Daily Options Report

NetFlicked

2009-07-13T14:09:00.003-04:00

Looks like someone's expecting Green Shoots in the DVD rental space. This on NFLX, via optionMONSTER (free sub. required).

Stock and options trading turned bullish on Netflix today as investors positioned for the movie-rental company to rally this week.

optionMONSTER's Heat Seeker tracking system detected heavy activity in the July 42.50 calls, with volume surging to 6,428 against existing open interest of 1,758 contracts. The calls were bid up from an opening print of $0.19 to a high of $0.94 at the same time the shares rose on heavy volume.

Now it's not that unusual to see call activity pick up on a nice rally. But volume almost 4x open interest in a near ATM that expires on Friday? We'll see.

SPY Games

2009-07-13T10:33:00.005-04:00

If you're sitting here watching the screens each day you'd likely feel as if market volatility has picked up the past few weeks. I certainly do.

Except it's not.

The chart above shows 10 day HV for SPY over the past half year, and it has actually started dribbling again towards 15, which is actually as low as that measure has been in the past year.

So what gives?

Well, these measures look at close to close moves and don't incorporate the intra-day chop. So perhaps the chop has picked up recently? Or perhaps I'm just feeling a volatility uptick that just wasn't there?

But regardless of the reason, numbers don't lie, and we still have the unresolved issue of options volatility overpriced vs. stock volatility.

Other VIX Gappage

2009-07-12T23:22:00.001-04:00

Another VIX "gap" I have seen lately notes the big diff. between moving averages. Like the 200 day and 50 day shown here for example.

Now first of all, isn't the "why" of this one incredibly obvious? The 200 day still includes data from last Fall's Mad Options Rush. The 50 day does not. But at this point, 80 VIX is ancient history (although Bill suggests that we reverse split the VIX to get it back there).

As to implications of the gap, not sure I have one. We know the VIX tends to mean revert, so one would think the tendency is to move towards the longer dated number. But this is such a unique circumstance, not sure it's anything beyond a remnant quirk from the environment we lived thru.

In terms of what to actually look at, I'm growing more and more fond of VXX. Take Friday for example. It spent most of the afternoon modestly green with the VIX itself modestly red. Why? Because again, actual SPX options bids evaporate ahead of weekend decay. The bids return in volatility terms Monday.

I believe when we have a few years of data under our belts in VXX, we'll see some inherently obvious relationships between the two. Again, all things equal, VXX will likely move an average of 40-50% of the VIX move, which makes it the best vehicle imho to speculate on volatility. But that average move will be extremely day of week dependent as VXX will underperform that expectation on the typical Monday and overperform on the typical Friday.

Will this knowledge make you money? Not really in the sense you can't arb them since you can't trade an actual VIX. But knowing that will help you more intelligently analyze VIX tweaks. And right here, right now, all we're seeing is tweaks that have little broader meaning.

Seemed Like a Great Idea Actually

2009-07-11T13:33:00.003-04:00

The artist formerly known as Ochocinco (wait, I'm being told he's currently known as Ochocinco) had a great idea to take the "inside the huddle" experience to a new level: In game twitter updates.

But doesn't sound like it's happening so fast. This, via ProFootballTalk.

Bengals receiver Chad Ochocinco recently expressed an intention to fully embrace the new technology known as Twitter, by posting updates to his page during regular-season games.
After catching wind of his vow, we asked the league whether in-game tweeting would be permitted. Initially, we were told that the league would look into it.

This morning, NFL spokesman Greg Aiello advised us of the league's position.

"We already have a rule that prohibits the use of cell phones or other handheld devices in the bench area during games," Aiello told us via e-mail.

Sounds like a joke of an issue, but it's apparently the next frontier for each major sport. There's no question Twitter is now THE way for celebs to interact with us mere mortals. And some sports really have some upside potential in this. Take tennis.. One of the criticisms of the sport is that the players tend towards precious little tending to the fan base.

So what about in-match tweeting? Justin Gimelstob came out of retirement to do just that the other day.

Well, they can't actually tweet themselves (no electronic devices allowed on the court), but apparently he relayed messages on to someone courtside, who sent them out for all to see. I believe Jim Courrier did something similar not that long ago.

Now no one's expecting the Federer's and Roddick's to follow suit. But if some critical mass plays along, could be an entertaining add on. Sure beats sideline reporting.

Housing Party?

