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/ 

Trade of the Day: Network Appliance (NTAP) September $39/$33 Bull Risk Reversal

The Trade

Trade executed was the September $39/$33 bull risk reversal 20,000x for a $.08 debit. Profit potential is unlimited. Break even is $39.08.

Shares are down, but have bounced from support near $34 since earnings. Recent large bullish activity seems to suggest the name has bottomed. Just last week you might remember, NTAP was a prior trade of the day.

$13.6B market value, trades 13x earnings, 1.3x PEG, 2.9x cash value and 12x cash flow.

Alternative trade would be the September $33/$31 put bull vertical and the September $39/$41 call bull vertical for a total debit of $.31. Trade offers sufficient profit potential with less risk.

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.

BofA to take $13 billion more in charges: Bernstein

this originally appeard here.  Maybe this is why all those puts were bot yesterday... 

Bank of America will take another $13 billion in charges related to pending settlement with private label mortgage-backed securities investors, Sanford C Bernstein said.

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.

Trade of the Day: Goldman Sachs Sell January '12 $110/$100 put spreads to buy $170 calls

The trade:
A trader sold the 2,500 January 2012 $110/$100 put spreads to buy 2,500 January 2012 $170 calls for even money.

Trade of the Day: Bank of America August $13/$10 bull risk reversal

The Trade:
A trader put on a bull risk reversal using the August $13/$10 options for a 1 cent credit, 4,700x.

Trade of the Day: GLD buyer of June $145/$140 put spreads

The Trade:
A trader bought 20,000 June $145/$140 put spreads at $1.

Trade of the Day: XLF July $14/$15 put front spread

The Trade
A trader sold 100,000 July $14 puts at $0.06 and bought 50,000 July $15 puts at $0.14 for a debit of 0.02 or $100,000.

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.

Option Flow Recap March 9th

Macro / Thematic

XLF Financial Select Sector SPDR – 120,000 June 18 calls were bought to open for $0.31.  Looks like a cheap bet that the XLF bounce off its 50 DMA hands and runs over 9% by expiration to profit. 

EEM iShares MSCI Emerging Markets Indx – 50,000 May 49 calls were bought for $1.02. The trade appears to be opening. The contract is 4.7 percent out-of-the-money and has 72 days until expiration. Also notable in today’s trading was a total of 40,000 April 50 / 52 call spreads bought for ~$0.21.

Consumer

CEDC Central European Distribution Corp – 3000 March 12.5 calls were bought for $1.05.  Bounce play.  Has a gap to fill @ $13.53.

TSN Tyson Foods, Inc. – 1400 April 17 puts were sold at $0.10.  Stock looks to be breaking out or making a move to previous highs.  Trader collects the premium at a strong support strike even if TSN pulls back and fills the gap @ 17.6.  200 DMA is at 16.9 and curling up.   

CRI Carter's, Inc.  – 2000 March 30 puts were sold at $0.95.  Looks like a pin play to 30.  Stock gaped down .75 today but was bought aggressively and closed the day up .48 or 1.65%.

BC Brunswick Corporation – 1000 June 21 puts were sold at $1.00 to open.  Strong up trend.  Trader looking to collect premium with the synthetic buywrite and willing to buy the stock around its rising 50 DMA.

Tech

TSM Taiwan Semiconductor Mfg. Co. Ltd. – April 12.5 calls were active today following noise that the company might be in a potential partnership with Apple. Over 3700 of the calls traded with 60 percent bought on the offer. Stock also recently found support on its 100 DMA after completing a 5 wave down move. Could be starting wave 3 or 5.

CTL CenturyLink, Inc. – 1400 of the April 41 calls were sold at $0.65 to open.  Possible buy-write.  Stock finally pulled back after a nice run from the mid 30's to the mid 40's and recently found support on its 200 DMA. 

Financials

TCB TCF Financial Corporation – 1500 of the March 15 puts were bought for $0.20. The trade appeared to be an opening position.  Stock acting poorly.  Cheap bet weakness continues over the next 7 trading days. 

BCS Barclays PLC – 3000 January’13 17.5 puts were sold at $2.65 to open.  Trader doesn't lose money until $14.85 on expiration.  Huge support at $16. Barclays is still way off its former highs and looks to be basing. 

