Gamma is Cheap(er)

With the market making new yearly hi's (SPY chart below), the price of front month options in the SPY is priced considerably lower than its back month comrades. As depicted in the skew charts below, 2011 illustrated a common skew that we often see - front month options being most expensive based Implied Volatility, or IV, relative to the other series. As you can see in the final skew chart, front month options are pricing in very little movement for the coming weeks. This is not really surprising given the general outlook on the VIX and the market action seen earlier this week in the VIX options, where vol reeled some 6 pts lower in a single day. With the vol of the vol so to speak seemingly headed lower, gamma is currently cheap and maybe will be cheaper still. Nevertheless, it provides some intriguing possibilities and opportunities, not the least of which is a reversion to the mean trades (read short calendars - warning:could take a while) or outright long gamma positions to speculate or hedge against near term portfolio events. Happy trading.

http://seaofopportunity.blogspot.com/ 

Macro Chart Review

SPY daily chart- Trading at the 50 day EMA. 

Moving Average Convergence - Divergence Trading Method (MACD)

The Moving Average Convergence-Divergence Trading Method is a price momentum oscillator.

MACD is calculated in three steps:
1. Calculate the point spread difference between two Exponential Moving Averages of the closing price: a slower, 26-day EMA is subtracted from a faster 12-day EMA. Plot this differential oscillator, which measures price velocity.

2. Smooth this price velocity with an even faster 9-day EMA. Plot this signal line.

3. Calculate a second differential oscillator by subtracting the signal line from the price velocity. Plot this measure of price acceleration as a histogram.

Relative Strength Index - RSI

The relative strength index, RSI, is one of the most popular price momentum indicators. RSI quantifies price momentum only and does not relate any security to another security. It depends solely on the changes in closing prices.

RSI is calculated using an exponential moving average which correctly avoids the problem of erratic movement. The time period used for calculating RSI varies. The most widely used is 14 days. Other popular lengths are 20, 10, 8, 7, and 5 days. Since RSI is a ratio, its range is limited from 0 to 100.

The Equis International MetaStock System Testing rules for RSI are:
Enter long: RSI<30
Close long: RSI>70

Just a Reminder

Just a reminder to the readers of our blog that might be newer to trading that days like today can be tough to trade. If you can scalp the range, great but if that's not your thing then don't be too proud to just take it easy until the right set up develops. Sometimes the best trade is not taking a bad one and giving up edge, or getting chopped up, or churning commission. As they were pushing the market to new daily hi's, we were looking for stops to get hit rather than a breakout. Hoping you didn't get sucked in. Remember to stay light and tight!

This isn't advice so much as its analysis. Use your brain.

What a day what a day!

"Cup check!" A favorite juvenile mantra of mine back in the Little League days echoed in my head today. This was not the sort of day that you forget to wear your cup. This movement is bringing a little bit of life into the options markets I trade so it is exciting, but I am on my toes for sure. In other words, I didn't get nailed today and I was glad to have my cup on. How about tomorrow? What then? Check us out after the break!

Who does this? Morally reprehensible. But pretty funny.

Option Flow Recap March 8

Macro

SPY SPDR S&P 500 ETF - April 132 straddle sold at $5.92 15,500x

SLV iShares Silver Trust- Jul 35 synthetic short trades 5,000x for a $0.10 credit (new OI) and the July 33 synthetic short also trades 5,000x for a $2.08 credit.  $1.9MM sold in calls and $2.3MM bought in puts today.  Could just be locking in gains BUT could also be very bearish....   

Consumer

TGT Target Corporation – 8000 July 49 / 52.5 bullish risk reversals were bought for .40. Paying $2.31 for the July 52.5 calls and sold the July 49 puts at $1.91.

MGM MGM Resorts International.  - Someone bought 10,000 June 17.5 Calls for $0.29 vs. stock

TIVO TiVo Inc - One strategist sold 10,000 August 7 puts and bought the August 8 / 15 call spread, 10000X. They also bought 10,000 May 20 calls and paid $1.06 for the four-way spread.

BIG Big Lots, Inc- 42.5/45/47.5 call tree trades 5,000x for a $.05 debit

Tech

QCOM QUALCOMM, Inc. - Large bearish trade where 9700 April 60 Calls were sold at $0.72 and 9700 April 48 Puts bought for $0.42, tied to 330k shares at $56.33.

NUAN Nuance Communications Inc. – 2500 January 25 calls were bought for $0.475 and 2500 January 23 calls were bought for $0.30.

Financials

C Citigroup Inc.– 50,000 June 5.5 calls were bought for $0.05 in a multi exchange sweep.

BX The Blackstone Group L.P.  – 26,700 June 30 calls were sold on the bid at $1.21. This is likely closing a trade that was opened on Feb 11^th and Feb 14^th.

WFC The Blackstone Group L.P.  – Nearly 5000 April 34 calls were bought for $0.50. It was an opening purchase.

