Blog

We were closing a position in the SL today and it was a ratio put spread turned into a very cheap (.04) butterfly and my feeling was BBRY is not quite done.   Earnings are coming out in the July cycle and some trades that have been working very well lately are the modified earnings plays.  What do I mean by that?  Well the idea is to own gamma and pay very little in theta for duration of the trade.  It is what Mark Longo calls on the Option Block “juice for free”. 

I’ve been building technology for trading firms for over a decade. From proprietary desks with in-house development and security so tight that you have to check your cellphones at the door, to shared office spaces where people openly collaborate about their strategies; I’ve seen it all. I’d say that one of the most common tools that I’ve seen on trading desks is Microsoft Excel.

One topic that consistently confuses people is VIX curve structure.  It’s not just the level; it’s the slope that matters.  Let’s look at two curves with very similar underlying VIX prices.  I the difference might be more clear.

On March 21st, 2013 the VIX closed at 13.99, a mere .30% lower than where the VIX is trading.  Also a very similar number of days to expiration across the different contract months relative to where we are trading today.  Notice the slope of the curve in the front two contract months:

www.vixcentral.com

The VIX cash is now trading at a discount of about .75 to the May future.  Does this mean all is well in the world of VIX, and that we can sound the all clear?

No it does not, while IV is certainly in today, the VIX cash is actually trading at about parity with the May future.  The weekend effect is distorting the current price.  You can read about weekend effect here.  Thus when we look at a VIX futures curve what is really going on?

www.vixcentral.com

I am a firm believer that the mini options are going to be a great thing for the retail trader long term, as long as the retail trader can steer clear of Television.  There are 2 trades we hear more about on CNBC than any other trades.   Those trades are GLD and AAPL.  CNBC chatter is indicative of where the retail trader is investing.  I wonder why the retail trader is still out of the market:

LivevolX (R) www.livevol.com

If we want to add in a third media darling, we can add Facebook.  Here is a chart of the returns of these two trades:

This was a weird day.  As weak as the market looked all day it felt more like a lack of buyers than an over- supply of sellers.  That did not stop the VIX from riding  a roller coaster.  This reminded me of the 2001 after 9/11.  There are a lot of strange vibrations coursing through the market picking up the news bites.  This is re-enforcing the tragic and generally gloomy news that we have had since Monday.  Mediocre earnings do not help.  The earnings were not awful from BAC but there was a sense of baggage on them. Add a Ricin letter and that was enough to keep the buyers away.  There a sense of gloom hanging over everything.

With the market recovering some of the sell off yesterday, we look at more mundane features in the market.  Redistributing some of AAPL's cash hoard comes to mind.  AAPL rallied to the $480’s earlier this year on the new cash payout hype so here we are again looking for another excuse to goose up the stock into earnings.

Let’s review the rules for dividends as it pertains to options.

First- Call values do not like dividends and put values do.  A dividend increase will decrease call values and increase put values.

            That does not mean that a big cash payout is not BULLISH.  It can be, but the dividend will affect the relative movement of call and put options.