2009-07-10T14:16:00.004-04:00

Looks like somebody been reading Cramer's Housing Bottom Call (Version 7.0).

Some of the homebuilders are seeing bullish flow ahead of housing starts data due out next week–on options expiration Friday, to make things interesting. Hovnanian (HOV) is down a penny and the focus is on Jan (2010) calls at the 2.5 strike, with 2050 traded (10X expected) and almost all of the trades hitting at the offer. Beazer Homes (BZH) is up 7 cents to $1.71 and 2300 calls traded, or about 11X the normal. Like HOV, Jan 2.5 calls are the most actives, with buyers dominating the flow. Meanwhile, Standard Pacific (SPF) is down 7 cents to $1.89 and 2000 January 2. 5 calls traded, with about two third hitting ask-side. The volume in these three builders might be by one player, taking positions in out of the money calls and hoping that a big gain in at least one will produce a profit for the entire basket.

.....If you are interested in more info like this, check out WhatsTrading.com

I would add that I never follow the notion of call buying when the entire stock is a call. Like HOV. Then again, I really don't trade single digit names much in any form, so I'm not a good reference on this.

And see, managed to go an entire day so far with Options Only content! Page hits will likely implode however from yesterday's Lennypalooza, lmao.

Forget Those VIX Gaps

2009-07-10T10:37:00.001-04:00

Have seen some recent articles and/or tweets noting gaps in the VIX (sounds like a straw man since I don't have one to link to, but really, have seen it go by often).

Let me nip it in the bud first, it's a silly concept. There's a reason stocks/futures/commodities et. al. have some reasonable probability of seeing gaps filled. It's simple supply and demand. There's a vacuum there.

VIX however is a STATISTIC. It's a calculation based on options markets in the SPX. If it gaps, one of few things probably happened. Maybe the market itself gapped, maybe there's a new uncertainty that arose overnight, or maybe it's simply Monday.

If the market itself gapped, the VIX will likely follow suit if for no other reason than SPX options have a normal skew to them. OTM puts trade at higher volatility than ATM's, so the mere fact that yesterday's OTM puts are now today's ATM's and have a greater weight in the calculation will in and of itself lift the VIX a smidge. Throw in the likely uptick in uncertainty and you see a gap. Does it tell you anything you don't already know from the futures/ETF's? No. Will it likely resolve on it's own as the market settles in? Yes.

And Monday's.

Consider a Friday like....well, today. Probably a snoozer and probably scant fear of a weekend event. Traders will lower options bids ahead of the weekend decay, which will give the impressition of lower volatility than it would be if today was not Friday. If we open unch. on Monday, those options will probably open in actual dollar amounts not signifcantly lower than today;s close. But that will translate into a lift in SPX volatility as the calendar his ticked 3 days closer to expiration. So you'll see a gap. One I would suggest carries even less meaning than the first one. Again, it will resolve on it's own.

Bottom line is any observation of VIX gaps and gap fills containing any predictive value is likely a case of mistaking coincidence with causality.

Some Words From the Masters

2009-07-10T06:17:00.000-04:00

Some great points on volatility that everyone needs to internalize, via Bernie Schaeffer's July newsletter. Keep in mind it went out to subs on June 25th, before the recent modest upswing in volatility.

You can't refer to the cheapness or the richness of the Chicago Board Options Exchange Market Volatility Index (VIX) outside the context of historical volatility. The VIX is, first and foremost, a measure of the anticipated volatility of the near-term options on the S&P 500 Index, and the most important clue over the years to the current level of the VIX has been the short-term (10-day or 20-day) historical volatility of the S&P (the VIX calculation doesn't exactly equate to a historical volatility but it is close enough). So the use of the VIX level as a "fear gauge" must always be assessed net of the major influence of historical volatility on the VIX. While it is tempting after today's VIX implosion to less than half its peak levels in January to suggest that investor fear has dissipated to dangerously low levels, this assessment is seriously complicated by the fact that the VIX is not "low" in the context of the recent volatility of the S&P.

Yup. It's a point we here tried to always hammer home as well. Implied volatility attempts to divine the volatility of the underlying over the stated time frame (commonly the next 30 calendar days). There are always expectations of news events, earnings, et. al., but the best "prediction" tool is simply the volatility of the underlying over the past 2-4 weeks. What else would you base your markets on than what you "feel" right now? And as we know, realized volatilities utterly caved early in the cycle and those "cheap" options actually overbid. It's not uncommon to see that, in fact McMillan showed an average 4 pt overbid of IV relative to HV.

