Apple ($AAPL) Options Flurry – Investors Brace for Volatility

Stocks are sharply lower into midday Tuesday. The S&P 500 is off 34.45 points to 2124.59 and has completely erased Monday’s 31.23-point advance.

Falling oil prices served as an early catalyst for weakness in energy-related names and crude is now down $1.37 to $44.92 per barrel. Gold is seeing a modest $3 advance to $1328.50.

Treasury bonds have given back morning gains and are adding to recent losses. The yield on the benchmark ten-year is now up to one-month highs of 1.7%, from less than 1.55% just one week ago.

In addition to Energy (XLE), Telecomm (IYZ), Financials (XLF), and Basic Materials (XLB) are pacing today’s decline on Wall Street.  All ten S&P sectors are in the red.

CBOE Volatility Index (VIX) jumped more than 3 points to 18.30 amid active trading in the options market. Roughly 3.6 million calls and 4 million puts traded through the first two hours Tuesday. Projected volume for the day is 17.6 million and 20% greater than the one-month daily average.

SPDR 500 Trust (SPY) Sep 215 calls, VIX Sep 17 puts, and VIX Sep 17 calls are among the most actives.

Apple (AAPL) options are seeing a flurry of activity, including 40.7K Sep 108 calls, as shares gain $2.17 to $108.15 on reports of strong pre-orders for recently unveiled iPhone 7s. A total of 329K calls and 169K puts traded in Apple options into midday Tuesday.

Outside of Apple, however, there are few bright spots in the equities markets as stocks sell off for the second time in three days. Friday’s 53.5-point tumble in the S&P 500 was largely attributed to interest rate jitters amid hawkish Fed commentary ahead of next week’s FOMC meeting. The S&P then rebounded Monday amid dovish commentary from other Fed members.

The ongoing he said-she said narrative seems to be creating a sense of uncertainty that is driving stocks lower, just as financial markets exit the seasonally slow summer period. The increased volatility is being felt across the bond market as well.

Take a look at the chart of the iShares High Yield Bond Fund below. Trading under the ticker HYG, this fund holds a portfolio of hundreds of different corporate bonds of companies from a diverse set of industries. None of the bonds account for more than .7% of the overall portfolio.

See Tradespoon’s Stock Forecast on iShares iBoxx $ High Yid Corp Bond (HYG)

Tradespoon’s Stock Forecast on iShares iBoxx $ High Yid Corp Bond (HYG)

Shares of the High Yield Bond Fund performed well through August and are up 6.2% year-to-date. However, over the past week, the ETF has lost 1.7% after failing to break through resistance at $87 per share. Tuesday’s decline to $85.50 has erased any gains scored Monday and shares are now teetering along a 50-day moving average.

Moreover, today’s options order flow in the High Yield Bond Fund is decidedly bearish. Morning trades included a buyer of a massive spread, in which 25K Mar 85 puts were bought and 50K Mar 81 puts sold, to open a new 1X2 put spread. Separately, a Mar 78 – 81 – 84 put butterfly spread was bought 10000X (selling 20K Mar 81 puts for the body and buying the other two strikes for the wings). Total options volume in the product is now lopsided 17:1 at 111,000 puts and 6,300 calls.

Heavy put activity suggests that some institutional investors are bracing for additional volatility in the bond markets heading into next week’s FOMC meeting. If so, like Friday, the bearish sentiment could easily spill over into the equities market. That certainly seems to be the case as bonds give up early gains and the S&P 500 falls to session lows into midday Tuesday.

For the High Yield Bond Fund, key levels to watch are resistance at $85.50, $86.10 and $87. Look for support along the 50-day moving average, $85.50, and $84.40. As for the S&P 500, today’s low of 2124 is support, as well as 2119 and 2100. Plenty of resistance on the upside, including 2150, 2157, and 2170.