Its a Wrap

Well, its time. Time to burst out of this blog bubble here and see what the real world offers.

In other words, The Daily Options Report has officially run its course. I believe I was the first one exclusively in the options space when I started, now there’s a bunch of excellent ones.

We posted maybe 14,000 times about the VIX, cheesily used VIX bikini shots and thrown “Erin Burnett” and “naked put sales” into the same article to fool the Search bots. While the world was running Lenny Dykstra hagiography’s, we were all over the fraud.

I hope you learned a thing or two about options. And I really hope you bought my book.

I really appreciate all the kind words over the years. And hey, I’m not going away, you can still find me on twitter (I’m @agwarner) on InvestorPlace and on a new venue To Be Named Later ( I haven’t started yet).

So, to quote Truman Burbank, “Good morning, and in case I don’t see ya, good afternoon, good evening, and good night!”

SKEW And You


Tired of laboring comparing two numbers on an SPX options board and dividing one by another? Fear not, the CBOE will now do it for you! This, from CNBC.

Investors looking for Black Swans in the stock market may be able to find them in the latest offering from the Chicago Board Options Exchange.

On Feb. 23, the CBOE plans to roll out the S&P 500 Skew Index, an options gauge that already has earned the monikers of both the Black Swan Index and, a bit more derisively, the SIX.

At its heart, the SKEW (as the CBOE prefers) will measure out-of-the-money S&P 500 options to determine the risk of unanticipated, or Black Swan, events threatening the market. The Black Swan reference, of course, is from the Nassim N. Taleb book of the same name that, in part, delineates the importance of low-probability but catastrophic events in financial markets.

The SKEW will measure the implied volatility between puts and calls and derive a numeric value from the difference between the two.

Well I guess this will look at more than 2 strikes. But its not going to yield an enormously different result from doing something simple like taking a call premium that’s X% away from the money and dividing it by a put that’s also X% away. Or just looking at a skew chart that’s available on ivolatility or LiveVol.

But whatever, it can’t hurt to have more info indexed in a more accessible format. Its generally going to tell the same story as VIX though. Remember that VIX incorporates all sorts of OTM puts, so looking at SKEW on top of VIX sounds very redundant. If OTM puts are flying, so will VIX.

And also, as my friend notes, “Since the whole point of Taleb’s work is that “Black Swan” events have no probability distribution (i.e., they are one-offs), how can one construct an instrument that attempts to assign such things a probability?”. Of course he’s right, you can’t, though the market will try.

AlphaIndexVille

Looks like we got a new group of options coming down the pike from Nasdaq. This, from Brendan Conway at The Journal

The exchange got the nod to list and start trading options on the so-called “Alpha Indexes,” a Securities and Exchange Commission filing late Tuesday shows. The indexes, co-created by the designer of the first VIX “fear gauge,” track popular stocks’ performance versus a broader market benchmark. By listing options, Nasdaq hopes to let investors generate returns even when markets are down, with options that profit when Apple or Citigroup outperforms even a plunging stock market.

“In stock options, you’re actually making two bets. You’re betting that Apple will rise relative to the market, and also that the market will go up,” VIX designer Robert Whaley, now a professor at Vanderbilt University’s Owen Graduate School of Management, told Dow Jones Newswires at the indexes’ October unveiling. “With these, you’re getting a more precise investment in something you have some knowledge about.”

The Alpha Indices let you make a bet on one product vs. another, but with just one trade. In other words, lets say you want to capture the return of Apple over SPY…..well, you’re in luck, there’s AVSPY. And given the bull market in AAPL, you’ve done quite well with that one. Not quite so much with the other 3 that go against SPY. There’s EEM (EVSPY), TLT (TVSPY) and GLD (GVSPY). And for good measure, there’s a play on C vs. XLF (CVXLF).

Not sure I totally see the demand to play C vs. financials, but the others do have some appeal imho. Obviously you can construct any of these on your own. And in any form you want. You can go long AAPL calls vs. short SPY, long AAPL calls vs, short SPY calls, long AAPL puts vs. SPY puts, or…….you get the idea. The “Alpha” Index itself gets you essentially long one stock vs. short the other. If you want an option play, it clearly makes life easier to use “Alpha” options. If you use calls (or puts) on both, you not only have bet on direction, you’ve also bet on the relationship of volatility of one to the other. So an “alpha” bet adds a layer of simplicity.

