (+8.6%) rather than autos, where orders grew by just 0.4%. Electrical equipment and machinery orders each snapped back following two months of declines. Orders for fabricated metals rose by 2.2% easily reversing a February decline while orders for primary metals jumped for a second straight month. Demand for capital goods outside of the defense arena rose by 1.7% and improved on a minor gain in February. It was the strongest gain since November. Such demand is often seen as a gauge of core business investment and includes computers and other capital equipment items.

Signs of faster growth will probably outweigh the accompanying jump in weekly initial jobless claims, which rose by 25,000 to 329,000 and missed economists’ forecast of 315,000. Gathering final demand is likely to lead to higher future employment while the latest view of granular jobs data is subject to distortions owing to the timing of Easter. 

Chart – Durable goods and ex-transport orders

2014-04-24 09:58:13

Posted by
Andrew Wilkinson
Chief Market Analyst
Interactive Brokers
Contributor

Options

Apple jumps on earnings - here's how an option trader might assess combinations

Let’s cut to the chase and show you the visuals for the shift in investor expectations post-earnings at Apple (Ticker: AAPL). Implied volatility or expected uncertainty at the nearby May options expiration was bid higher ahead of earnings (chart 1), running at 22% compared to ~17% on June and July expiries. Judging by the 8% pre-market gain in shares of Apple it is not unreasonable to expect implied volatility at the front end to head lower to similar levels to June or July.

Chart 1 – May implied volatility higher into earnings

The second chart displays the Probability Distribution either side of earnings – the blue curve is before the event and the red curve, reflecting a shift in expectations to show the typical type of post-earnings drop in implied volatility, is shown in red.

Chart 2 – Probability Distribution before and after earnings

Using the IB Probability Lab, users can build customized scenarios using live option prices to determine potential strategies that suit their forecasts. Of course we had no idea that Apple would beat the street, but the ability to plan using this free software allows investors to examine their homework through the lens of wishful thinking. Importantly here, investors can rank strategies according to computed Sharpe ratios for each suggested strategy. It is also possible to compare potentially profitable strategies according to the number of legs associated with each trade and determined by the user. Below we show the difference in potential profitability, ranked by Sharpe ratio and determined by the number of legs chosen, using the same strategy.

Chart 3 – Rising Sharpe ratios

By recalibrating the software to select one, two, three or four legs investors are returned a choice of possible strategies and can quickly determine which might be the best strategy given their view. In this scenario you can see from chart 4 that adding two long strikes in combination with two short options at even higher prices returns a better outcome than using three, two or one legged combinations.

2014-04-24 09:42:05

Posted by
Jamie Lissette
Trading Analyst
Hammerstone Group
Contributor

Stocks

Hammerstone recap

The S&P 500 ended its 6 day winning streak on Wednesday to close 0.2% lower.

In terms of data, housing was again the focal point yesterday and the data wasn’t that good. We started with mortgage applications data from MBA; The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, declined 3.3 percent last week.

The much looked at New Home Sales numbers were also pretty bad. The U.S. Commerce Department reported that the annualized sales pace of new single-family homes fell 14.5% to a seasonally adjusted 384,000 last month. This was a huge miss from economists’ forecasts of 450,000, and would add to worries that growth in housing has started to stall in an otherwise broad economic recovery in the US.

On The Forum

Participants on the forum remained focused on discussing the earnings numbers from the previous night and adjusting their positions based on the new data.  From the previous day’s earnings, forum participants appeared to be the most impressed with the positive numbers from GILD.

On the broad market, forum participants discussed how, in the recent past, poor macro data was usually seen as good news for stocks as it increased the possibility of Fed easing. Participants discussed if they could see that dynamic again with the poor housing data, however, that did not turn out to be the case.

Wednesday was a big day for earnings, and participants on the forum were generally impressed by earnings reports from heavy-weights AAPL and FB.

Looking Forward

The investor sentiment appears to have improved after last night’s blowout earnings from AAPL and FB, and therefore the path of least resistance may be higher for the stocks.

In terms of macro data, we have Durable Goods Orders, Claims (today at 8:30AM ET); and Markit US Services PMI and U. Michigan Confidence (tomorrow.) 

The bulk of this week’s remaining earnings will come out tonight including AMZN, BIDU, BRCM, LVS, MSFT, P, SBUX, and V. The Ford Motor Company reports tomorrow morning. 

 

The Hammerstone Institutional Forum, a chat-based platform for traders, provides subscribers with up-to-the-minute breaking news headlines and instant analysis that drive the market. For more information please visit www.thehammerstone.com.

2014-04-24 06:39:19

Posted by
Darren Deacon
Australian Trade Desk
Contributor

Stocks

Mostly small gains for Australian equities

Another small rally on the ASX with the ASX200 +0.24%.  In a shortened trading week with Easter holidays and ANZAC day tomorrow, the local market saw moderate gains Tuesday (+0.46%) and Wednesday (+0.70%), on positive US/EU market leads.  Wednesday was a little busier with stock option expiry and quarterly inflation (annualized) at 2.9% reducing pressure for any interest rate rise from record low rates by the Reserve Bank of Australia, which holds a 2-3% inflation target band.

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