Options Education

The Musk Effect

Submitted by atg on Wed, 05/22/2013 - 3:50pm

Most of the news is out from Big Ben and hte skinny is the Fed could taper bond purchases. The market is taking it fairly well as the the SPX is down about 1% today after being up almost 1% in the morning. I take it that where the Fed has to intervene less would be a good thing but the market has had so many up days that this would be enough reason for a pause. Things still look to be just ok which is much better than before in the bad old Euro crisis days. Remember SPX 1350? Just look at last year around this time.

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Crunch Time for May VIX Futures

Submitted by msebastian on Mon, 05/13/2013 - 6:35pm

When traders see a wide spread between the VIX and Front month futures they often get confused or even worried. When in fact the opposite is usually true. Last month with 8 days to go to VIX expiration the VIX closed at 13.19, the April VIX future closed 13.60. A mere .50 premium to the cash. The VIX future ended up settling at 15.64. The month before that the VIX closed 11.56 (it’s lowest since 2006) the March VIX futures closed 12.95 on their way to a settle near 12.50. Today the curve looks as such:

www.vixcentral.com

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Why Won't the VIX Fall?

Submitted by msebastian on Wed, 05/08/2013 - 3:55pm

As the SPX continues its rally though 1630 and toward 1650, may a novice is asking why the VIX isn’t touching all-time lows. The answer is simple: volatility

When the VIX got to its recent low realized volatility was in the toilet. We had been through about 2 straight months of nothingness. 10 Day HV was near 5 and both 20 and 30 day HV were near 10%. Looking at HV now we can see a clear difference. 10 day HV is closer to 10% and 20 and 30 day are actually trading at a premium to VIX.

LivevolX (r) www.livevol.com

VIX Term Structure Finally Normal

Submitted by msebastian on Fri, 05/03/2013 - 3:37pm

The last two weeks have been interesting for VIX and VIX futures watchers, for several reasons. In relation to the VIX, the realized volatility has been above implied for about 2 weeks and appears that it might stay there for a while.

Livevol (R) www.livevol.com

The market seems to be okay with HV higher than IV as long as the move is higher. This makes me uncomfortable, with overall VIX levels and has me convinced we do NOT see an 11 handle anytime soon.

Guest Post: Option English by Justin Braun

Submitted by msebastian on Fri, 05/03/2013 - 3:25pm

I wrote the first installment of this series over two years ago, promising to explain the practical ramifications of the the basics that I’d covered using the tools of the trade. After enough procrastinating, I’ve finally gotten around to doing the second installment.

Classic Example of An Earnings Vol Crush: FB Edition

Submitted by msebastian on Thu, 05/02/2013 - 4:05pm

One of the most followed stocks on the NASDAQ, FB, had earnings last night. There was HUGE volume yesterday ahead of earnings and May3 weekly volatility got to 150% ATM. FB actually made a decent move by the end of the day today, moving up to near 29.00 a share. But, those who bought upside calls are probably NOT happy. Take a look at a shot of the FB May3 29 calls from yesterday.

LivevolX (r) www.livevol.com

Notice that high IV of near 140%. Notice the price of the calls is above .50 a contract. Take a look at what happened to FB volatility today.

Trading TWX Ahead of Earnings

Submitted by msebastian on Tue, 04/30/2013 - 4:43pm

Today on Bloomberg TV I discussed an earnings trading in Time Warner Entertainment (TWX). While I am not an expert on cable entertainment, I am an expert on paper flow. You can watch the video here:

My main point revolved around how large customer money was flowing today. Take a look at time and sales for option traders larger than 100 contracts today:

BAC IV Probably Too Cheap

Submitted by msebastian on Thu, 04/25/2013 - 4:41pm

IN the last few days, since Bank of America took a dive on its earnings, the stock has found some real strength. BAC is now just a few cents from its 52 week high and threatening a 2 year high. The move has not been a slow grinding move like we see sometimes out of banks. It’s been a nice quick move.

This is why I am so confused by where BAC IV is trading. Take a look at this stock chart, IV graph (the red line) and 20 day HV chart (the blue line).

LivevolX (R) www.livevol.com

Getting creative with BBRY

Submitted by atg on Wed, 04/24/2013 - 4:04pm

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”.

Same VIX, Different Message

Submitted by msebastian on Mon, 04/22/2013 - 3:20pm

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: