Daily Options Report

Off The Lows!

2008-10-10T14:30:00.000-04:00

So what can we do when Ben and Hank run out of bullets? Which appears to have happened some time between yesterday and mid-August.

Well, Bubblevision has found a way to get some buying interest. Maria and Erin have agreed to "resolve their differences" whatever that means, after the close today, provided we're up on the day.

OK, just kidding. The real plan is to make everyone open this Rally Monkey video and leave it running with the sound on until you start buying stock. I tried it and within a minute I said "make it stop" and just backed up the truck.

Getting more questions lately regarding specific trades/ideas/positions et. al. And I'm happy to answer them as best I can. But just want to emphasize, everybody's goals and parameters and risk tolerance and whatnot are very different, so the correct answer for someone may be utterly terrible advice for another.

There are some principles that should apply to all though. The higher the volatility, the smaller and wider you need to trade, be it options or stock or both. If you are going to buy options (which will remain the right play until we actually see something resembling a rally imho) allocate it as if you bought (or sold) that share equivalence of stock. In other words, if let's say it's an $80 stock and you buy 10 calls with a delta of 50 and a strike price of 8, don't look at it like you're allocating $8000, convert it to how much stock it equates to. In this example, that's $40,000. The options now effectively become a long with a stop, as opposed to a potential 100% wipeout.

Holy Emerging Double Ultra Straddle Prices, Batman

2008-10-10T10:37:00.000-04:00

So as the VIX crosses 70, how about a look at some actual dollars you can now invest in options paper?

Been looking to buy puts in Ultra shorts as a way to know how much money I am going to throw away playing for a rally without using actual stops. So I checked out two of the more insane ones, EEV and FXP.

Well among other things, the markets are wide enough to drive and entire emerging country through, so it's pretty untradable anyway. But since I'm writing, I can look at hypothetical fills.

So, interested in an FXP straddle? Say, the Oct. 145's with one week to go? Midpoint to midpoint, it would cost about $42.

EEV Oct 180? About $49.

I remember trying this exercise in SKF at about this point in another cycle, and it was the same thing, unreal prices. And guess what, it was a buy, you got a play in both directions.

No way, no how I'm playing these either way, but for the record, I'll take the "over".

Buy, Right?

2008-10-10T07:12:00.002-04:00

So I'm breezing through some Dorsey Wright newsletter that found it's way into my email, and lo and behold I see a blurb about buy-writes. They love the idea here. I don't. Which does lead me to thinking, since among other things, they're brilliant, and I'm not. So what am I missing?

I guess there's just so many variables, either answer could be correct.

Let me try to 'splain.

I don't think walking in right now and slapping on buy-writes, or their Evil Twin, naked short puts, is a bad idea. I don't think it's the best idea right now either, but I mean it all depends on what you are trying to accomplish. You're locking in fat volatility sales, but the flip side is there have been a whole lot of sales that looked very fat not all that long ago. You're also at worst, buying stock at prices even lower than these, of course that too sometimes seems dubious when the stock actually gets there.

The best way of looking at it imho is that you want to get long, but not aggressively. And despite the open-ended downside nature of they play, it's certainly less aggressive than buying stock. The flip side of course is you don't get the upside, but that hasn't been an issue lately.

What IS a horrible idea though is over-writing fat calls against a stock position you've ridden down, or are riding down, or just own and are getting ill with. The relatively small money you took in vs. the stock will barely ease the bleeding, and will only annoy you to now end if/when it ever turns. I would way rather do the exact opposite and sell the loser stock out and replace it with calls. The premium you paid will drive you nuts when you pay it, but the plus side is you've now defined your downside and will still participate if it ever turns.

Anyway, going to close with a thought from Nick (Ocho Cinco) Perry over at Schaeffer's regarding the pros and cons of premium sales in this environment.

Now, I know that one of the characteristics of volatility is that is it supposed to be mean reverting. In that scenario it seems logical to assume that volatility will decrease and therefore take option premiums with them. If that is the case, then yes, selling premium here is a potentially "easy" trade. But that is built on the premise that volatility, and the wild swings, starts to recede here.. My response to that would be - have you followed the market this week? There is nothing rational or logical going on here. Prices are swinging wildly. Maybe that lasts for a couple of days, maybe a couple of weeks.

The issue with premium selling is the you have limited upside and can be subject to some big risks. That is a fine strategy if you understand that risk and have the capital to ride through a potential blow-up. However, for most of us, I think it best to keep this quote, attributed to John Maynard Keynes, in mind...

"Markets can remain irrational longer than you can remain solvent "

And So We Go On

2008-10-09T13:19:00.005-04:00

All rise as we continue on Page 617 of this Bloomberg article. Remember, these blog posts read right to left today.

``If ever there was an environment where options overwriting makes sense, it's now,'' she said. ``When you sell those calls, you get extra income.''

Huntington's Chip Hendon sold October $80 puts linked to New York-based Goldman Sachs on Sept. 16 as the stock tumbled to an almost three-year low of $133.01. He collected a premium of $3.72 for each contract. Because that put can now be purchased for $1.13, Huntington has gotten a 70 percent return.