Industrials / Materials

LPX Louisiana-Pacific Corporation  – On the back of renewed takeover speculation in the name 1800 of the March 11 calls were bought for today for $0.05. A total of 2239 calls traded today with no puts trading.  The stock could have formed a big rounded bottom. 

UTX United Technologies Corporation - Ahead of the United Technologies Analysts and Portfolio Managers Meeting tomorrow both the March 85 and April 85 calls were active. 6700 and 2200, respectively, traded on the two lines (with 64% and 58%, respectively, being bought on the offer).  The stock is also in a strong uptrend and continues to move from the lower left to the upper right of the chart.

CX Cemex SAB de CV – 5000 of the April 8 puts were bought for $0.23.  The stock has been in a downtrend since the end of last year.  This trader is looking for a test of 52 week lows or lower. 

Energy

LNG Cheniere Energy, Inc. – 10,000 of the April 10 calls were sold at $0.65 while another investor sold 5000 of the March 8 calls at $0.90. Interestingly the March 9 calls traded 6100x with 85 percent of the trades being executed on the offer.  Huge volume in here recently.  Looks like the 100 DMA held on the first test down but a nasty bar today. Capitulation? 

KWK Quicksilver Resources Inc – Throughout the day an investor appeared to be building a position in the April 14 /15 bullish risk reversal with a total of 11,700 trading on the day. One block traded at $0.20 1400x. Trader looking for a breakout of a long base. 

Healthcare

WCRX Warner Chilcott Plc – 5000 of the March 24 calls were sold at $0.20 to open.  Looks like a pin play. 

SQNM Sequenom, Inc. – 2500 January’12 7.5 calls were bought for $1.00.  Stock coming into strong support.  Trader looking for a bounce... maybe even a gap fill!  52 week high is 8.65 and the trade breaks even at 8.50 so basically looking for new highs by expiration. 

AVNR AVANIR Pharmaceuticals – 5000 January’12 5.0 calls were bought for $0.28.  Trader looking for this bounce off the trend line and 200 DMA to run and test the highs. 


*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.

Trade of the Day: XLE 74/71 1x2 put spread for $0.05

Looking for ways to spend a nickel? With oil a hot topic in the headlines, a trader today appears to have bought a 1X2 put spread in the XLE March 74/71 series for just a 5 cent debit.

The usually quiet put market in XLE saw 7k of the 74 puts trade against 14k of the 71 puts on our old friend PSEX. Kind of interesting, given that the average daily volume in the puts is usually about 29k contracts. Not an amateur trade at all, given the margin requirements of a 1X2 in a spendy underlying. The trade captures about 3 pts of vol edge according the LivevolPro skew chart below, but clearly what the trader is most interested in is a move to $71 even.

Courtesy LIVEVOLPRO.com

At this point, the trade yields the max $2.95 gain per spread, or a little over $2mm for this trader. Here's a look at P&L at expiration from TOS.

Courtesy Think or Swim

It certainly seems possible, for XLE to retrace some of its recent solid gains based on the chart below. I drew in the green lines to show the strike prices of the puts in the trade.

Courtesy LIVEVOLPRO.com

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.

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.

Trade of the Day: AAPL March $335/$340 put bull vertical

The trade

A trader sold 4,000 March $340 puts at $2.22 and bought 4,000 March $335 puts at $1.72 for a credit of $0.50 or $200,000.

Risk/Reward

As you can see from the graph above, the bull vertical has limited risk and limited profit potential. The max risk of the bull vertical is $1,800,000. The max gain is the credit received. The break even underlying price level is $339.50.

The line shown in the chart above is the break even underlying price of $339.50. The bull vertical is profitable as long as the underlying price is above the break even. The 52-week range for AAPL is a low of $195.71 and a high of $364.90. AAPL has a higher P/E ratio, Price-to-book ratio, and Price-to-sales ration than it's competitors HPQ, MSFT, and DELL.

AAPL traded 561,023 contracts today compared to average volume of 301,564.

