A concise weekly overview of the U.S. equities and derivatives markets
Despite the week ending on a positive note, the S&P 500 Index and Nasdaq 100 Index suffered their largest weekly declines since February. September was the worst monthly performance since March 2020. In September, every S&P 500 Index sector was lower, except for Energy. Energy gained nearly 11% as crude oil and natural gas prices rose substantially. Rate-sensitive Utilities and Real Estate declined 6.9% and 5.8%, respectively. Information Technology and Healthcare each lost 5.1%. Financials were only lower by 4% as the yield curve steepened. The prospect of rising rates has spurred market rotation and value outperformed growth by 3.2% in September. For comparison, from January to March, when rates rose and the curve steepened, value outperformed growth by approximately 9%. Small caps have outperformed in recent weeks as inflation and interest rate fears percolate.
Meanwhile, U.S. legislators temporarily avoided a government shutdown by passing a short-term spending bill. Concerns about a debt ceiling breach remain. Treasury Secretary Yellen and others have warned against political brinkmanship that could affect U.S. treasury markets.
- U.S. Equity Indices wrapped up a volatile week on a positive note following the most significant decline from highs in 2021.
- S&P 500 Index (SPX®): Decreased 2.2% week-over-week.
- Nasdaq 100 Index (NDX): Decreased 3.5% week-over-week.
- Russell 2000 Index (RUT℠): Decreased 0.2% last week.
- Cboe Volatility Index™ (VIX™ Index): Measured between 24.89 and 17.74 last week and closed at 21.15, higher by 3.27 vols week-over-week.
- SPX options average daily volume (ADV) was about 1.9 million contracts per day, the heaviest SPX options volume since the week ending March 15, 2020. The one-week at-the-money (ATM) SPX options straddle (4360 strike with a 10/8 expiration) implies a +/- range of about 1.9%. The weekly ATM straddle settled on a 16.2% implied volatility.
- VIX options ADV was about 320,000 contracts last week, which was significantly lower than the previous week’s ADV of 620,000 contracts. The VIX options call-put ratio was 0.09:1.
- RUT options ADV was 62,100 contracts, compared to an ADV of 63,700 contracts the previous week.
Across the Pond
- The Euro STOXX 50 Index decreased 3.6% on the week.
- The MSCI EAFE Index (MXEA℠) decreased 3.3% week-over-week and the MSCI Emerging Markets Index (MXEF℠) decreased 1.2% week-over-week.
Charting It Out
Observations on VIX futures term structure
- The VIX Index moved higher by more than 3 vols week-over-week and the spread between the October and November VIX futures settled at 1.45 wide.
- A week prior, that spread was 1.70 wide. The October VIX futures jumped 1.75 whereas the November contract gained 1.50.
- The visual below plots the VIX futures term structure after Tuesday’s 2.2% selloff in the S&P 500 Index. Despite the largest single day decline since May, the VIX futures curve did not close inverted.
VIX Futures Term Structure
Source: LiveVol Pro
- The U.S. 10-year Treasury Yield traded up to 1.56% on Tuesday, the highest level for the 10-year yield since mid-June. Rates fell on Thursday and Friday and the 10-year yield ended the week at 1.46%, which is in line with the previous Friday.
- The S&P GSCI climbed another 2.2% on the week. The GSCI is currently at the highest levels since late 2014. Hogs, Cotton, Natural Gas, Crude Oil and Grains rose. Cotton futures are at the highest levels since 2011.
- Cattle, Industrial Metals (Copper), Lumber and the Bean complex declined.
- Bigger picture, the U.S. Dollar Index has been stronger alongside higher U.S. sovereign yields. Historically, commodities perform well when the USD declines (most commodities are dollar denominated) so it is unusual to see a positive correlation between the dollar and commodities.
- Big Tech leaders struggled last week and underperformed the S&P 500 Index.
- Amazon fell 4.2%. Alphabet lost 4.0%. Microsoft declined by 3.4%. Apple and Facebook declined by 2.9% and 2.8%, respectively.
- Tesla outperformed the group, ending the week unchanged.
- The technology-heavy Nasdaq 100 Index suffered its worst weekly performance since February. Growth stocks have underperformed as interest rates climb.
- Bitcoin (BTC) prices were approximately $42,000 on Friday, Sept. 24. Last week the cryptocurrency traded between $48,000 and $40,700.
- Bitcoin was trading about $47,800 as of Friday, October 1, higher by 13.2% week-over-week.
- Bitcoin’s market cap is approximately $900 billion and it constitutes 34% of the overall crypto market.
- Last week, Ethereum (ETH) traded between $3,300 and $2,700.
- ETH ended the week up 14%, on highs near $3,300.