Investors who initiated a buy-write strategy on New York- based American Express Co. on Aug. 15 would have generated a 5.5 percent profit by the next month's expiration on Sept. 19. That scenario, based on selling the September $42.50 call, outperformed owning the shares, which rose 3.4 percent to $40.40 during the period, while the S&P 500 declined 3.3 percent.

Well, um no. Studies have shown that actually the best time to overwrite is when volatility is sinking, not rising. It's tempting to say that taking in way more premium must inherently be a better trade than taking in less premium, but the fact is both times premium is "fair" based on the market backdrop. In a low volatility environment, your basic stock holding is not likely to decline much, and in fact is probably rising slowly. The upside move is probably not that exciting either, hence you're not giving away much, if anything, over-writing a call. Think back to the last bull move of a couple years ago. I bet you could have gotten your best options premiums in the mo-mo names, yet think of all the upside you would have given away, and the complete lack of cushion "overwriting" provided you on the way back down.

For a good illustration of this point, how about we look at ......this AXP trade they refer to, lmao. The graph shows volatility for the past 3 month's. They initiated the trade at what looks like a low 40's volatility, pretty much as cheap as AXP has traded in this stretch. If they repeated the trade in mid-September, they would have sold options for somewhere between a 60 and 80 volatility. Both of which would have seemed thrombolic as prior to September, the 52 week high volatility in AXP was in the low 60's.

Well guess what, 3 weeks later, AXP volatility is now 120, and the stock has lost about 1/3 of it's value. So lo and behold, buy-writing at the worst volatility possible in the last quarter worked well, buy writing it when AXP options hit new highs put you in the poor house.

Better idea? How about if instead of writing the call in September at the seemingly high volatility, you sold out your stock and replaced it by buying that very same call. At record prices. You would have saved a fortune.

And how about that other trade? Well yes, great sale in GS puts. IT"S ONE TRADE. Was it against puts or short stock he already had, or something similar in the portfolio? Did they hedge at all? I own some FSLR puts with a strike of 230 since last expiration, I imagine I've made money like 10-fold on those. If only that was all I had done, lol.

But the article's not a total horror show, they do have a very valid point in the very last paragraph.

``It's a fantastic time to trade options,'' said Jody Smith, a London-based volatility trading analyst at Russell Investments, which oversees about $213 billion. ``You have people that need to own contracts, people who want to sell, and there's a lot of opportunity to put on positions and take them off.''

Yes and yes.

Boom Time for Options Players?

2008-10-09T10:37:00.000-04:00

Lot's of buzz about this article on all the coin minted by options traders this year.

Well, that's the implication, but it's a tad more complex than that. Generally speaking, an increasing volatility environment is a good one for options traders. But that's a broad statement, individual results can and will vary enormously. Someone's also getting obliterated selling all that "fat" premium as it got twice as "fat" almost overnight. And someone's also doubling down on DEEEPs on the way down too.

Anyway, let's dig in.

The same credit-market rout that sent stocks to the steepest loss in two decades is also making it the best year ever for options traders.

U.S. equity derivative prices and trading surged to records as one of the worst months for the Standard & Poor's 500 Index since the Great Depression wiped out three years of stock market gains. The retreat drove the Chicago Board Options Exchange Volatility Index, a measure of how much options cost, to the highest level in its 18-year history.

Huntington Asset Management returned 70 percent in two weeks by selling contracts on Goldman Sachs Group Inc., the Wall Street bank that sold $5 billion of preferred stock to Warren Buffett. Target Corp.'s 25 percent plunge yielded about $12 for every contract traded by Scoggin Capital Management LP using a so- called no-cost collar. Contracts for Coca-Cola Co., Wal-Mart Stores Inc. and Campbell Soup Co. surged as much as 119 percent since the end of 2007, according to the implied volatility of options expiring in 30 days.

OK, I am going to change my opinion of this article from misleading, to patently ridiculous. They're cherry-picking a couple particularly good trades. It needs a ton of context, like what else you're doing in that name, whether you're just throwing every position into a big picture position, as all derivatives professionals do. Not to mention that a "no-cost collar" is just a pure directional bet, not all that different from shorting stock in this example. And "no-cost" is a misleading term. What it means is Scoggin bought some OTM put and shorted some OTM call for a net of zero cash. If TGT went up, it's ain't no cost anymore.

But let's continue.

The all-time high in the VIX meant investors paid 2 1/2 times more for S&P 500 options than they did in 2007, based on its average level last year. The measure, calculated from the prices paid for S&P 500 options, has exceeded 30 for 16 consecutive days, the longest streak since 2002.

``This is the worst fear that I can think of in my career,'' said John Wilson, 63, co-director of equity strategy at Morgan Keegan & Co., which manages $120 billion in Memphis, Tennessee.

September's market gyrations sent trading of options on U.S. stocks, indexes and exchange-traded funds to an all-time high of 375 million contracts, according to the Chicago-based Options Clearing Corp. Volume was almost double the figure from a year earlier.

``People are nervous and they want protection for their portfolio, so they'll pay a premium,'' said Adam Stern, who oversees more than $1 billion at AM Investment Partners, a New York-based hedge fund that invests in options. ``It's possible to make a bit of money as people bid for that premium.''