The catch? Well, who knows the liquidity. I can’t imagine they catch fire so fast. These “alpha’s” are just indices now, and rather ignored ones. Letting the world trade them will generate some attention. But how much, we don’t know.

Also, they’re European exercise and cash settled, for the obvious reason that there’s nothing to deliver just yet. That works fine sometimes, well at least until you start getting the big players in messing with settlement prices. The plus side though is that an index base will not have the inevitable problems that an ETF or ETN will encounter. Such as fees, and problems tracking the underlying.

All in all I find this a very interesting idea. Not sure I’d go trade these so fast though. Wait and see if they get some traction.


AAPL Volatility Droppings

Got some thoughts on AAPL options over at Investor Place. Nickel version is that they’re kind of cheap. Dime version is that its not that simple. Quarter version is…..please click thru.

Half dollar version is…..I’m sorry, Black Eyed Peas are awful. I flip around like 3-4 stations on Sirius, none of which play anything from them, yet I’ve heard “I’ve Got a Feeling” 42,000 times in my life. Here’s my realistic suggestions for next year. Green Day or Pearl Jam.

Happy VIX Days From Here

happydays Happy VIX Days From Here

This, from MKM Partners

A defining characteristic of equity implied volatility is its tendency to mean revert. With the CBOE SPX Volatility Index (VIX, 15.93) having been sustained below 20 for more than two months, we believe reversion through the long-term mean is inevitable. As a result, we see short-term risk as becoming increasingly asymmetric and continue to recommend that favorable option market dynamics be exploited.

Spot VIX declined through 20 on December 2, 2011, and at that time we argued that the displacement of VIX to 45 earlier in 2010 coupled with a two-month consolidative phase between October and November would apply significant downward force into the volatility wave trough. Our expectation at the time was that VIX would be sustained under 20 for around two months and trough close to the bottom of the 15-18 range that had been established beginning in July 2007, while the S&P 500 Index gained in the neighborhood of 10% based on the precedent of the March-April 2010 period.

As the two-month anniversary of VIX being sustained under 20 approached, we discussed on January 18 our view that the criteria for a wave trough had been met and suggested that, within our framework, this equated to an increasing state of disequilibrium for U.S. equity markets. As a result, we recommended that favorable volatility dynamics – namely low implied volatility and flat skew – be exploited to reduce risk following what was then a 23% appreciation of the SPX from the August 2010 low. Over the subsequent two weeks, VIX ran up sharply to just above 20 on news of unrest in Egypt, then rolled over to close Friday just below the 16 level while the SPX managed to grind another 1.2% higher.

Then, last week, sub-20 readings for spot VIX surpassed the March-April 2010 period and all prior troughs since the current high-volatility regime began in July 2007. Naturally, this has prompted questions about any change to our view. For example, some wondered if unprecedented U.S. monetary policy has distorted the current volatility cycle, shortening it relative to the 5.5-year average duration of regimes over the last 30 years. In our view, this is unlikely. We think it as improbable that the aftermath of the global financial crisis and deep U.S. recession is more psychologically benign than recovery periods following what were relatively shallow economic troughs in March 1991 and November 2001.

As a result, our base case remains that the current high-volatility cycle returns to its July 2007-August 2008 pattern when spot VIX was bound between 15 and 30, an outcome that may feel somewhat moderate relative to the volatility events over the last two years. Still, if our framework holds, implied volatility will revert through its long-term mean just above 20, coincident with a pullback in the U.S. equity market. Following a 25% gain in SPX since late August 2010, unrealized gains abound. Low implied volatility and flat skew afford the opportunity to hedge these gains or replicate long exposure synthetically using options to reduce risk. With the next volatility event still on the horizon, in our view, this is not a time to accept complacency.

I would agree that we’re a bit overdue for a volatility *correction*. And I currently pay decay, first time I’ve had that on in eons. I’m net long options gamma in a handful of individual names and not short enough index options premium to offset it. But (big but)….its VERY tough to time a volatility explosion. You generally get one or two per year. Our last big one was in May, and we’ve had pretty modest and quick one’s in November and a couple weeks ago. That being said, there’s no magic time frame for the next one, and no magic VIX low that will ignite it.