- ETH market cap is $390 billion and makes up 15% of the overall crypto market.
- On Friday Coinbase (COIN) announced that hackers stole cryptocurrencies from roughly 6,000 clients. The attacks occurred between March and May of this year. The company promised to reimburse those impacted.
- Most cryptos moved higher on October 1 following news that Federal Reserve Chair Jerome Powell “does not intend to ban cryptocurrencies.”
- The 7-day average COVID-19 infection rate in the U.S. decreased from approximately 127,000 a week ago to approximately 111,000 on October 1. The trend continues to improve domestically and globally.
- 56% of the U.S. population is fully vaccinated against COVID-19 and 65% have received at least one dose of a COVID-19 vaccine. For just those 12 years and older, the numbers are 65% and 76% respectively. Daily vaccination numbers, however, continue to decline.
- Globally, the 7-day average infection rate continues to decline, moving from 507,000 to 447,000 week-over-week.
COVID-19 Infection Rate in the U.S.
Source: The New York Times
Tidbits from the News
- On September 28, the S&P 500 Total Return Index fell by more than 2%. It was the largest decline since May 12. Also on September 28, the VIX Index closed at 23.25. On May 12, the VIX Index closed at 27.59. Interest rate concerns tethered to ongoing debt ceiling negotiations were a primary driver. 1-month realized S&P 500 Index volatility increased considerably since early September. 30-day realized volatility shifted from approximately 7.5% to approximately 12% by month’s end.
Days the S&P 500 Index Rose and Fell
- September was a difficult month for both developed and emerging markets. The third quarter overall, however, was more mixed. China and Brazil struggled but U.S. equity indices were mostly higher (excluding small caps). Indian markets have performed very well and the Nifty 50, a benchmark Indian stock market index, gained more than 12% on the quarter.
Source: S&P Dow Jones Research
- Natural Gas futures moved significantly higher over the past five weeks. The November contract moved from 4.00 to as high as 6.32 on September 28. In the UK, Natural Gas futures have gained more than 400% from the early 2021 lows. The Natural Gas market has a history of parabolic rallies.
Natural Gas Futures March/April 2022 Spread
The Week Ahead
- Data to be released this week: Factory Orders on Monday; ISM and Markit Services Purchasing Managers Index and Trade Deficit on Tuesday; ADP Employment Data on Wednesday; Weekly Jobless Claims on Thursday; Nonfarm Payrolls and Unemployment Rate on Friday.
Originally Posted on October 4, 2021 – The Week that Was: September 27 to October 4
- The information provided is for general education and information purposes only. No statement provided should be construed as a recommendation to buy or sell a security, future, financial instrument, investment fund, or other investment product (collectively, a “financial product”), or to provide investment advice.
- In particular, the inclusion of a security or other instrument within an index is not a recommendation to buy, sell, or hold that security or any other instrument, nor should it be considered investment advice.
- Options involve risk and are not suitable for all market participants. Prior to buying or selling an option, a person should review the Characteristics and Risks of Standardized Options (ODD), which is required to be provided to all such persons. Copies of the ODD are available from your broker or from The Options Clearing Corporation, 125 S. Franklin Street, Suite 1200, Chicago, IL 60606.
- Trading FLEX options may not be suitable for all options-qualified market participants. FLEX options strategies only should be considered by those with extensive prior options trading experience.
- Uncovered option writing is suitable only for the knowledgeable market participant who understands the risks, has the financial capacity and willingness to incur potentially substantial losses, and has sufficient liquid assets to meet applicable margin requirements. In this regard, if the value of the underlying instrument moves against an uncovered writer’s options position, the writer may incur large losses in that options position and the participant’s broker may require significant additional margin payments. If a market participant does not make those margin payments, the broker may liquidate positions in the market participant’s account with little or no prior notice in accordance with the market participant’s margin agreement.
- Futures trading is not suitable for all market participants and involves the risk of loss, which can be substantial and can exceed the amount of money deposited for a futures position. You should, therefore, carefully consider whether futures trading is suitable for you in light of your circumstances and financial resources. You should put at risk only funds that you can afford to lose without affecting your lifestyle.
- For additional information regarding the risks associated with trading futures and security futures, see respectively the Risk Disclosure Statement set forth in Appendix A to CFTC Regulation 1.55(c) and the Risk Disclosure Statement for Security Futures Contracts.
VIX® Index and VIX® Index Products
- The Cboe Volatility Index® (known as the VIX Index) is calculated and administered by Cboe Global Indices, LLC. The VIX Index is a financial benchmark designed to be a market estimate of expected volatility of the S&P 500® Index, and is calculated using the midpoint of quotes of certain S&P 500 Index options as further described in the methodology, rules and other information here.