OK, well we're getting a little better here. Indeed it is possible to make some coin selling that premium. Just because I don't think that was THE best strategy through all this, doesn't mean you couldn't win doing it. Think of options selling as an insurance transaction, where you are now AIG.......OK, bad example. You are now Generic Insurance Company Who Was Happy Sticking to Your Core Business. And consider yourself selling home insurance in a flood or earthquake zone. If you can price those premiums high enough, sure you can do great net selling, even if you have to pay some claims here and there.

Getting a little long here, and they get into the specifics of the trades, as the article goes on, so we'll hopefully continue later.

A New Brilliant Idea

2008-10-09T08:54:00.000-04:00

My friends, so how about put buys on some Double Inverses?

I suppose it's not that much different from buying a call on a regular ETF or double ETF. But be that as it may, I'm trying it here and there on those (too frequent) moments I want to do something bullish on either direction or volatility or both at once.

Volatility is of course double the regular. But hey, you effectively get twice the movement and gamma, and you will get some gravity working in your favor as these all underperform longer term (something that's a feature, and not a bug, as Greg always tells me).

So we'll see.

Classic VIX

2008-10-08T16:18:00.002-04:00

Well, as long as I have to atone in the next 24 hours anyway, how about one last VIX Bikini.

And one last shoutout to the VIX. Up on the day! Hanging out with a 56 full!

Just wondering what surprises Ben and Hank and their Worldwide Central Bank Circle of Love have in store for tomorrow. I will not be my most attentive as it is Yom Kippur and all.

Never Another Down Day!

2008-10-08T14:22:00.000-04:00

So looks like we're off to the races.

It sure would seem bullish if we close at or near the highs. Then again, how many times could we have said that? How many times have we actually said that?

Bill Griffeth informs me the VIX hit new all-time highs today at 59. Actually he called it the "so-called" VIX.

No, it's actually just plain old VIX. Now go back to "so-called" financial information television and keep monitoring our bottoming process.

And a news flash. The VIX has hit repeated new "all-time" highs since last week, 59 is now something like 20% above the "old" ones. And the market continues to struggle.

There is a growing realization everywhere else however that there is no magic number here.

I pick on useless VIX analysis on my teevee because I am an options site, but let's face it, there are mountains of indicators demonstrating we are beyond beyond beyond extreme oversold. There are fewer NYSE stocks above their 50 Day MA than any time since 1987. Not sure the symbol of that on sharpcharts, but the chart here shows that same measure for the S&P. We're also 25% below the 200 MA in the SPX, something that also goes back to 1987.

So serial bottom callers. If you still have money left, time to load the boat!

Let's Cross Our Fingers That Bjork is Diversified

2008-10-08T10:00:00.001-04:00

Scary news from Iceland.

How do you know your country’s finances are in trouble? When you’re looking to Russia for a loan.

The worldwide turmoil in the banking system did not originate in Iceland, and will not end in Iceland, but that country may be one of the hardest-hit. The country is in the midst of trying to secure loans for its largest banks, in part from Russia, and announced plans to peg its currency to the euro, one that will likely be vulnerable to speculators.

“You sort of liken this to Thailand in 1998,” says Win Thin, currency strategist at Brown Brothers Harriman. “It wasn’t really the cause of the crisis and wasn’t a major factor in the crisis but it was sort of like the epicenter — all of the conditions were present there, almost like a little test tube.”

Apparently they've now pegged their currency to the Euro, and now have nothing lift in the till and incalculable inflation.

I truly have nothing intelligent to add here, I just couldn't pass up the rare opportunity for a Bjork reference.

Back here on dry land, it feels like we've had about 6 days worth of market action by 9:40.

Use this as an example of why even purely objective calculations like historical volatility and ATR can't always capture the actual price motion we're living through. SPX futures dropped what, 30-40 points in the overnight, then rallied something like 50-60 points on the rate cut, then went back to the overnight lows pre-open, then lift back to unch. and above.

Think back also to those days in 2005-2006 where if memory serves me correctly, we never saw so much as a 2% move in a given day. Today we dropped 5% just in the time it took me to do school drop off and get my morning ice coffee.

So let's recur a theme here. Options right here right now are clearly not high compared to actual volatility, and in the general sense, still not a sale. Specific strategies and circumstances of course vary, I'm talking in general. That actual stock volatility itself of course is a sign of an extreme and bullish, just like everything else.

Brilliant!

2008-10-08T07:06:00.002-04:00

So riddle me this. Short selling was still disallowed yesterday, yet financials utterly imploded. How in the world were those America Hating Evil Shorts going in there and pounding the Morgans and Goldman's and all their friends?

Could it be, perhaps, that there are other ways to go "economically" short a stock without physically shorting it? Well, yes, we've gone over many of them since the Hank Doctrine came down. Could it be that some sellers were actually longs, both physically and economically? I imagine that too.

A more logical interpretation is that the rule did give pause to anyone thinking of selling the stocks for whatever reason (although merely thinking of selling the stocks was outlawed too). So in a sense a rule we mocked maybe did have the intended affect, similar to a trading halt. There was some utility to slowing it down, although I would be more inclined to have just let it play out. In fact I suspect we'd all have been better off if the PPT had just allowed more flush-outs over the course of time.

