Options Flow Recap Oct 11

Macro / Thematic

EEM – 76,000 of the October 36 / 39 put spread was sold at $1.11. The put spread was sold to close and likely closes a position opened approximately one month ago for a $0.55 debit.

SPY – 30,000 of the January 110 puts were bought for $4.44. 40,000 of the January 105 puts were bought for $3.29. 20,000 of the January 85 puts were bought for $0.92. 50,000 of the January 100 puts were sold at $2.43 and 40,000 of the January 90 puts were sold at $1.28. The trade was done as a package.

VIX – 18,000 of the January 25 puts were bought for $1.075.

XLF – 17,000 of the January 12 puts were sold at $0.98.

Options 101 - NYSE Tick

The NYSE Tick represents the number of stocks ticking up minus the number of stocks ticking down on the NYSE, it can be used as a barometer for short term momentum of stocks trading on all US Exchanges.

Trade of the Day: HSBC (HBC) September $52.50/$45 bull risk reversal

The Trade

A trader bought the September $52.50 call and sold the September $45 put 3,600X at $0.01 debit, $21,600 total. Risk is limited to the total debit of $21,600. Profit potential is unlimited.

It seems that this investor is looking for lows near $47 to hold as a possible double bottom and for a nearly $3 bounce to the upside to break even. The daily chart below depicts the possible double bottom formation and a horizontal line that indicates the $52.50 break even point for the trade.

HSBC (HBC) has been a bank under pressure with weak earnings and concerns on the European debt crisis. The company has also announced massive job cuts. Shares trade 14.75X earnings, 1.13X book and 2.4X cash with a 3.7% dividend yield.

http://seaofopportunity.blogspot.com/


*Special thanks to Option Radar, BMO Capital, MEB Options, Bloomberg, Reuters, Optionistics, LiveVolPro, CBOE, AMEX, Option Monster, T.O.P. group, and all of the options desks and traders we work with to provide the option flow!No position at this time.


 Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

Options Flow Recap July 26th

Macro / Thematic

GLD SPDR Gold Trust – 20k of the August 167 / 175 call spread was bought for $0.29. 20,000 of the August 168 / 176 call spreads were bought for $0.23.

SPY SPDR S&P 500 ETF – 30,000 of the July (29^th) 131 puts were bought for $0.37.

XLE  Energy Select Sector SPDR – 54,000 of the September 79 / 83 call spread was sold at ~$1.60.

XME SPDR S&P Metals and Mining – 15,000 of the September 63 / 58 1x2 put ratio spread was bought for $0.13. The open interest in the September 58 puts (17% out of the money) are nearly 37,000, meaning the trade could be a roll up in strikes.

XRT SPDR S&P Retail – 40,000 of the December 44 puts were sold at $0.645 to buy 15,000 of the December 50 puts for $1.755.

Option 101 - Modeling Calendar Spreads part II

As traders, it is prudent to model potential positions as part of ones due diligence prior to entering a particular trade.

With the aid of option simulation software, modeling can allow one to analyze all the relevant risks (delta, gamma, theta, vega) and understand the maximum loss and gain for any position over time.

The example used for this post is slightly different than the previous post. It is the 11-strike out-of-the-money August/September calendar spread for BAC. Notice the differences in the risk profiles between the two as this example, which is considered out-of-the-money, carries more profit potential. This is because out-of-the-money options carry more risk due to the larger price swing needed to be in-the-money. As a result, they are priced at a discount to compensate for the additional risk.

Courtesy of Option Oracle, above is the theoretical pay off diagram for the position based on the price of BAC on August 20, the expiration day for front month of the spread. Furthermore, shown below, is the theoretical payoff diagram for the position based on varying volatility levels.

In this calendar spread example, the maximum risk, $12 per spread position, is calculated as the net premium outlay for the position.

The maximum profit potential by August 20 is $30.27 per spread position (252.24%). It is calculated based on ideal assumptions for the underlying and various Greeks. Specifically, it assumes volatility levels for each contract will remain constant and that the position will remain slightly delta positive per spread. Hence, it assumes there will be little price fluctuation. Consequently, because reality generally deviates from theory, it is highly recommended that sensitivity analysis be performed on all assumptions in any model.

