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.

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Trade of the Day: Gold (GLD) January $150/June $225 Bull Risk Reversal

The Trade

Trader sold January $150 puts at $2.35 and bought June $225 calls at $6.95 15,000x for a $4.60 debit, $6,900,000 total. Maximum risk is $231,900,000. Profit potential is unlimited.

Chart above graphs profit and loss profile for the trade. Trade is highly bullish and benefits from rise in volatility. Blue line below highlights break even at $187.49.

Alternative trade would the January $145/$150 bull put spread, buying $145 and selling $150, with the June $225/$240/$255 call butterfly. $1.05 debit for butterfly and $.60 credit for put spread, $.45 total debit. Position limits downside risk, while retaining bullish bias with a superior risk-to-reward ratio.

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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.

Trade of the Day: Eastman Kodak August $2.5/$3 bull put spread

The Trade
A trader executed the EK August $2.5/$3 bull put spread for a $0.14 credit, 4,090x.