If you want my (uninformed) theory, here it is. The actual shorts maybe weren't even economic shorts at all, rather they are hedges against CDS or CDO's, or some other product out there that I don't totally understand but allows unlimited and unregulated size betting on the fate of a company. If I'm standing in an options crowd and someone keeps coming in and buying puts from me by the truckload, I am going to have to keep shorting stock. Or doing a spread with someone that gets me physically long the stock that I can then turn around and sell . Am I the one "gambling" or "manipulating"? Of course not, it's the guy buying all those puts. So compare the sizes of the markets, and it's easy to see how a CDS panic spilled over into the shorts that Dick Fuld (and everyone else) actually abetted before becoming mortified by them

But whatever. We are here. I could argue financials both ways going forward. On one hand, sure looks like people went economically short ahead of the "real" shorts. So maybe they get whipsawed on that trade. Remember, shorts do actually get caught all the time and chase.

On the other hand, well, they sure act like wallpaper. I covered a small long gamma UYG position WAY too early, so unless it goes towards 17-18 again, I'm done.

Another Day in Paradise

2008-10-07T14:47:00.001-04:00

I'm just a Caveman, I'm not familiar with your ways. This thing you call Bubblevision. Is it me, or do they truly speak out of both sides of their a**? I mean on one hand, it's Anti-Capitalist and Against Everything We Believe In to question why a CEO took home a gazillion dollars bonus based on paper profits, and then blamed short sellers and accounting rules when those profits turned into actual losses. On the other hand, they cheerlead like schoolgirls in the presence of Derek Jeter every time Hank and Ben come up with another Alphabetized program to cover yet another bill on the taxpayer dime.

Our congresscavepeople were two-faced too, kind of like that guy from Casablanca "OMG, there's gambling going on here". But here's what we did back in our day. We stoned all short sellers. In fact I have included some footage of it here. And accounting? Whatever the nearest abacus said, that's our model. Don't like it? We stoned them too.

Now please excuse me, time to go get ready for Mad Money. His thinking is worth millions.

Anyway, to clarify, what I was trying to say in my last post was IF you are of a mind to sell options premium, THEN here's how I would go about it. Sell time, look at dollar amounts as much as the volatility. The market's not likely to fall asleep in a range any time soon

Not saying I would go hog wild selling though. Im net long gamma as I've mentioned numerous times. I did listen to myself and sell some further out premium, but more as a general volatility hedge than anything else.

How About Options Sales?

2008-10-07T10:42:00.000-04:00

So what about actually selling puts (or both put and calls) into this volatility explosion?

In a small-ish up day like today, that's the best position to have on, naked short puts. My opinion is that this type of day will remain more the exception than the rule in October, but be that as it may, how would I go about it?

Well, I would sell puts (or both) with some "time" in them, maybe in the 3-6 month range. Even though volatility has had it's most pronounced surge in the nearest month's, the rise is pretty impressive all along the curve. The graph here show's 90 day normalized volatility in SPY. Remember when a 30 VIX was considered some sort of raging buy signal (all of about 4 week's ago?). Well, as of yesterday, the market anticipated 38.40 volatility out three month's (and 36 vol. out 4 month's, and 33.50 vol. out 6 month's) . These are huge numbers.

If you sell near month options, you are making as much a bet on actual stock price action as you are on options volatility. And as we have shown, in the near term, stocks are indeed moving at a higher volatility than even these soaring near term options have priced in (today excluded). The further out you go though, the more you are betting on options volatility. And if that's what you are trying to fade (options volatility), then that's where I would place that bet.

Now I also would not linger with this trade and shoot for that last dollar, or whatever. If it works well, I'd take the win sooner over later.

CME to the Rescue!

2008-10-07T07:04:00.000-04:00

Um, this would have been a really great idea about a year or two ago.

Officials at the Federal Reserve plan to meet with top executives from two commodities exchanges in an effort to create a new marketplace for credit default swaps, one of the most important, controversial and opaque securities traded on the Wall Street, CNBC has learned.

The meeting, scheduled to be held as early as Tuesday of this week at the headquarters of the New York Fed, is expected to clear the way for the creation of a new clearing house, or exchange, where CDSs can be traded with more transparency and with a degree of government oversight.

At the moment CDSs are traded in the over-the-counter market, where traders buy and sell the securities among themselves.

The effort by the Fed is designed to create a centralized market place where CDSs can be traded.

People close to the talks say that the new exchange could be up and running in a matter of weeks.

Must have been blasphemous to the Pure Movement Capitalists at CNBC to print this.

But seriously, better late than never. And in the future perhaps when the size of some as-yet-to-be-invented OTC derivative product gets beyond comprehension, they'll be more proactive in listing and regulating them. But I won't hold my breathe, we'll be arguing against oppressive government regulation by then.

Anyway, as far as options go, we have something here that doesn't exist anywhere else on my screen. A good bullish story. A (sort-of) up stock.