So don’t get carried away anticipating it. Time costs money in options world.

Stats and Selection Bias


If there’s one thing I learned writing a book, its that you can make stats say what you want if you’re so inclined.

OK, that’s not true, I was well aware of that years ago. Its a very real trap though when it comes to trading. We naturally tend to highlight, link to, and trade off data that confirms our pre-existing opinions. Actually, we do that in every walk of life, so why wouldn’t we transfer that to trading? If I have a thesis that stock XYZ is headed to 0, I will naturally highlight confirming data, and ignore disputing data, and may not even realize I did so.

The baseball site Fangraphs has some great stats-minds if you’re into that sort of geekery. But they’re far from immune to succumbing to pre-existing biases. In a way they’re actually worse. Its almost like LTCM knowing so much about bond arbs that they bet themselves into bankrupcy waiting for that elusive mean reversion. Here’s a post on Matt Cain.

To quickly fill-in, Cain is the battlefield for stats vs. observation. The stats community believe his true talent level lies below his actual (very good) performance. Why? Mainly a disproportional number of fly balls he gives up stay in the park. Every year of his career. So they debate whether that’s a skill or an fluke that will ultimately mean revert.

Any time a general theory that applies to most people is advanced, people naturally begin to look for the outliers, and they often use the examples at the ends of the spectrum to cast validity on the theory. Or, they just dismiss the theory as not being applicable to that specific case, which may or may not be true. We see this quite a bit with metrics like xFIP and Matt Cain, who has become the poster child for the part of our readership who thinks that stat isn’t worth all that much. For years, Cain’s ERA has been better than his xFIP would suggest, largely because he has sustained one of the lowest HR/FB rates in all of baseball.

The low HR/FB rate was brought up again yesterday in a reasoned post over at PaapFly. As is often stated by the Cain-is-better-than-xFIP-says crowd, the author noted that Cain has thrown 1,100 innings in the big leagues now, and that should be a large enough sample to conclude that this is a legitimate skill that he can carry forward.

Just for fun, I decided to look back at the data that has been collected over the last nine years. We’re starting to get large enough samples now where we can find other pitchers who have had similar stretches of home run prevention for 1,000+ innings, and still have observed performance in seasons after their run of keeping the ball in the park.

Below are 10 pitchers who, from 2002 to 2007, had the lowest HR/FB rates in baseball, who have thrown a similar number of innings to Cain, and have thrown at least 100 total innings in the last three seasons. The first section is their 2002-2007 IP and HR/FB rate, with the second section being their 2008-2010 IP and HR/FB rate.

Pedro Martinez: 981 IP, 8.0% HR/FB – 154 IP, 14.2% HR/FB
Roy Oswalt: 1,272 IP, 8.3% HR/FB – 602 IP, 10.4% HR/RB
John Lackey: 1,162 IP, 8.5% HR/FB – 555 IP, 10.5% HR/FB
CC Sabathia: 1,226 IP, 8.5% HR/FB – 721 IP, 8.2% HR/FB
Brad Penny: 1,041 IP, 8.7% HR/FB – 324 IP, 10.5% HR/FB
Jarrod Washburn: 1,121 IP, 8.7% HR/FB – 330 IP, 9.3% HR/FB
Barry Zito: 1,320 IP, 8.8% HR/FB – 571 IP, 7.9% HR/FB
Miguel Batista: 1,051 IP, 8.8% HR/FB – 269 IP, 11.7% HR/FB
Dontrelle Willis: 1,022 IP, 8.9% HR/FB – 123 IP, 11.5% HR/FB
Kevin Millwood: 1,160 IP, 9.1% HR/FB – 558 IP, 10.6% HR/FB

Group: 11,351 IP, 8.6% HR/FB – 4,202 IP, 9.9% HR/FB

The league average HR/FB rate is usually around 10.6%. As a group, the ten best big time home run suppressors from 2002 to 2007 were only marginally better than average at that same skill from 2008 to 2010. Sabathia and Zito bucked the trend and actually lowered their HR/FB rates over the last three seasons, so it’s certainly possible that Cain could continue to post low HR/FB rates going forward. After all, he does pitch in a pretty good pitcher’s park and his career HR/FB rate is better than any of the pitchers in this sample, so maybe there is something to David Pinto’s theory about how his fastball moves.