Industrials / Materials

PCX Patriot Coal Corporation – Bullish trade where 4200 April 26 / 30 call spreads were bought for $0.80.

TIN Temple-Inland, Inc. – 2500 of the March 22 puts were bought for $0.50. The trade appears to be to open.

Energy

HK Petrohawk Energy Corporation – 5800 June 18 Puts were sold at $0.39

LNG Cheniere Energy, Inc. – 7400 April 10 calls were bought for $0.35 to open.

Healthcare

HGSI Human Genome Sciences – Nearly 10,000 of the March 20 puts traded today ahead of FDA's decision on the company's BENLYSTA lupus drug, expected around March 10.

TEVA Teva Pharmaceutical Industries Ltd – 3400 June 42.5 / 55 bullish risk reversals were bought for $0.27

*Special thanks to Flotilla Partners, Option Radar, BMO Capital, MEB Options, LiveVolPro, CBOE, Option Monster, 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.

Option Flow Recap Feb 24

Macro / Thematic

XLE  - Downside plays today March 74-71 1x2 put spreads bought for 0.50, 7000x by 14000x. The trade makes money with XLE closing on March expiry between 73.50 and 68.50, max profit of 2.50 with XLE closing on March expiry at 71.00 (7.75% lower from here), if assigned on short puts getting long XLE for 68.50 (~10.5% lower from here)

SPY - 8200 weekly call verticals bot @ $0.63 

GLD - Downside play with a 1x2 put spread 26440x13220 in the Sept 132/120 puts for a 1.97 debit (possible hedge)

Consumer

HBI – Bullish trading today with the March 25 calls seeing the most action. The largest single trade being 1730 March 25 calls bought for $1.15 to open.

TOL – Bullish flow in the homebuilder today with over 16,000 calls and 1400 puts trading on the day. Almost all the trading took place in the March 21 calls which was over 12,500 on the day

PHM – 18,850 April 7 puts were sold at $0.45. The investor saw the three day slide in homebuilders as an opportunity to sell the at the money puts.

Energy

PBR – 3000 April 45 calls were bought for ~$0.50.

KWK – 7000 of the March 15 / 16 call spreads were bought for $0.45

HK – 20,000 January 30 / 35 call spreads were bought for $0.53 to open.

Industrials / Materials        

WM – Bearish option flow today with over 11,000 puts and only 2100 calls trading on the day.

FDX – 1500 April 90 / 95 call spreads were bought for $2.41.

Tech

BRCD – 19,000 of the April 6 straddles were sold at $0.77.

LLTC – 4900 March 34 calls were bought for $0.85

Financials

RDN – 1000 March 8 / April 7 put spreads were sold at $0.35. The March puts were sold and the April puts bought.

*Special thanks to Flotilla Partners, Option Radar, BMO Capital, MEB Options, LiveVolPro, CBOE, Option Monster, 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.

Option Flow Recap Feb 23

Macro /  Thematic

SPY – 100,000 March 126 / 116 put spreads appeared bought for $0.83

Consumer

LYV – Over 4100 of the July 10 puts traded today (77% on the offer) for ~1.15. It appears some investors are bracing for further downside in the entertainment company.

F – 25,000 March / April 15 call spreads were bought today for $0.26. It is either a roll out a month or a bet that the shares will hold below 15 between now and March expiration (3/19) and then rally from that point.

GM – Options were active ahead of the company’s earnings report tomorrow morning. Over 98,000 calls and almost 62,000 puts traded on the day. One notable trade was 4000 June 40 / 34 collar for $1.00.

Energy

KWK – Call options were active today with over 11,000 calls and only 1900 puts trading. March 16 calls were the most active with almost 6600 trading on the day (52% on the offer). The activity comes ahead of the company’s earning report due February 28^th, before the market open.

PBR – 4500 April 42 / 45 1x2 call spreads were purchased for $0.34. It appears to be a bullish play targeting $45 per share by April expiration.

SD – 3000 of the June 6 calls were bought for $3.00.

Materials / Industrials

SLW – 3000 of the March 41 / 38 put spreads appeared bought for $1.37 to open.

IPI – 2200 June 40 calls were bought for $1.70, to open.

CF – Options were active today as the stock reversed a nearly 8% decline in the morning to end the day up almost 2%. 28,000 calls and 13,000 puts traded on the day. The April 125 calls were the most active with almost 5500 trading on the day.

Tech

EMC – The stock saw a lot bearish flow this morning with over 23,000 April 26 puts trading in the first hour of the day. Most of the flow appeared to be opening customer buyers

STX – Bullish activity today with 18,000 September 12 calls being purchased for $1.95. The calls were bought to open.

Financials

C – 70,000 January’12 7.5 calls were bought for $0.06.

AIG – 5000 January’12 35 puts were sold at $3.95, tied to $40.03 stock. The puts were sold to open.

Healthcare

CLDA – 6500 June 40 straddles appeared to be bought for $10.25 to open.