And Bernie goes on with another favorite topic, the seasonality of volatility.

Equity volatility is seasonal. According to a recent study by Larry McMillan: "There is also a seasonality to VIX trading patterns. ... You can see several patterns (over the past 20 years). Early in the year, there is typically a small peak in VIX in January, followed by a slightly higher one in March. Then it goes into a decline during the spring and into mid-summer. It probably comes as a surprise to no one that the low in volatility occurs around July 1st of each year. What might come as a surprise though is that volatility typically rises quite a bit during July and August. Then it really gets going in the fall -- In September and October, when the stock market typically has major declines. It peaks in October. After that, volatility becomes surprisingly docile for the rest of year, until by Christmas it is almost back at the July lows. Not every year follows the pattern exactly, but most are a reasonable approximation. 2008 followed quite closely, and this year the pattern is typical as well." So is it time to assume that the VIX will rally according to these past seasonal patterns? Perhaps, but I'd also suggest the possibility, based in part on the ongoing compression of historical volatility, that the VIX might continue to decline to surprisingly low levels – perhaps as low as 20 - before it bottoms.

Well, first of, feel great that two of the absolute masters in this biz agree with some data I threw in my book. I came to similar conclusions re the early July cycle trough.

Which is also why it drives me nuts seeing "analysis" on that cheap VIX without putting it in it's proper context. And that analysis took the form of assertive directional calls in both directions.On one hand "smart" options money was right lowering bids as they "knew" the bull would continue this summer. On the other hand, 26 VIX was a red flag of complacency and bearish.

In truth, neither interpretation was correct. It was a prediction that the always slow start of summer was upon us, plain and simple.

Lenny Speaks

2009-07-09T20:40:00.002-04:00

Haven't had a chance to view this myself yet, but apparently it's Jane Wells sitdown at Chez Lenny. HT anonymous commenter in the post below.

Also, the letter is officially legit as Todd sent me this link to a Philly.com article that got Lenny's confirmation.

A Word From Our Lenny

2009-07-09T14:03:00.003-04:00

I can't verify that this letter from Lenny to his subs is authentic. Trader08 found it online here and linked it over in a comment. But it's clearly in the style of whoever currently ghostwrites Lenny's newsletters. And it's both sad and hysterical enough to seem real,

I mean, who could make up comparisons to Mark Twain and Walt Disney. Not to mention Abe Lincoln and Thomas Jefferson.

By Lenny Dykstra

July 9, 2009

By now, many of you have read the news and begun to ask me about it. Since I feel you are like family to me, I will therefore hold nothing back. . . .

I have always prided myself on transparency - both in my personal life and in business. Although there will always be people who choose to spin information negatively, I do hope and believe that most of you will not be swayed solely by muckraking and sensationalized accounts. For those who are interested in the actual facts, I am happy to share.

Incidentally, I expect to be taping an interview for CNBC later this morning and welcome you to tune in for more.

The facts:

1. On July 7, 2009, in a move necessary to shield my property from a host of meritless claims, I filed a petition for Chapter 11 protection.

2. The action will provide me time to reorganize my estate and allow me some breathing room to challenge a multitude of meritless claims that have been made against me.

3. This will further allow me to pursue my lawful claims against a number of parties who have attempted to steal my property, breached material agreements with me or otherwise acted in bad faith or with the intention of causing me to suffer financial harm.

4. I expect to emerge from Chapter 11 protection and continue to achieve my business goals, free from the attacks of those who have attempted to extort me.

5. Aside from the re-launch of my investment newsletter, I will soon be able to resume publication of project which is very close to my heart - The Players Club: A magazine built "For the Players, by the Players."

I assure you that my personal financial maneuvers will in no way adversely affect the quality or continuance of this service. On the contrary, we are now moving full steam ahead on some major enhancements and updates. Within a week or so, you will already start to see the improvements!

You, my loyal subscribers, have stood behind me and realize that my record speaks for itself (111 and 0 with more victories on the way!).

Perhaps if I had invested in my own picks (I am barred from doing so legally), instead of entering into business with parties who sought to destroy me, things might be different for me today.

Regardless of my personal woes - the Chapter 11, the divorce proceedings which my wife sadly seems intent upon pursuing (emotionally, this is by far the most painful of my troubles) and issues regarding my home and the mortgage my lawyers consider to be fraudulent; I am nonetheless committed to serving you and helping YOU to make money.