Like everywhere else, volatility is quite high, in the 80's, about double the norm. So it's a bit of a tradeoff as on one hand, it's a rare chart that's not a disaster zone, on the other hand, it's already seen a quick and sizable bounce off some poundage.

Looks Like I Picked the Wrong Week to Quit Watching Power Lunch

2008-10-06T15:18:00.002-04:00

Hot Picks

2008-10-06T14:50:00.002-04:00

OK, some people call me a "Maverick". It may be because "Top Gun" was one of the first movies I ever saw with my wife.

Or maybe it was "Hot Shots", not sure, it was a long time ago.

Anyway, here's some Maverick-y ideas to play with this market.

Buy nearish term calls or puts, or both, and trade stock against it. Your risk is that you're buying volatility at the highs, you're reward is the market just won't stop plowing around.

A little squeemish with that one? Me too, not buying much of anything in options any more. My position now is like one big OTM call, with a couple puts left as a hedge.

How about buying bullish call spreads? You don't really risk volatility.

Well, that's fine, but depending on the numbers involved, it's not all that different from simply buying calls. I mean if you buy 1 call for $8 or 2 call verticals for $4, you're really just risking the same amount of money if the stock implodes. But you're reward is better buying calls. So it depends on the specifics, but I kind of feel like if I'm going to risk throwing away the premium on a directional move, I'd rather just keep the upside.

How about just buying stocks with stops?

Well, hasn't exactly worked like a charm lately, but you can certainly make a case we got so unbelievably extreme it's not a bad idea to take a shot. Cramer's calling for a 20% decline, what better indicator can we get than that?

What about some ratio call spreads? Like buy one of a call here and short a greater number at some distant OTM price that has some real volatility pumpage too?

Kind of like this one, but again, it's about the specifics. I do expect volatility to stay frothy until we actually rally (as opposed to us settling in here in any meaningful way), but once we rally, it's pretty clear options have a lot of room to get pounded. Current ATM's will hold up better in that situation, as their intrinsic value will explode. So while I like the idea in concept (especially since unlike a straight vertical, you may even structure it to take a credit in), it's a little trickier in practice. I tried it in POT the other day for a small credit, and the stock has only gotten plowed since, so at this point I really have not accomplished anything.

.......And special kudos to Power Lunch on their Umbrage contest earlier regarding the questioning Dick Fuld's pay package. Surprised, but the Gold Medal in "Most Outrage at Questioning Someone's Pay Package" goes to .......Matt Nesto. Other trophy for today is awarded to Dennis and MCC for their interview Sheldon Adelson for declaring we should ban shorting (um, we're actually banning alot of shorting right now and it's not exactly working) and we should get rid of Mark to Market accounting. The last way to get a useless guest back is to question him on transparently ridiculous points. So congrats, he's now primed to be a regular.

Oh, and Octobox Award to the entire group for continuing to genuflect in the presence of every CEO. They are truly all-knowing. On the way up.

.....OK, according to Cooper on MV, this Sheldon Adelson owns Las Vegas Sands. Which is kind of ironic, since he believes short selling should be banned because it's "gambling".

Viewer Email

2008-10-06T11:33:00.001-04:00

Got this comment on Saturday.

Here is an unrelated question about VIX (not the bikini!). It has reached the record level which gives a buy signal according to many pundits, since it's suposed to measure fear. But what if it just measures the stupidity of the 'no-short rule"? People cannot short, so they buy puts and therefore VIX's 40ies today is really only 20ies of the last year. Any thoughts

To which I answered.

That's an excellent point, one that people always miss. Rule changes, new products, technology, et. al. all tug the VIX. It's why comparing VIX by absolute numbers is truly not useful.

The No Short Rule does likely add to put demand, and probably nudges volatility higher than it would be. Maybe 40 isn't the new 20 (I'm 43, I feel good and relatively immature, but not THAT good), but 40 may be the new 30 or 35, no question.

Of course the flip side is that if anything, the VIX is understating *real* volatility as measured by individual stock options and volatility of the stocks themselves, as we've noted recently. Even today as it crosses 50, and as TenDollarTommy alerts me, the VXO hits new all time highs, actual stock volatility keeps rising as well.

But since this keeps coming up, I feel the need to reiterate it. There is nothing magical about any number in the VIX or VXO. Even all-time records. They are statistics that snapshot one narrow measure of volatility (30 day normalized volatility of a hypothetical ATM option in the SPX or OEX). In hindsight, we will have some high number that we'll be able to point to and say "ah, that was THE signal". It belies the fact that we have blown thru 28 other big round numbers and 2008 highs and historic highs.

There are literally a jillion other signals that point to extraordinary Fear right now. LIBOR anyone? TED spreads? Actual stock volatility? Incredible soaring volatility in stocks themselves? Every magazine cover and every conversation about the economy and the market? The fact that my most popular link outs are not VIX bikini women, but actual biz sites?

I am buying small into this to the extent my positions allow me to. Yes, I smell the extreme fear and know the odds of a complete crash are still remote. But I imagine the market didn't look all disimilar this time of day during the actual crash in '87. And don't forget if the VXO existed then, it would have gone to 170.

......Adding, now THIS may be a better bottom signal than anything.