You could have made a similar argument about almost everyone on the above list, though, and as a group, they didn’t demonstrate that there was really much of a sustainable skillset there.

xFIP is their definition of *real* ERA, basically assuming normal numbers of balls in play of each type (grounders,flies, etc.) turn into hits, normal number of flies are homers, and so on.

It all sounds great, right? Matt Cain is straight out of Fooled by Randomness. Except the writer has a major #fail here, he implicitly assumes every pitcher has an identical skill set in the 2002-2007 period as he does for the 2008-2010 period.  So let’s say “for kicks” we make a very minor attempt to control for skill level.

In other words, here’s the thesis. If ability to keep flies in the park is a skill for this tiny sample set, it should correlate with other skills. Like ability to strike out batters, or the ability to avoid walks. Or best of all, the ratio of strikeouts to walks (K/BB).

And guess what, the overall skill level of the above 10 pitchers deteriorated in the later period. From 2002-2007, they combined to strike out 6.84 batters per 9 innings (K/9), while walking 2.81 per 9 (BB/9) for a K/BB ratio of 2.43. That’s an excellent ratio btw, so as a group these are elite pitchers. Fast forward to 2008 and the numbers drop to 6.72 K/9, 3.20 BB/9 and 2.10 K/BB.

Only 3 of the 10 pitchers improved their K/BB in the later period, Oswalt, Lackey and Sabathia. But Sabathia improved in his ability to keep flies in the park too, so its actually consistent with viewing that as a skill (pro Cain ability). Lackey’s K/BB nudged up from 2.63 to 2.67, and Oswalt was basically flat, 3.43 to 3.44. We should also note that Zito saw his K/BB drop from 1.82 to 1.58, so that’s inconsistent with his improvement in keeping flies in the park.

So what we have here are 6 pitchers whose ability to avoid giving up homers deteriorated with their ability to control the strike zone in general, and a 7th (Sabathia) whose got better at both. And all 7 showed significant changes in K/BB. On the flip side, we have Oswalt and Lackey barely budging in *skill* and simply allowing more homers, and Zito allowing fewer homers while his *skill* level eroded.

I don’t believe any of this proves that HR/FB is a skill, but it certainly suggests there’s some ability attached to it. It certainly refutes the author’s take on it.

VIX Divergences and The Idiocy of Deion Sanders

Screen shot 2011 01 25 at 9.27.06 AM1 VIX Divergences and The Idiocy of Deion Sanders

Should we worry about divergences between VIX and SPX? Was there actually a divergence recently? I attempt to answer that over on Investor Place.

And oh yeah, this from Deion Sanders.

Sanders lamented that Cutler was filmed shopping with his girlfriend, Kristin Cavallari, at a Los Angeles mall days after his season ended.

‘‘I feel really bad for the kid,’’ Sanders said. ‘‘I hope someone can get to him and help him make better decisions because it really doesn’t help his cause.’’

But Sanders pointed to the maturation of Philadelphia Eagles quarterback Michael Vick and expressed optimism about Cutler bouncing back.

‘‘Michael Vick has matured quite a bit through all the trials and tribulations,’’ Sanders said. ‘‘He’s quite a different guy than what he was several years ago.

‘‘I think Jay’s going to be all right.’’

OK, let’s put just a dollop of perspective on all this. Vick admitted to participation in the torturing and killing of dogs. Cutler had bad body language.  We all have our opinions on Vick’s crimes, and his redemption to date. And we all have opinions on Cutler.  But what “better decisions” should Cutler make?  WTF crime did he actually commit? Suppose he over-emoted his injury like, I don’t know, Favre? Would that please Deion?

That’s an easy answer. Yes, that would please Deion. In fact that’s literally all he had to do. But that’s apparently not Cutler’s personality. If his whole body language thing bothers his teammates to the point he loses them, that’s a problem in the narrow sense of football. But there’s no evidence that happened, in fact quite the opposite, we haven’t even heard off the record concerns.