Bottom line is that this is not about me, it's about YOU! I still stand behind you 100%.

For those who judge me harshly, they might consider if they have fairly examined the evidence before throwing the first stone. . . .

I know that those of you who are honest with yourself realize that no matter how successful we are at any particular point in our lives; it can all come crashing down in a heartbeat.

Of course we all fall down at times (clearly, me included!). Nonetheless, through God's grace and the mercy of the US Bankruptcy Code, thankfully, this is not a life sentence.

Just like when we analyze a solid "though as nails" stock and choose to buy in when it is down, I hope that you will similarly stand behind this "Nails"- your most humbled servant.

My investment strategy is designed to counter against the inevitable ups and downs in the market and leverage them for gain. Even stock in the greatest of companies can tumble. However, when this happens, the ride back to the top will be that much more rewarding. . . .

Although I am saddened and a bit embarrassed that I had no choice but to resort to this action, at least I am in good company. . . .

Two of our greatest presidents, Thomas Jefferson (filed several times) and Abraham Lincoln, were able to restructure their lives through bankruptcy and went on to do great things such as helping to establish the University of Virginia and abolishing slavery.

Ulysses S. Grant went bankrupt after leaving office when a partner in an investment-banking venture swindled him. (I can certainly identify with this one.)

William McKinley filed for protection while serving as Ohio's governor in 1893. He was in debt to the tune of $130,000 (an insurmountable sum in those days!) before some friends eventually helped to bail him out. Three years later, he occupied a desk in the Oval Office.

Other prominent men who made the list and later went on to huge successes:

- Mark Twain
- Donald Trump (2 timer)
- Henry Ford
- William Crapo Durant (founder of GM)
- Walt Disney (up to bat several times)
- Burt Reynolds
- H.J. Heinz
- Milton Hershey
- P.T. Barnum
- Lenny K. Dykstra (coming soon!)

When I look back and appreciate what incredible contributions these men made to our country and our freedom, I wonder if the quick-to-judge media outlets of today would have been wise enough to allow them the opportunity to rise again. . . .

Feel free to contact me any time, teammates. I'm here in the dugout watching out for you: Nails@NailsInvestments.com. As always, I welcome your questions and comments.

Remember: Life's a Journey, Enjoy the ride.

...Because That's How Jeff Goldblum Would Have Wanted You To Use This Info

2009-07-09T09:59:00.000-04:00

Just a word about trades I post from What'sTrading or Schaeffer's or OptionMONSTER or Options News Network, or someone pings me with, or whatever.

In all cases, it's just to shed light on something that traded somewhere. To me they provide more value than simple looks at volume. I'm not a big fan of simple analysis that looks at put or call volume or whatever and attempt to interpret it without any knowledge of the players or the actual trade. So the goal here is to at least enlighten as to what actual went on.

But even then, it's not a recommendation to go follow someone into a trade. Or take the other side. It's simply to enlighten a smidge. Take these XRT butterflies of the last couple days. A simple volume look would say "wow, look at all those puts trading". But a few minutes of research later, we see the quantity of put contracts wildly oversates the bearish bet going on. It's still a bearish bet however. So now you know that, but whether that actually means anything to you is another question.

Personally, info like that would never inspire me to go either follow or oppose the play. But it does get me to look at the name as the order flow piqued my interest. Sometimes that will lead to a trading idea, other times not.

So just wanted to put this info in context. It's there to make of it what you want, not to suggest a specific trade.

ICE Creamed

2009-07-09T06:03:00.001-04:00

Some move in ICE this week. Kind of encapsulated the best, most mediocre, and worst of my trading operation.

The bad? Well, I have a handful of naked put shorts that I generally roll each cycle. The names change, but basically, just look for generally uptrending names, and then short some puts into mini dips. I defend them with either some stops in the stock, or longs in the inverse ETF's.

ICE hit my radar a few month's ago, and it worked pretty peacefully until about........well, yesterday. My position was not big and this name had not threatened anything on the downside for a while, so didn't bother with a stop in here.

Oops.

So I ended up covering by turning the put short into a butterfly, going long the 100 strike. That was the mediocre. Stock kept going lower, so then had my one good idea. Just converted it to long downside gamma by shorting more 105 puts so that I was now short the 105-100 put spread 1:1, and then bought an equal number of 95 puts and a little stock.