Now we’re in trouble. Jim “Mad Money” Cramer has thrown in the towel.

The hyperactive CNBC showman has urged investors to get out of the stock market, and sharpish:

Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now

I don’t care where stocks have been, I care where they’re going, and I don’t want people to get hurt in the market,” Cramer told Curry. “I’m worried about unemployment, I’m worried about purchases that you may need. I can’t have you at risk in the stock market.

You might need to see this to believe it - here’s the link to the video.

Things I Expect to Hear on Bubblevision

2008-10-06T09:09:00.006-04:00

The Bottoming Process

Meltdown

We're Off the Lows

It Could Have Been Worse.

Capitulation

Major VIX signal (Bill says it's opening over 50).

Excellent time to nibble if you're a Long Term Holder.

You Eating the Rest of That?

How much can I get for my hair

I guess the big question is what is the Plunge Protection Team (shown above) is going to do today. Rate Cuts? Expansion of lending facilities Money injections? Public caning of shorts? New "buy some stock, get automatically entered in a "win a trading day with Hank Paulson" contest?

Look, there are truly no answers. If you have a mind to buy stock or short *fat* puts , I'd buy calls instead. Don't worry about the nutty volatility. As we keep noting recently, implied volatility still has not caught up with actual volatility.

.....Adding, don't be tempted by LEAPS and their "cheaper" volatility. That's the spot where you can get a real vega hit down the road.

Average True Brett

2008-10-05T21:58:00.001-04:00

So let's look at volatility another way, the volatility of stocks themselves. It's absolutely soaring, ahead of options themselves n fact. Bill started the ball rolling the other day, and Dr. Brett keeps up the analysis.

The chart above (on Dr. Brett's site, please click thru) shows the S&P 500 cash index (blue line) versus its 20-day average daily true range (ATR). The 20-day ATR is a measure of actual price volatility in the index; not implied volatility as calculated by options and not premium levels built into options pricing. The ATR is the larger of the following:

* The percentage price range between today's high and low prices;
* The percentage price range between today's high price and yesterday's closing price;
* The percentage price range between yesterday's closing price and today's low price.

What this means is that ATR captures, not only the size of the range during the trading day, but also the gaps that occur between yesterday's close and today's trading. It is a measure of past price volatility both within and between trading days.

The chart is showing us that actual price volatility has gone into a parabolic rise and that we recently exceeded the volatility levels from the 2002 bear market period.

What's it all mean? Dr. Brett finds some other times when ATR got this high, and all of which are associated with long term buying opportunities. But here's the catch. If can get stupendously worse before it gets better (like in 1987 when it got super-elevated) or simply linger and fail to resolve (like in summer of 2002; we didn't make significant new lows after that, but we also didn't bounce until March 2003.).

It's also important to note that while elevated stock volatility in and of itself is ultimately bullish, it would be more bullish if in fact options got so nervous they actually trade even more elevated than stocks. And it would also be more bullish if it stopped going up.

Again, my basic strategy it so play very small, lean a little long via put vs. stock trades, and kick myself for any stock I buy.

We Interrupt Our Credit Crisis For Some Lenny

2008-10-04T17:01:00.001-04:00

Great streaks? UCLA won 88 straight basketball games from 1971 to 1974. Eric Gagne converted 84 straight saves from 2002 to 2004. The Pats went 19-0 in 2007, I have the t-shirt to prove it.

Oh wait a sec., scratch that last one.

But can any match up to this from Lenny Dykstra?

I may have a perfect record with 70 wins and zero losses this season, and I may make it look very easy at times. The truth is that I put in a lot of hard work so that it is as easy as possible for my readers. In the end, though, it's worth it. The system works -- in both up and down markets -- and the proof is in the pudding, as they say.

Yes kids, work hard, and only book your winners, and you too can go 70-0.

What's his secret? Mastery of elementary school math.

......my strategy calls for buying deep-in-the-money calls. I usually pay a premium of $1 or less to purchase these options contracts. Sometimes it's a little over a dollar, but it doesn't happen all that often. That's a main part of my system and it's part of my ground rules.

I figure out the basic premium by adding together the strike price of the option I am purchasing plus the amount I am going to pay to purchase each contract. From that total, I subtract the price the stock closed at the previous day. When that calculation is done, I should have a premium of less than $1.

Note to subscibers: Calculations may take 4-6 weeks for delivery.

I hate to break it, but "dollars over intrinsic value" is not an intelligent criteria for options selection. Suppose a stock is trading $80, and the April 70 calls trade $2 over, it would not meet Lenny's criteria. But now let's say the stock splits. BINGO, the $35 calls are now only a buck over. Now we can buy them, even though it's the same exact call it was pre-split.

Not to mention you can also get calls closer to intrinsic at all times by going closer in time, or lower in strike. But of course each of those makes the calls more and more like simply buying stock. Which is of course verboten in Lenny's system.

But who am I to make suggestions, I've made plenty of bad calls this year.

Rumor Follow-Up

2008-10-03T21:35:00.002-04:00

As per Alley Insider, it looks like the SEC is interested in that "Citizen Journalism".

We expected that the false report would lead to an SEC investigation, and, indeed, the SEC has already launched one.