- VIX futures and Mini VIX futures, traded on Cboe Futures Exchange, LLC, and VIX options, traded on Cboe Options Exchange, Inc. (collectively, “VIX® Index Products”), are based on the VIX Index. VIX Index Products are complicated financial products only suitable for sophisticated market participants.
- Transacting in VIX Index Products involves the risk of loss, which can be substantial and can exceed the amount of money deposited for a VIX Index Product position (except when buying options on VIX Index Products, in which case the potential loss is limited to the purchase price of the options).
- Market participants should put at risk only funds that they can afford to lose without affecting their lifestyles.
- Before transacting in VIX Index Products, market participants should fully inform themselves about the VIX Index and the characteristics and risks of VIX Index Products, including those described here. Market participants also should make sure they understand the product specifications for VIX Index Products (VIX futures,Mini VIX futures and VIX options) and the methodologies for calculating the underlying VIX Index and the settlement values for VIX Index Products. Answers to questions frequently asked about VIX Index products and how they are settled is available here.
- Not Buy and Hold Investment: VIX Index Products are not suitable to buy and hold because:
- On their settlement date, VIX Index Products convert into a right to receive or an obligation to pay cash.
- The VIX Index generally tends to revert to or near its long-term average, rather than increase or decrease over the long term.
- Volatility: The VIX Index is subject to greater percentage swings in a short period of time than is typical for stocks or stock indices, including the S&P 500 Index.
- Expected Relationships: Expected relationships with other financial indicators or financial products may not hold. In particular:
- Although the VIX Index generally tends to be negatively correlated with the S&P 500 Index – such that one tends to move upward when the other moves downward and vice versa – that relationship is not always maintained.
- The prices for the nearest expiration of a VIX Index Product generally tend to move in relationship with movements in the VIX Index. However, this relationship may be undercut, depending on, for example, the amount of time to expiration for the VIX Index Product and on supply and demand in the market for that product.
- Mini VIX futures contracts trade separately from regular-sized VIX futures, so the prices and quotations for Mini VIX futures and regular-sized VIX futures may differ because of, for example, possible differences in the liquidity of those markets.
- Final settlement Value: The method for calculating the final settlement value of a VIX Index Product is different from the method for calculating the VIX Index at times other than settlement, so there can be a divergence between the final settlement value of a VIX Index Product and the VIX Index value immediately before or after settlement. (See the SOQ Auction Information section here for additional information.)
Exchange Traded Products (“ETPs”)
- Cboe does not endorse or sell any ETP or other financial product, including those investment products that are or may be based on a Cboe index or methodology or on a non-Cboe index that is based on investment products trading on a Cboe Company exchange (e.g., VIX futures); and Cboe makes no representations regarding the advisability of investing in such products. An investor should consider the investment objectives, risks, charges, and expenses of these products carefully before investing. Investors also should carefully review the information provided in the prospectuses for these products.
- Investments in ETPs involve risk, including the possible loss of principal, and are not appropriate for all investors. Non-traditional ETPs, including leveraged and inverse ETPs, pose additional risks and can result in magnified gains or losses in an investment. Specific risks relating to investment in an ETP are outlined in the fund prospectus and may include concentration risk, correlation risk, counterparty risk, credit risk, market risk, interest rate risk, volatility risk, tracking error risk, among others. Investors should consult with their tax advisors to determine how the profit and loss on any particular investment strategy will be taxed.
Cboe Strategy Benchmark Indices
- Cboe Strategy Benchmark Indices are calculated and administered by Cboe Global Indices, LLC as described in the methodologies, rules and other information available here using information believed to be reliable, including market data from exchanges owned and operated by other Cboe Companies.
- Strategy Benchmark Indices are designed to measure the performance of hypothetical portfolios comprised of one or more derivative instruments and other assets used as collateral. Past performance is not indicative of future results. Strategy Benchmark Indices are not financial products that can be invested in directly, but can be used as the basis for financial products or managing portfolios.
- The actual performance of financial products such as mutual funds or managed accounts can differ significantly from the performance of the underlying index due to execution timing, market disruptions, lack of liquidity, brokerage expenses, transaction costs, tax consequences and other considerations that may not be applicable to the subject index.
Index and Benchmark Values Prior to Launch Date
- Index and benchmark values for the period prior to an index’s launch date are calculated by a theoretical approach involving back-testing historical data in accordance with the methodology in place on the launch date (unless otherwise stated). A limitation of back-testing is that it reflects the theoretical application of the index or benchmark methodology and selection of the index’s constituents in hindsight. Back-testing may not result in performance commensurate with prospective application of a methodology, especially during periods of high economic stress in which adjustments might be made. No back-tested approach can completely account for the impact of decisions that might have been made if calculations were made at the same time as the underlying market conditions occurred. There are numerous factors related to markets that cannot be, and have not been, accounted for in the preparation of back-tested index and benchmark information.