Fortunately, option modeling programs like Option Oracle, allow one to do just that. As a cautionary concluding note, remember markets are dynamic and as a result, assumptions and decisions based on them must be constantly updated to maintain one's edge.

http://seaofopportunity.blogspot.com/*Special thanks to Option Radar, BMO Capital, MEB Options, Bloomberg, Reuters, Optionistics, LiveVolPro, CBOE, AMEX, Option Monster, T.O.P. group, and all of the options desks and traders we work with to provide the option flow!No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

Options 101 - Modeling Calendar Spreads

As traders, it is prudent to model potential positions as part of ones due diligence prior to entering a particular trade.

With the aid of option simulation software, modeling can allow one to analyze all the relevant risks (delta, gamma, theta, vega) and understand the maximum loss and gain for any position over time.

The example used for this post is the 10-strike at-the-money August/September calendar spread for BAC.

Courtesy of Option Oracle, above is the theoretical payoff diagram for the position based on the price of BAC on August 20, the expiration day for front month of the spread. Furthermore, shown below, is the theoretical payoff diagram for the position based on varying volatility levels.

In this calendar spread example, the maximum risk, $19, is calculated as the net premium outlay for the position.

The maximum profit potential by August 20 is $19.70 per contract (103.66%). It is calculated based on ideal assumptions for the underlying and various Greeks. Specifically, it assumes volatility levels for each contract will remain constant at approximately 35% and that the position will remain delta neutral. Hence, it assumes there will be little price fluctuation. Consequently, because reality generally deviates from theory, it is highly recommended that sensitivity analysis be performed on all assumptions in any model.

Fortunately, option modeling programs like Option Oracle, allow one to do just that. As a cautionary concluding note, remember markets are dynamic and as a result, assumptions and decisions based on them must be constantly updated to maintain one's edge.

http://seaofopportunity.blogspot.com/*Special thanks to Option Radar, BMO Capital, MEB Options, Bloomberg, Reuters, Optionistics, LiveVolPro, CBOE, AMEX, Option Monster, T.O.P. group, and all of the options desks and traders we work with to provide the option flow!No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

Options 101: Skew

Skew, also referred to as the "smile", is the difference in implied volatility levels of single cycle options. There are two main groups of skew, horizontal and vertical. Horizontal skew shows how implied volatility changes across time and vertical skew depicts the change in implied volatility across strikes.

Although there are many beliefs as to why it exists, in general, skew is a product of supply and demand. Knowledge of skew shapes can help traders identify opportunity and steer clear of danger when spreading in various markets.

Using option analysis software, one can plot implied volatility as a function of both strike price and time to maturity to create an implied volatility surface. This allows traders to quickly determine the shape of the skew and identify any areas where the slope seems irregular.

http://seaofopportunity.blogspot.com/*Special thanks to Option Radar, BMO Capital, MEB Options, LiveVolPro, CBOE, Option Monster, T.O.P. group, and all of the options desks and traders we work with to provide the option flow!No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

Options 101: Types of Volatility

When discussing volatility, some traders may learn that they are not always talking about the same type of volatility. A volatility of 25% can mean a variety of things. To prevent any future misunderstanding, it will be helpful to define the various types of volatility.

Options 101: Synthetic Stock Positions

An important characteristic of stock options is that they can be combined with other options or underlying contracts to create positions with characteristics which are almost identical to some other contract or combination of contracts.

A synthetic underlying position is an equivalent position that is constructed without actually buying or selling the underlying stock. Instead, call and put options are purchased and sold simultaneously. It's important to note that interest rates, as well as the possibility of early exercise, can cause the delta of a synthetic underlying position to be slightly more or less than 100.

The Momentum Indicator

Momentum measures the amount that a price has changed over a given time span. The ratio is calculated by the following formula:
Momentum = (C/Cn)*100

where C is the most recent closing price, and Cn is the closing price n periods ago.

Trend followers buy when the momentum indicator bottoms and turns up, crosses above some absolute threshold, crosses above some moving average of itself, or shows some positive divergence relative to price. Trend followers would sell when the opposite conditions apply.

Classic Indicators by Linda Raschke

The Black-Scholes Formula (video)

Options 101: The Risk Reversal

A risk reversal consists of buying an out of the money call and being short an out of the money put, both with the same expiration month.