Here's CNN's statement about the Steve Jobs heart attack story that appeared on its iReport site this morning:

iReport.com is an entirely user-generated site where the content is determined by the community. Content that does not comply with Community Guidelines will be removed. After the content in question was uploaded to iReport.com, the community brought it to our attention. Based on our Terms of Use that govern user behavior on iReport.com, the fraudulent content was removed from the site and the user's account was disabled.

Later, the company confirmed Bloomberg that it is talking to the SEC:

The U.S. Securities and Exchange Commission is investigating the origin of a false report on a CNN citizen journalist Web site that Apple Inc. Chief Executive Officer Steve Jobs had a heart attack and was hospitalized. The agency's enforcement unit is trying to determine whether the iReport.com posting was intended to push down the company's stock price. CNN is cooperating with the SEC's probe, network spokeswoman Jennifer Martin said.

And as we know, the SEC takes their job very seriously, so expect action on this by the Fifth of Never.

Wacky Bailout Bonanza

2008-10-03T14:39:00.001-04:00

We're all safe now, phew.

So why isn't the market exploding like the told us? Why is the VIX still pretty gosh darn high?

Certainly possible it was pretty obvious the vote would pass this go around.

And Wacky Bank? Color me not as impressed as the Bubbleheads on the fact WFC don't need no stinkin' backstops to do this deal. Didn't they have the ultimate backstop, Big Hank's Bailout?

Speaking of WB, Someone's bunny made a nice trade yesterday. 29,599 Oct 5 calls traded, greater than the open interest.

Which leads me to the subject of rumors and AAPL and what-not.

That's Wall Street. Rumors happen, always have, always will. This is a new one though as someone exploited the credibility of the same organization that vouches for Wolf Blitzer's beard. CNN apparently has this "innovative" Citizen Journalist feature. I'll let Marketbeat explain (hat tip Abnormal).

Shares of Apple Inc., which opened marginally higher, briefly dipped on a CNN iReport that Apple CEO Steve Jobs had suffered a heart attack and had been rushed to a hospital. It’s hard to overstate the lack of credibility this report has, but that doesn’t stop short-term trading types.

The story was posted by a user named “johntw,” and may have had an impact on the shares, which dropped sharply, to $94.65, before recovering. An Apple spokeswoman said this report was untrue.

Were this to have appeared on a random stock messaging board somewhere, it would likely have had little impact, but CNN has put its weight behind this iReport endeavor, saying on its Web site that “we’ve launched an independent world where you, the iReport.com community, tell the stories we’re not used to seeing. And the most compelling, important, and urgent ones may get seen on CNN.” They do say, however, that “the views and content on this site are solely those of the iReport.com contributors. CNN makes no guarantees about the content or the coverage on iReport.com!”

If WB rumors were indeed out there (and that call volume suggests they were), that's not actually a rumor, that's priveledged information, and passing it out there is certainly a serious crime.

Rumor Mongering

2008-10-03T09:45:00.005-04:00

Unconfirmed Steve Jobs rumors flitting around, so keeping an eye on AAPL here. Volatility lifting, but not enormously so. Volume is pretty high though for this time of day.

....OK, it's on the internets now.

"Citizen journalism" gets its first real test. A story of major consequence that, thus far, no one else has reported.

CNN's iReport:

Steve Jobs was rushed to the ER just a few hours ago after suffering a major heart attack. I have an insider who tells me that paramedics were called after Steve claimed to be suffering from severe chest pains and shortness of breath. My source has opted to remain anonymous, but he is quite reliable. I haven't seen anything about this anywhere else yet, and as of right now, I have no further information, so I thought this would be a good place to start. If anyone else has more information, please share it.

We're making calls, but as yet we have no idea whether it's true. Nor does anyone on Twitter, which is buzzing about it.

Volatility has officially picked up now, up 10 points or so in the Octs.

.....and now it's denied.

"Citizen journalism" apparently just failed its its first significant test. A CNN iReport poster reported this morning that Steve Jobs had been rushed to the ER after a severe heart attack. Fortunately, it appears the story was false. An Apple spokeswoman categorically denies the report

...And volatility back to whence it came. Or something like. Octs in the 90's again, which is new normal for AAPL.

The Other Side of the Coin

2008-10-03T06:30:00.003-04:00

Mark from Options For Rookies (which incidentally is a great site and not just for Rookies, I've done this 20 years and I learn over there) chimes in on our discussion from yesterday regarding volatility trading.

I'll take the other side of the discussion.

Volatility does matter, and it's very important.

Your stance (and Don's) obviously relates to people who buy options and thus, are looking for the underlying asset to make a large enough move to overcome the cost of the options. Ok. That's a reasonable way to look at the situation. But my feeling is that buying options is not the path to consistent profits because the vast majority cannot correctly predict market direction.

If you are referring to delta neutral trading by buying options against a stock position, that's a different issue. It does not sound to me as if that is the situation described.

But what about us premium sellers? I make my money the same way that Don states - by guessing the magnitude of the move made by the underlying during the lifetime of the options. I limit risk by selling spreads and never naked options.