*Special thanks to Flotilla Partners, Option Radar, BMO Capital, MEB Options, LiveVolPro, CBOE, Option Monster, 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.

Song of the Day: Aloe Blacc & Wu-Tang Clan - I Need A Dollar (Bakija Remix)

The bulls got hit today with the SPY down over 2% and the QQQ's and IWM down over 2.5%.  That brings us to our song of the day as the bulls scream "I need a dollar!"  Bears be careful going all in here, as you can see from the chart below a bounce before more downside isn't out of the question.  Plus all of the "buy the dip" traders could be in full force with the trend still up. 

Fresh remix by Bakija as he used the classic C.R.E.A.M. acapella over the Aloe Blacc track "I need a dollar"  

Enjoy! 

Option Flow Recap Feb 22

Macro / Thematic

SPY - 5,000 April 130 / 122 put spreads bought for $1.33

EEM - March 43 / 38 puts spread traded was bought 30,000x for $0.93

XLI – 9200 April 37 puts were bought for $1.15.

IWM – 10,000 March 81 puts were sold at $1.96.

Consumer

SVU – 17,000 of the March 8 puts were sold at $0.15.

TGT – 10,000 of the March 52.5 puts were sold at $2.06

COST – 18,000 March / July 70 put spreads were bought for $1.66. It appears to be an investor rolling out a hedge to July.

ORLY – 5000 of the March 55 puts were sold at $1.15 to open.

Energy

HERO – 10,000 January 2.5 puts were bought for $0.25

LNG - 4000 June 13.0 Calls were bought for $0.70 to open.

MRO – 10,000 April 43 / 50 call spread appeared to be sold 10,000x

Industrials / Materials

GR – 4000 March 90 calls appear to have been bought for $0.75. This comes a week after the company announced plans to increase its stock repurchase plan to $1.1 billion from $500 million.

IP – 6300 March 27 puts were bobught for $0.75 to open.

IVN – 2000 September 21 puts were sold at $ 1.05 to open

Tech

HPQ – 2500 March 48 / 45 1x2 put ratio spread was bought for $0.43. It appears to be a short term hedge going into earnings.

CVC - 20,000 June 38 / 42 call spreads appeared to be bought for 1.80. It appears to be an investor rolling an overwrite to a higher strike.

T – 1000 January’13 25 / 35 call spreads were bought for $3.32.

Financials

BAC – 5,000 March 13 synthectic shorts went off for10,000 April 13 puts were bought via a multi exchange sweep for $0.29.  

BX – 4800 January’12 15 calls were sold at $3.40

Healthcare

CLDA – Following the news that FRX is buying the company for $30. An investor bought the June 31 /30 puts spread for $0.725, 10,500x.

*Special thanks to Flotilla Partners, Option Radar, BMO Capital, MEB Options, LiveVolPro, CBOE, Option Monster, 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.

Option Flow Recap Feb 17

Macro

SPY - 30,000 127 / 121 / 120 put trees trade for a .05 debit 

Consumer

FDO – Options were very active in Family Dollar again, a day after it was announced that Nelson Peltz's firm is looking to buy the company. Options volume of 15,000 calls and 3,375 puts traded on the day. 6100 March 50 calls traded (81% on the offer). Also 3,560 April 49 calls traded (99% on the offer).

LOW – 40,000 March 26 calls were sold to open at $0.88. 4700 March 25 / 27 strangle was bought for $0.98.

MGM – 11,500 January’12 12.5 calls were bought for $4.25.

Energy

YGE – 5000 February 13 puts were swept early in the session for $0.45.

NOG – 2500 March 27 puts were sold at $0.95.

CVX – 1250 March 100 calls were bought for $0.84.

HAL – 1300 January’12 50 call were sold at $5.15.

Tech

VZ – 16,000 April 36 calls were sold at $1.06

MRVL – Over 30,000 calls and 10,000 puts traded today on the back of TXN -for-MRVL chatter.

NVDA – Which traded up 2.30 on the day saw a lot of option action with over 184,000 calls and 79,000 puts trading on the day.

INTC – 4300 of the October 23 calls were bought for $0.96.

Industrials / Materials

AKS - 28,000 March 18 calls were bought for $0.43 to open.

VALE – An investor sold 20,000 May 30 puts, bought 10,000 May 35 calls and bought 10,000 May 40 calls, paying $1.43 for the package to open.

FCX - An investor paid $0.65 for the May 52 / 57.5 1x2 ratio spread, 7500x. The company was mentioned cautiously in a Stansberry Research newsletter Tuesday. Yesterday I suggested the May 50 / 45 1x2 ratio spread.

Financials

C – A strategist sold 40,000 January 4 puts to buy the January 5 / 5.5 call spread, 40000x.  We break down this trade here for our trade of the day.

Healthcare

XNPT – 1500 March 9 calls were bought for $0.65, to open.

*Special thanks to Flotilla Partners, Option Radar, BMO Capital, MEB Options, LiveVolPro, CBOE, Option Monster, 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.