This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Chart Advisor: Vote of Confidence

Investopedia

Contributor:
Investopedia
Visit: Investopedia

Tuesday, February 23, 2021

1/ Volatility traders show faith in the market 

2/ Airline companies holding on to call options? 

3/ The travel industry trade 

4/ The bottom line

1/ Volatility traders show faith in the market 

Stock prices dipped hard to open trading today but staged an impressive rebound beginning early in the session. Under such circumstances, seasoned chart watchers would expect the Cboe Volatility Index (VIX) to explode higher. That is not what happened today. Instead, the VIX actually opened lower, then spiked briefly in mild fashion and closed near its low for the day.  

This kind of a move is not what experienced option traders and professional analysts would expect to see. But that’s what makes today’s occurrence so meaningful. Whenever the market indexes display something you don’t expect, then it’s time to take note. These are times when investors are collectively speaking their mind and giving important clues about market sentiment

The chart below shows that investors took the lower end of the regression channel as an opportunity to buy more shares in State Street’s S&P 500 Index ETF (SPY), and that VIX traders didn’t think the drop was cause for concern. Taken together, these are very bullish signals. Investors are clearly expecting markets to trend higher.   

2/ Airline Companies Holding on to Call Options? 

If the price of oil and gasoline represent the largest expense to airline companies, then shouldn’t higher oil prices put pressure on their stock prices? In fact, it has been a long-standing tenet among professional investors that the airline industry often moves with a negative correlation to the price of oil. However, as the chart below shows, this relationship has flipped.  

The price on the left side of the chart tracks something that is known as the Crack Spread. This is a measure of the difference between the cost of Crude Oil future (CL) and what someone could sell as a refined oil product, such as gasoline (RB). It is interesting to compare this with the major airline companies, Southwest Airlines (LUV), Delta Air Lines (DAL) and United Airline Holdings (UAL), because these are certainly among the largest consumers of refined oil products.  

Notice the red area to the lower left of the chart. This shows the correlation of the crack spread to an equal-weighted portfolio of the three air carriers. That this correlation has recently gone from negative to positive could be explained by many things, however the most likely one is this: airline companies are holding call options on gasoline futures. It may not be obvious to investors who bought shares of DAL, for example, that they are functionally participating in a large bet on jet fuel. 

It’s no stretch of the imagination that fuel costs have a big influence on airline company operations. Consider that Delta reported that its average per-gallon fuel costs went from $2.01 in 4Q 2019 to $1.45 a year later. They know the prices won’t stay low for long if travel resumes and they’d have been crazy not to lock in prices by buying oil futures or even call options on oil futures. 

3/ The Travel Industry Trade 

If airline stocks are moving higher simply because the price of oil and gasoline is moving higher, does that mean that most investors are not expecting the economy to recover and travel restrictions to be lifted this summer? It is hard to know with certainty, but a big clue might be given tomorrow when Bookings (BKNG), the largest travel service company by market cap, releases its quarterly report.  

As the chart below shows, BKNG shares are pushing strongly higher into the upper edges of its volatility range. However, option traders are showing a bias towards the downside with 52% of today’s trading being done with put options. This is a very pessimistic outlook by option traders, who are apparently worried about how high the share price has run. It may be that when BKNG releases its earnings report tomorrow after the market is closed, chart watchers will be able to discern whether the news favors continued bets on the travel industry or not. 

4/ The Bottom Line 

Stock prices fell today while the VIX dropped as well. This is typically a bullish signal. Airline companies seem to be responding less to their own prospects and more to the cost of jet fuel. Earnings info from BKNG may help analysts differentiate between the possible outcomes.       

Originally Published on February 23, 2021

     

Disclosure: Investopedia

Investopedia.com: The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy.  While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. This information is intended for US residents only.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Investopedia and is being posted with permission from Investopedia. The views expressed in this material are solely those of the author and/or Investopedia and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Options Trading

Options involve risk and are not suitable for all investors. For more information read the Characteristics and Risks of Standardized Options, also known as the options disclosure document (ODD). To receive a copy of the ODD call 312-542-6901 or copy and paste this link into your browser:

http://www.optionsclearing.com/about/publications/character-risks.jsp

Disclosure: Futures Trading

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.

trading top