My profits are limited. His are not. But, in return, I can win when the underlying is very volatile - if some of the moves are higher and some are lower. I don't win every time. But, when I have a loser, I take my loss and move on. Most of my trades are winners and premium selling - with protection - does work over the longer term. Can the same be said for premium buying? I have no idea.

Obviously these are volatile times and option premium must be higher than it was during recent times. I like owning positions with short vega (owning iron condors is one example) - when IV is high.

BTW, I did notice that the straddles you spoke of buying did work well. But now VIX has doubled and it's a new ball game.

First off, Mark's right too, which sounds odd considering to some extent he's disagreeing. There are many ways to skin this cat. Don and I were refering to what it takes to "win" on a long volatility position. And Don's point, which I agreed with, was that you need to focus more on the price action than the volatility.

But yes, volatility does *matter*. And even though I mostly talk about long volatility (or if you prefer, long gamma) plays, Mark is also correct that selling options premium works better over time. And in a disciplined hand, probably works better. The wind is at your back at most times. Time is your friend, as you earn daily decay and can make some wrong decisions and still ultimately win. With long gamma, the onus is on you to make correct decisions, recognize trend days and range days, be patient or aggressive, et. al.

All things being equal, I would rather net-sell options than net-buy them. But all things are not equal now, the market is insane. Volatility keeps lifting, meaning that instead of collecting decay on shorts, your paying in the form of higher premiums. That won't last forever, in fact for all I know this is right about the top. Which is why ultimately owning options is going to be about the price move, because it's rough to bank on any increased options premiums with volatility here.

Now the key to Mark's approach when selling options is discipline, as he states (or spreads, but that's another subject). You HAVE to be willing to make some bad trades, sell bottoms and then buy back higher, stuff like that. It's a high wire act, but if you can handle it, it can and does work. Just tread unbelievably carefully if you try it now.

Food For Thought

2008-10-02T14:49:00.000-04:00

So what's hot right now? Giada. My wife stumbled on her local book signing and reports back it had a line of about 20,000 people. The higher pic. was the best she could do when I requested some visual evidence that Giata was indeed here. OK, actually I first requested that she save a place on line for me and I got rebuffed, lol.

So believe it or not, the financials are up 15% off the bottom on July 15th, as defined by IYF.

I know no one actually trades IYF, but that is what SKF and UYG are based off.

So how have those Double Bad Boys done since then?

SKF is off almost exactly 50%, while UYG is up about 23%. Not exactly the 30% moves one might expect. Then again one shouldn't expect that. As we've noted from time to time, the math in these will send them all towards zero eventually. Remember they only strive to match double the DAILY move in IYF, up or down. Any time IYF revisits a price from a different day, both UYG and SKF will be worth less than they were the last time IYF was there.

It's fine to spec. on these for day or swing trades, just don't hold for too long.

Phish Back

2008-10-02T10:40:00.000-04:00

Don Fishback adds this comment on below.

I'll toss a grenade into the debate. VOLATILITY IS THE WRONG THING TO LOOK AT! Not enough time to go into details here. But the bottom line is that you make money in options by guessing the magnitude of a stock's move over a fixed period of time. In the current hyper-choppy environment a person could buy a straddle and still lose money, even though volatility is rising. Remember, you get paid in dollars, not volatility points. And dollars are won and lost when the stock moves beyond your strategy's breakeven point.

Focus on movement, not volatility!

Don is absolutely correct. I use IV and HV as proxy's for whether options ownerships works or not in a given timeframe. In actual trading, it's truly about the specifics.

Let's say you buy a near month straddle right here and right now. Whether you make money or not depends more on *how* the stock moves, and how you handle it than anything else. If it goes up small each day and you do nothing in the stock until expiration, volatility both perceived and measured will be very low. But yet you'll likely win on the position as the intrinsic value of the position likely went up enough. Conversely, you could have a situation where it fluctuates in a large range each day but closes at strike on expiration. You got your high volatility, but if you did nothing in the stock the whole time, you got smoked.

So as Don says, your ultimate P&L on an options play is denominated in dollars, not volatility points.

And in this environment, it's a bit tricky. If you own options and have ammo to flip stock, you have to thread the needle between being too aggressive too early in a move vs. making sure to avoid the later situation where you miss the swings that you need to catch to pay for the trade.

Every situation is different, but the best meta thought is to trade smaller and wider and blend both approaches. Trade some stock into moves, but leave some powder dry.

......And yes, Phish is indeed back.

Get your Hacky Sack and Frisbee out of the closet, fill the tank of your Volkswagen van and put your senior thesis aside: Phish is reuniting. The Vermont jam band, made up of Trey Anastasio, Mike Gordon, Page McConnell and Jon Fishman, will play its first shows in more than four years in 2009 in Hampton, Va., according to the band’s Web site, phish.com. The hirsute quartet’s three-night stand at the Hampton Coliseum, scheduled for March 6-8, will be its first gigs since a farewell festival in Coventry, Vt., on Aug. 14 and 15, 2004. (Above, the group at a Coventry show.) Tickets for Phish’s Hampton Coliseum shows go on sale to the public Oct. 18, and more reunion dates are expected to be announced shortly.