- No Cboe Company is an investment adviser or tax advisor, and no representation is made regarding the advisability or tax consequences of investing in, holding or selling any financial product. A decision to invest in, hold or sell any financial product should not be made in reliance on any of the statements or information provided. Market participants are advised to make an investment in, hold or sell any financial product only after carefully considering the associated risks and tax consequences, including information detailed in any offering memorandum or similar document prepared by or on behalf of the issuer of the financial product, with the advice of a qualified professional investment adviser and tax advisor.
- Under section 1256 of the Tax Code, profit and loss on transactions in certain exchange-traded options and futures are entitled to be taxed at a rate equal to 60% long-term and 40% short-term capital gain or loss, provided that the market participants involved and the strategy employed satisfy the criteria of the Tax Code. Market participants should consult with their tax advisors to determine how the profit and loss on any particular option or futures strategy will be taxed. Tax laws and regulations change from time to time and may be subject to varying interpretations.
- Past performance of an index or financial product is not indicative of future results.
- Brokerage firms may require customers to post higher margins than any minimum margins specified.
- No data, values or other content contained in this document (including without limitation, index values or information, ratings, credit-related analyses and data, research, valuations, strategies, methodologies and models) or any part thereof may be modified, reverse-engineered, reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of Cboe.
- Cboe does not guarantee the accuracy, completeness, or timeliness of the information provided. THE CONTENT IS PROVIDED “AS IS” WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY WITH RESPECT MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
- Hypothetical scenarios are provided for illustrative purposes only. The actual performance of financial products can differ significantly from the performance of a hypothetical scenario due to execution timing, market disruptions, lack of liquidity, brokerage expenses, transaction costs, tax consequences and other considerations that may not be applicable to the hypothetical scenario.
- Supporting documentation for statements, comparisons, statistics or other technical data provided is available by contacting Cboe Global Markets at www.cboe.com/Contact.
- The views of any third-party speakers or third-party materials are their own and do not necessarily represent the views of any Cboe Company. That content should not be construed as an endorsement or an indication by Cboe of the value of any non-Cboe financial product or service described.
Trademarks and Intellectual Property
- Cboe®, Cboe Global Markets®, Bats®, BIDS Trading®, BYX®, BZX®, Cboe Options Institute®, Cboe Vest®, Cboe Volatility Index®, CFE®, EDGA®, EDGX®, Hybrid®, LiveVol®, Silexx® and VIX® are registered trademarks, and Cboe Futures ExchangeSM, C2SM, f(t)optionsSM, HanweckSM, and Trade AlertSM are service marks of Cboe Global Markets, Inc. and its subsidiaries. Standard & Poor’s®, S&P®, S&P 100®, S&P 500® and SPX® are registered trademarks of Standard & Poor’s Financial Services LLC and have been licensed for use by Cboe Exchange, Inc. Dow Jones®, Dow Jones Industrial Average®, DJIA® and Dow Jones Global Indexes® are registered trademarks or service marks of Dow Jones Trademark Holdings, LLC, used under license. Russell, Russell 1000®, Russell 2000®, Russell 3000® and Russell MidCap® names are registered trademarks of Frank Russell Company, used under license. FTSE® and the FTSE indices are trademarks and service marks of FTSE International Limited, used under license. MSCI and the MSCI index names are service marks of MSCI Inc. (“MSCI”) or its affiliates and have been licensed for use by Cboe. All other trademarks and service marks are the property of their respective owners.
- © 2021 Cboe Exchange, Inc. All Rights Reserved.
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, or at www.theocc.com. The information in this program is provided solely for general education and information purposes. No statement within the program should be construed as a recommendation to buy or sell a security or to provide investment advice. The opinions expressed in this program are solely the opinions of the participants, and do not necessarily reflect the opinions of Cboe or any of its subsidiaries or affiliates. You agree that under no circumstances will Cboe or its affiliates, or their respective directors, officers, trading permit holders, employees, and agents, be liable for any loss or damage caused by your reliance on information obtained from the program.
Copyright © 2021 Chicago Board Options Exchange, Incorporated. All rights reserved.
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 Cboe and is being posted with permission from Cboe. The views expressed in this material are solely those of the author and/or Cboe 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.
In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.
Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.
There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.
Disclosure: Digital Assets
Trading in digital assets, including cryptocurrencies, is especially risky and is only for individuals with a high risk tolerance and the financial ability to sustain losses. Eligibility to trade in digital asset products may vary based on jurisdiction.
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:
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.