But back to the real world, it takes a special kind of nitwit to compare Vick to Cutler here. Congrats Deion.

FSLR Volatility Surge

Screen shot 2011 02 02 at 3.48.09 PM1 FSLR Volatility Surge

The A-Team at Goldman had this yesterday in FSLR.

FSLR February options appear expensive and earnings are estimated for after Feb expiration. In the context of our bullish view on FSLR shares, we see implied volatility as elevated. In particular, February options appear expensive as they are trading in-line with March options despite not capturing earnings, scheduled for 24-Feb. February implied volatility is roughly inline for Feb and March options at 40% and 42%, respectively. Shares tend to move +/- 13% on earnings day, which should drive a larger differential between February and March. We recommend selling Feb $150/$165 strangles for $6.02 (4%) with shares at $156.10. We estimate covered strangle sellers outperform shares alone if shares are between $144 (-8%) and $171 (+10%) at February expiration. Strangle sellers risk limiting upside on their stock positions beyond $171 and have double exposure to downside below $144.

Now a funny thing happened. FSLR shot up 5%. It didn’t change the price of the strangle much though, as it only lifted about $1. I know GS only has our best interests at heart, but this highlights an important point. Don’t play for earnings 3 weeks in advance. To say it doesn’t isolate the play is an incredible understatement.

Among other things, those volatility numbers are already non-operational. Feb now trades at 42 and March at 46. And that’s after a rally, which should presumably reduce IV if there’s a normal skew.

GS is correct that volatility in general is high. They’re also correct in that there’s not much spread between the earnings month and the non-earnings month. But its still not a great idea. Its simply too early to throw on a calendar. You’re just not getting enough decay in the Febs yet, especially with IV and HV shooting up almost daily.  Selling Feb. now naked might work, but it has nothing to do with earnings.

*UPDATE 3:45PM: FSLR announces earnings date is February 17th. That’s actually before Feb expiration, so the whole premise of this play is now non-operational. Didn’t like the idea before that, REALLY don’t like it now, lmao.

Some Groundhog VIX Sonar


….And 1.5 days later, the VIX rally is no more.

As Jamie mentions, we had a bad VIX tick on Monday. At maybe 12:50 EST, VIX all of a sudden dropped from the mid 19′s to the mid 17′s. Its incredibly rare, but not impossible, to see VIX move that much in a tick. But something would accompany it, like a market gap or a move in VXX and VXZ. We saw none of that, which should provide an instant red flag that its a data error.

And sure enough, about 3 seconds of research later, it was obvious that there were simply some bad quotes in a few SPX calls. Bids were $5 too low, which had the effect of lowering the implied volatility on certain strikes, which translated to lower VIX. Which leads to another point. Always remember VIX is not a stock, its a statistic based on the implied volatility of SPX options. So if SPX options quote incorrectly, so does VIX.

None of it has any real meaning. Its like a stadium scoreboard inadvertently showing the wrong score for a minute. Its not like a team suddenly thinks they’re trailing in a game where they actually lead by 14.

Viewer Email


We get some questions in email. And every once in a while, we respond. We even respond in *first person*, even though for some reason we’re writing this intro in third person. Maybe it sounds better, like there’s a whole staff here or something.

Anyway, here we go.

Q: I have been going back and forth with balancing short dated options vs longer dated ones. I understand the difference in deteriorating time value, however I am more interested in gauging my thoughts against someone’s experience in selling puts. I am trying to understand generally how the longer dated options and shorter ones react to different environments.

My hunch is that in an environment with neutral or slightly rising prices, short dated options would be best to maximize the annual yield. However in an environment with spiking prices, longer dated puts would be better ( more downside protection, more premium gained from price appreciation). Am I correct in this assumption? Or am I missing something? Can you give me your thoughts on short dated vs longer dated options?

To which I responded.

