ETF or $VIX Options Dominate with Global Macroeconomic Uncertainty

Mixed trading into midday Tuesday after the market started the week on a bullish note. The S&P 500 is up 2.81 points to 2086.06 in the wake of a 12-point advance Monday.

Five of ten market sectors are higher. Energy (XLE), Tech (XLK), and Utilities (XLU) are the best gainers. Healthcare (XLV), Basic Materials (XLB), and Consumer Discretionary (XLY) are seeing modest weakness.

Crude oil is off 70c to $49.25 and gold gave back $19 to $1273.

Treasury bonds are flat on a light day for economic data and as Fed Chair Janet Yellen delivers two days of congressional testimony. The yield on the benchmark ten-year is little changed at 1.68%.

CBOE Volatility Index (VIX) continues its descent from last week’s multi-month highs and is down .02 to 18.35. Trading in the options market has slowed after a few days of relatively brisk action. Roughly 3 million calls and 2.5 million puts traded through the first two hours Tuesday. Projected volume for the day is 12.2 million contracts and nearly 20% less than the one-month daily average.

Index and exchange-traded fund options dominate the options flow, as the twenty-four most actives into midday Tuesday are either ETF or VIX options. The list includes iShares Emerging Markets Fund (EEM) Sep 36.5 calls, VIX Jul 15 puts, and SPDR 500 Trust (SPY) Jul 201 puts. Apple (AAPL) Jul 102 calls are the most active single stock options, but with just 15.7K contracts changing hands.

The disproportional activity in ETF and VIX options, rather than single stocks, reflects the investor focus on macro rather than earnings or other company specific developments. The list of uncertainties has been widely covered and includes the “Brexit” vote later this week, Federal Reserve interest rate policy, and murky global economic data.

The iShares Emerging Markets Fund is seeing notable options flow in this environment. The ETF holds shares of leading companies from developing economies around the globe and top holdings include Samsung, China Mobile, and Taiwan Semiconductor. EEM Sep 36.5 call options have traded more than 75,000 contracts Tuesday and are the most actives at midday. Aug 36.5 calls, Jul 45 calls, and Jul 45 puts are busy as well.

See Tradespoon’s Stock Forecast on IShares MSCI Emerging Markets ETF (EEM)

Tradespoon’s Stock Forecast on IShares MSCI Emerging Markets ETF (EEM)

Looking at the price of the Emerging Markets Fund, in the chart above, shows the seesaw action of the past few weeks. While it sits near $34 and at the same levels seen a couple of months ago, shares have had a fair amount of ups and downs amid the global macroeconomic uncertainty.

Most recently, a couple of positive developments have “emerged”, as EEM has successfully tested a 50-day moving average and is in the midst of a one-week 3.2% advance. It has also reclaimed the 200-day moving average, which is likely to serve as short-term support. $33.50, $33, and $32.5 are also short-term support areas to watch. Meanwhile, resistance is likely near current levels of $34, $34.40, and $34.80.

As for the S&P 500, it failed a test of the 2100 level Monday. 2090, 2110 and 2115 are also resistance areas. Look for support 2077, 2062, and 2050.