Trade: C March $5 short straddle 10,000x

The Trade

A trader sold 10,000 March $5 calls at $0.12 and sold 10,000 March $5 puts at $0.22 for a credit of $0.34 or $340,000.

Risk/Reward

As you can see from the risk reward graph above, the short straddle has unlimited risk in both directions, and limited profit potential. The max profit would occur at an underlying stock price of $5 at expiration. The max profit would be the credit of $340,000. The lower and upper break even prices of the underlying are $4.66 and $5.34, which is the strike price plus and minus the credit. Knowing the characteristics of short straddles, we know that a large move in the underlying hurts, an increase in volatility hurts, and the passage of time helps.

The lines shown in the chart above is the upper and lower break even underlying prices of $4.66 and $5.34. The 52-week range for C is a low of $3.15 and a high of $5.15.

Alternative trade

An alternative spread that is more practical for a retail investor that uses less margin is the iron fly. It's less risky than the short straddle but also has less reward. For example, a trader could have set up the iron fly by buying the March $4.50 put at $0.05, selling the March $5 put at $0.22, selling the March $5 call at $0.12, and buying the March $5.5 call at $0.03 for a total credit of $0.26 (minus commissions). Basically, the trader would be short the straddle and long the strangle.

As you can see from the risk reward graph above, the maximum profit would occur at an underlying stock price of $5. The maximum loss risk for the iron fly would be $24 per spread. The maximum profit for this spread would be the credit. The lower and upper break even prices of the underlying are $4.74 and $5.26. This profit window is $0.48, compared to the straddle's profit window of $0.68.

Option Flow Recap for Febuary 11, 2011

Macro / Thematic

SPX – 15,000 of the March 1300 / 1310 put spread was purchased after the close for $2.60 (SPX options trade until 4:15pm ET).

GLD – 7000 of the September 135 calls were bought for $6.15

IWM - Bearish flow this morning with an investor buying 15,000 of the June 75 /65 put spreads for $1.77; The March  79 / 72 put spread was purchased 7500x for $1.01.

EEM - Size call buying with the March 47 / 49 call spreads being bought 15,000x for $0.40

Consumer

ODP – 6000 of the March 6 calls were bought for $0.35 in a multi-exchange sweep. The company is expected to release earnings on February 22^nd before the market open.

M – 14,000 of the May 25 / 29 call spreads traded on the day and it appears to be an opening bullish position into the company’s earnings report that will be released on February 22^nd.

GRMN – Bullish flow today in Garmin. The February 34 calls are the most active with almost 3000 trading on the day. Briefing reported takeover speculation in the name.

Energy

TSO – Call activity in Tesoro was very active today on Sunoco (SUN) takeover speculation. The February 22.5 calls were the most active with over 9500 calls trading.

SD – An investor bought 10,000 January’13 7.5 puts for 1.75 and 3000 were purchased later in the day for $1.76

ENOC – 900 February 25 calls were sold at $0.30.

HK - The June 17 / 20 3x1 risk reversal traded 3000 x 1000. Buying 1000 June 20 calls and selling 3000 of the June 17 puts and collected .10

Industrials / Materials

KGC – 5000 August 20 calls were sold at $0.48

DOW – 2500 June 40 / 36 risk reversals traded. The investor bought calls and sold puts, collected $0.03

TX – 1500 February 35 calls were sold at $1.15 to open.

CAT – 2900 of the August 90 puts were sold at $3.15 to close.

Tech

NOK – One investor sold 11,000 of the July 11 calls at $0.29. The trade iss probably a liquidating trade.

MU – 5000 of the January 10 / 12.5 1x2 call ratio spread was bought for $0.40. The trade is likely a roll up in strikes.

VMED – 2500 of the February 26 calls were bought for $0.55 in a multi exchange sweep.

Financials

BX  - 12,000 of the January 20 calls were bought for 1.05. It is an opening position.

Healthcare

NVS – 6000 of the April 52.5 / 57.5 strangle was sold at $2.00

AVNR – 4200 of the September 4 calls were sold at $0.65.


*Special thanks to Flotilla Partners, Option Radar, BMO Capital, LiveVolPro, CBOE, Option Monster, Shaefers, and all of the options desks and traders we work with to provide the option flow!