That’s exactly right. Or at least how I look at it. I’m not averse to selling puts in low volatility environments, and actually in a way I think they work better. Implied volatility kind of floors, whereas realized volatility (volatility of the underlying) can tank much further. But I would go shorter term in duration in low volatility environments. Its kind of like fixed rate mortgage vs. adjustable. If rates tank, you want to lock in the fixed rate, even though the fixed rate is higher than the adjustable. Same principle here. As a seller, if volatility spikes, you want to lock in the higher volatility for longer duration when you can. You can use a moving average as a proxy. Let’s say the VIX is 10% above its 10 day Simple Moving Average. Maybe then you would increase the duration of put sales.

I know I often use that “10%” rule as a proxy, but there’s nothing magical about that particular level. The idea is that if volatility elevates, and you’re looking to sell some, look to go out further in time.

Relative Blahs


I have RSI(2) set as a default on Stockcharts, so generally when a pop a chart up on these pages, it is included. But of course, did not actually notice the unique string of readings over 90 the past couple weeks in the SPX. This from Michael Stokes at MarketSci Blog.

The S&P 500 has traded 9 days in a row at an extreme RSI(2) reading over 90. Unfamiliar with RSI(2)? Read more here and here.

Echoing Rob Hanna at Quantifiable Edges, extended overbought readings like this were much more likely in the last century when the market was momentum-driven (i.e. up days tended to beget more up days), but are a rarity in today’s mean-reverting market (read more).

Prior to this month, this century had only seen one instance of a 7-day RSI(2) run over 90 – we’re now at 9-days and counting.

Where does the market go from here?

Now as you can see from the chart, the streak ended. Of course the logical inference was that we got overbought and we're going lower. As always though, not quite that simple.

All indicators can emit signals, and then go further. As Michael would point out, you'd get bearish too early following this one religiously. Of course in hindsight we'll be able to point to this as a red flag that the market went too far too fast.

And remember that big futures premium in the August VIX? It's all but gone now, or at least levels that are not terribly significant in a vacuum. We're under 2 points now which is as much margin of error as anything as the VIX is never perfect to the penny.

What's most interesting is that the premium resolved not with a market melt or a volatility explosion, but simply a meeting in the middle. The VIX lifted a couple points and the futures have drifted lower. There was not much path to profitability here as the only way to "buy" the VIX is to buy VXX or VIX futures or calls. And they all declined. And owning actual volatility (say SPX or SPY straddles/strangles) didn't work well either as realized volatility of the underlying remains under implied options volatility.

Play Ball

Well, still here....

So I was thinking, is there an analogy between juicing athletes and cheatin' speculators or traders?

Well both have existed since the beginning of time. If there's a game for money, there's going to be someone in it vying for an edge and willing to cross some lines. Only the technology changes.

If you're a non-juicing athlete, you certainly would like the powers-that-be to put a stop to the roid use. But by the same token, if you're a pitcher and one of them is up at the plate, you still have to try to get him out. If he takes you deep, you can complain all you want. And of course you'd be 100% right in your complaints. But it's basically going to fall on deaf ears. In 5 years he might be dating Kate Hudson and admit he was cheating when he knocked one out on you, but that's small satisfaction.

To me, it's somewhat similar to trading. Let's say you were in the oil pits and you go short Crude and it keeps running in your face. And then a year later they say that ....hot damn, there's some speculatin' going on. I'm not sure what they did was even illegal, but for argument's sake, let's say it was. Are you getting that money back? You might have a class action and in 5-10 years get pennies back on the dollar. Oh, and "know" you were maybe right. Wahoo, not much solace.

Anyway, I think I summed up my feelings on the topic in this response to a comment yesterday.

On the fronting/speculating or whatever, it just feels like a waste of time and energy to whine. Been off the floor for almost 8 years now, but I imagine many things are the same, just with better technology. As an MM, not a day goes by where someone doesn't pick you off right before a big order hits the stock and you have trouble hedging. Yes, it's totally wrong, but it's literally never penalized. You can and do complain about egregious violations, but at the same time, you're rarely if ever going to get compensated for the bad trade they hit you with. The most important thing to do is move on and be ready for the next trade. You have to learn to live with the fact there are bigger fish then you and try to make money anyway. In a perfect world they'd take the front running trade off the tape and punish the violator. But it's not a perfect world, it never happens that way

Tomorrow Never Knows


So if you wake up tomorrow and click on this site you may notice it looks a bit different. Yes, we're leaving this popsicle stand for...... a slightly larger popsicle stand with a real address. The bookmark you use now should still work, but will give you updated address info when it's officially up and running.