Risk reversals are used when the investor has a market opinion. For example, if the trader is bullish, another option besides going long the stock, would be to buy an out of the money call option, and simultaneously sell an out of the money put option. The money he receives from the sale of the put option would finance all or part of the purchase of the call options. Then as the stock goes up in price, the call option will increase in value, and the put option will decrease in value.

Options 101: The Bear Call Spread

The bear call spread is a bearish strategy used by traders who want to capitalize on a decrease in the price of the underlying stock. The bear vertical consists of buying a higher strike call and selling a lower strike call. The call options will have the same expiration. The bear call spreads have limited risk and limited profit potential. The total premium received to put on the spread, the credit, is the max profit potential of the spread. The max loss is the difference between the two strike prices minus the original credit received.

Options 101: The 1x2 Ratio Call Spread (front spread)

A ratio 1x2 call spread, or front spread, is comprised of 2 legs, both calls at two different strike prices in the same expiration month. Ratio spreads involve buying one option and selling two options with a higher strike price. The most common ratio is 1x2, but any ratio can be used. Ratio spreads can be executed for debits, credits, or even money. Ratio spreads can be very complex, which increases the amount of risk involved.

Options 101: The Call Backspread

A back spread, or ratio back spread, is a bullish spread that consists of selling a number of call options and buying more options of the same underlying stock with the same expiration date at a higher strike price. In other words, a back spread has more long contracts than short contracts. When reading this type of spread, the lower strike is generally stated first, whether it is long or short. Back spreads are very flexible, and can be executed for debits, credits, or even money when there is no debit or credit.

The back spread profits when the underlying stock price makes a move to the upside toward, through and beyond the long strike. The call back spread has limited risk and unlimited profit potential. The bigger the ratio of short options to long options, the more risk involved.

Options 101: The calendar

The calendar or time spread is a position with options in two different expiration months, with both options being calls or puts. Both calls or puts will have the same strike price. Calendars involve buying an option in one expiration month and selling an option in another option with a different expiration. A long calendar is buying an option in the back month and selling an option in the front month. A short calendar is selling an option in the back month and buying an option in the front month.

Calendars maximize their value when the stock is at the strike price of the options, and the front month option is expiring. Calendars have their minimum value when the stock is very far away from the stock price of the options. Therefore, if you buy a calendar, you want the underlying stock price to be at the strike price at expiration. If you sell a calendar, you want the underlying stock price to be as far away as possible from the strike price at expiration.

The delta and gamma of a calendar depends on where the underlying stock price is relative to the strike price of the options.

Similar to calendars, a time spread with different exercise prices is a diagonal spread.

Options 101: The Bull Call Spread

The bull call spread is a bullish strategy used by traders who want to capitalize on an increase in the price of the underlying stock. The bull vertical consists of buying a lower strike call and selling a higher strike call. The call options will have the same expiration. The total cost of the spread is the debit, or premium paid, which is the max risk. The max profit potential is the difference between the strike prices minus the debit.

read more after the jump:

Options 101: The Straddle

The long straddle consists of a call option and a put option with the same number of units, expiration, and strike price. It is a spread that involves the simultaneously buying of a put and a call. A long straddle has unlimited profit in either direction and limited risk. The costs to put on a long straddle is the debit, or premium paid. The debit is the maximum risk. A large move in the underlying would increase the value of the straddle. The passage of time hurts and an increase in volatility helps. Long straddles are attractive because of the unlimited profit potential. However, long straddles are considered risky because a large move is needed in order for the spread to be profitable. The break even price levels for the straddle are the strike price plus and minus the debit.

Options 101: The Butterfly

A butterfly is a spread consisting of 3 legs with exercise prices that are equally spaced apart. All options are either calls or all puts with the same expiration. The ratio is always 1x2x1. In a long butterfly, the outside options are purchased (the wings) and the inside options are sold (the guts). An important characteristic of all butterflies is the limited risk. The cost to put on a long butterfly is the debit which is the max risk. The max gain is the difference between the strike prices minus the debit. The max gain occurs if at expiration the underlying stock price pins to the exercise price of the short calls. If a long butterfly is executed for a credit, the only risk is the execution risk. A large move in the underlying generally hurts, an increase in volatility hurts, and the passage of time helps.