Initially it will have similar content, other than a redesign and few bells and whistles. But we're going to have added content and tie-ins pretty soon, one's I hope you will enjoy. As to the VIX bikini pics, hopefully we can continue those too (they're not a potential sponsor as of yet, but one can always dream).

Now I usually pop on a post in the early AM, but may be a little tardy with that tomorrow as the transfer takes place. Search and archives should pick up anything from the old site, so if you're doing Lenny research or something, that should all make the move over. Obviously there's potential for bugs et. al., so please bring any you might find to my attention.

Anyway, thanks to all for your patience and support and hopefully if all goes according to plan we'll be broadcasting with a bigger megaphone tomorrow.

Kristin Did It


Who's messin' with them there oil prices? Time to round up the usual suspects.

The Commodity Futures Trading Commission plans to issue a report next month suggesting speculators played a significant role in driving wild swings in oil prices -- a reversal of an earlier CFTC position that augurs intensifying scrutiny on investors.

In a contentious report last year, the main U.S. futures-market regulator pinned oil-price swings primarily on supply and demand. But that analysis was based on "deeply flawed data," Bart Chilton, one of four CFTC commissioners, said in an interview Monday.

The CFTC's new review, due to be released in August, adds fuel to a growing debate over financial investors who bet on the direction of commodities prices by buying contracts tied to indexes. These speculators have invested hundreds of billions of dollars in contracts that were once dominated by producers and consumers who sought to hedge against oil-market volatility.

This is outrageous. I am shocked SHOCKED that investors bet on the direction of commodities prices by buying contracts tied to the indexes. Who even knew there were futures and options, not to mention ETF's and leveraged ETF's, tied to commodity prices? Who are the nitwits that approved trading on these vehicles in the first place without properly controling the market so it only moves the way we want it to? Oh wait, that was probably the CTFC.

In other news, I am hearing rumors that financial investors bet on the direction of stock prices. Yes, you heard me correctly, they buy financial products and hope they go higher so they can sell them to someone else. In fact these very unsavory characters may have something to do with the market lift since March. Not only that, there are also financial investors who sell calls against their investments, thereby driving down options volatility. Yup, I was amazed to hear that too.

Anyway, not to worry, Jimmy Booya will get to the bottom of this for you all.

Who?

Who did what?

Who manipulated oil up? Who caused the spike? Who manipulated stocks, as we all know happened, with naked shorting?

Manipulation is a crime.

We know that. We know that the CFTC has figured out traders manipulated. Why not turn them over to the authorities? We know short-sellers used naked shorting to manipulate stocks. Once again, though, the operative term is manipulation. It is true that the SEC had outlawed naked shorting, but manipulation is illegal and was illegal.

We need names.


Yes, because the best lesson an investor/trader can learn is to take credit for wins and blame someone else for losses.

Look, if there's any there there, the SEC and CTFC will never find it anyway. Yes, I'm that cynical. But whatever, it's a waste of time regardless. There's not an even playing field out there. Learn to live within it or don't trade/invest, unfortunately it's that simple.

Dispersion Time?

Yes kids, this hair dispersion was pretty normal not that long ago, lol.

As to options, we touched on the concept of the Dispersion Trade yesterday, but just wanted to go a bit more in depth for those not familiar as it has an intriguing setup now.

The idea is to go long options gamma in individual names are sector specific ETF's, and go short gamma in index ETF's or index options. Ideally you set it up so your net daily decay is near zero.

You can fade stock moves in your long gamma names, but at the same time may have to chase strength or short weakness in your index ETF gamma shorts. You hope to earn more flipping the longs than you pay on the shorts.

In a perfect world, you longs will go in all sorts of offsetting directions and/or gap frequently while the offset keeps the underlying index non volatile. In other words, you want correlation to implode.

In the real world, it rarely goes to perfection.

The setup is intriguing now in that there's a bevy of spots where volatility is relatively low compared to index volatility. And volatility overall is on the low side while correlation is relatively high (basically a hangover from the volatility explosion that was not all that long ago).

Now of course it's not so simple to slap this play on. Unless you have market maker margin, it eats up too much capital for most everyone. In addition, it requires more monitoring than the typical options play. So I'd look at it as a decision of alternatives. If you want to own options gamma, I'd look at individual stock and sector specific ETF names. If you want to short options gamma, I'd look to index ETF's.

Timely Trading Halt


Haven't heard of a ban this serious since Kramer was barred from buying fresh fruit from the local stand. This from The Unnamed Blogger Known As Moronic.

IMPORTANT NOTICE: Inverse, Leveraged and Inverse-Leveraged Exchange Traded Funds are no longer available for new or additional purchases at UBS

Effective July 27, 2009, UBS is suspending the offering of Inverse, Leveraged and Inverse-Leveraged Exchange Traded Funds (ETFs). You will no longer be able to make new or additional purchases and will only be able to liquidate current positions through UBS at this time. Any attempt to execute a trade of such ETFs will be rejected.

Please contact your Financial Advisor with questions.

Now over a year ago, we started a series of about 2000 posts or so highlighting the problems with holding these pups for a duration longer than a couple days. So consider the timing of this move rather odd since the math behind them never changed. And the big hit here had to be last Fall and winter when investors who owned these had to discover the issues here (the hard way).

I can't verify this memo from Zero Hedge is real as he does not provide a link to it. I can't even verify that Zero Hedge as a site exists because he writes under the cloak of anonymity. But assuming he didn't make it up, it's an interesting development. ProShares and Direxion can throw on all the disclaimers they want, but it's pretty obvious no one ever reads a prospectus before trading something. It's incumbent on the SEC and or the brokers to make it clear how they work. The SEC of course keeps approving new ones, so we know where that's going, so if this is real, must be some serious complaints going on behind the scenes.

The VIX Ship Be Sinkin’



Did that persistent premium in the VIX August futures tell represent smart money "knowing" the early summer VIX dip was a mere blip? How about all those cheapie VIX call buyers, you know, the one's that loaded up on the Augs and Seps with 45 and above strikes?

Well, as to the former, that premium gets smaller by the day as the futures are drifting towards the actual VIX. As to the latter, looks like not the greatest investment in the world. As Jamie notes here, the tide has turned and now they're seeing some big sellers in August OTM VIX calls. Specifically here he notes sellers in August 32 and 35 calls. For those keeping score at home, that's an ugly spread if it's the same guy that owns calls at strikes $10 higher.

Now it's perfectly reasonable to expect volatility to do better in the Fall. It almost always picks up when summer ends. It just feels now that the market does not have quite the same optimism for the magnitude of that inevitable uptick.

The Year In VIX


So flash back one year ago. Before the financial system nearly imploded, it was rather calm. Cramer called a housing bottom (well, that doesn’t really disinguish is from the other 10 housing bottoms) . And the VIX was almost exactly where it sits now.

In light of this whole correlation excitement, I ran some comparisons of how volatilities of different ETF’s, and a few individual stocks, compared to the VIX on Thursday, a month ago, and a year ago. The “year ago” column is relied on my eyeball estimate of the ETF/stock vols. as the charts did not give exact numbers. But it’s more to compare it from then to now, not get it exactly to the penny.

Anyway, you can see the numbers here. Or you can rely on my description.

Basically, some ETF’s like XLF, XLE, XHB and XRT now trade at implied volatilities significantly cheaper relative to the VIX than they did a year ago. AAPL does too, as does POT to name another one. Other ETF’s like EEM and IYR are not significantly different relative to the VIX. Nor is CAT.

What’s it all mean?

Well, not all that much. I mean if you like the Dispersion Trade, which involves going long individual stock gamma and short index gamma, you can do it at pretty good prices in many spots. That’s the good news. The bad news is I have found from personal experience you really will just churn with the play unless volatility perks up.

In other words, let’s say you go buy AAPL and XRT and XLF options gamma (say long straddles or strangles) vs. short gamma in SPX or SPY. The daily decay you earn on the short gamma should roughly offset what you pay for your long gamma. You are now effectively betting that correlation will decline and/or volatility in these names will lift relative to SPX/SPY volatility. Anecdotally, of all the things to root for, a simple broadbased lift in volatility works best, even if correlation does not budge.