That part worked out well yesterday as the stock imploded. The only thing holding me back was....well, me. I got short and shorter thru 95 and was patient all the way until....the 91's. Which sounded great at the time, not knowing it would go to the 84's. By which time I bought more stock and kept the long gamma game going by purchasing some July 85 puts.

Roll it all up and a lot of trouble to pretty much break even, although even sounds good compared to the initial ugliness of my put short. I'm now just long some gamma. For the moment, will probably sell some "wings" (OTM puts and calls) and call it a day.

Designer Fly On Sale

2009-07-08T14:36:00.000-04:00

The interest in retail continues to extend beyond Nicki Hilton at the mall. This today, courtesy of WhatsTrading.com

SPDR Retail Trust (XRT) puts are active for a second day. With shares up a nickel to $26.12, one player sold 5000 Sep 20 - 22 put spreads at 20 cents to buy 2500 Sep 19 puts for 20 cents. Looks like this three legged strategy traded more than once. Meanwhile, the July 26 - 24 - 22 put butterfly spread discussed yesterday traded another 25000X. Perhaps a closing the spread already? ISEE says, No, opening buyers on half the trades. So, the strategist is possibly adding to yesterday’s position, which would bring the total position to 50K (100K on the body).

Now the Seps could mean anything, But it's hard to imagine the July's are anything but what Fred says here and OptionMONSTER noted earlier. Just a straight play on some downside. And XRT keeps nudging lower, now $26.25 as I type, so the buyer getting some nice play out of it.

Who'd Have Seen This One Coming?

2009-07-08T12:10:00.001-04:00

Can you go 110-0 picking winners with Deep Calls and still have to file Chapter 11? If you're Lenny Dykstra, apparently yes.

The one-time Mets hero, facing divorce, foreclosure on his mansion and a multitude of lawsuits, filed for bankruptcy protection in California, his attorney said Wednesday.
.....the 46-year-old Dykstra, a two-time World Series champ with the Mets and the Philadelphia Phillies, currently faces upward of 20 lawsuits from creditors coast to coast - most related to The Players Club, a problem-plagued magazine he launched last year.
Among those claiming they were stiffed by the player known as Nails are a pair of private jet rental companies, his brother, a Las Vegas printing business, a former lawyer and several former employees. Dykstra's wife is also suing him for divorce, and his $18 million California mansion is in foreclosure.
"In a move that will shield his property from a host of meritless claims, Mr. Lenny Dykstra filed a petition for Chapter 11 protection," his California attorney, Walter Hackett, said in a statement.
"This action will provide Mr. Dykstra time to reorganize his estate (and) successfully challenge the multitude of meritless claims that have been made against him."
Hackett, in his statement, described the pending lawsuits as "parties who have attempted to steal his property, breached material agreements with him or otherwise acted in bad faith."

In no way, shape or form should you consider this a bad sign. It's simply what everyone would do when 20 independent parties conspire to meritlessly ask for money you owe them.

In a related story, TMZ would like an apology.

Somebody Forgot About the Green Shoots

2009-07-08T10:08:00.001-04:00

Got some bearish bets going on yesterday in XRT, via OptionMONSTER.

The first set of big trades is a bearish "butterfly spread" in July. In one trade, 25,000 of the July 22 puts were bought for $0.05, 50,000 of the July 24 puts were sold for $0.10, and 25,000 of the July 26 puts were bought for $0.50. (See optionMONSTER's Education section).

This butterfly trade cost $0.35, which is the maximum risk. The trade will take a maximum profit of $1.65 if XRT is right at $24 at July expiration.

Another set of large related trades followed roughly an hour later, as another 20,000 of those July 24 puts traded for $0.13, and 10,000 of the July 26 puts for $0.61. It appears that in this case that the July 24 puts were bought and the July 26 puts sold. This may well have been a closing of some of that earlier position, with a profit of $0.14--not bad for an hour's wait.

Pretty interesting chart juncture too as we hover near the lows since the big push higher ended in early May.

Now keep in mind that butterflies are low risk/low reward sorts of plays. Farther out in time, they're marginally even directional plays. But July's with under 2 weeks to go, you're pretty much betting straight on a decline here with only the relatively small debit at risk. So it feels like a pretty intelligent shot on a quick dip.

More UNG

2009-07-08T09:56:00.000-04:00

It's a relatively new product, so not a whole lot of history to go on.

But it is worth noting that options open interest has veritably exploded over the past month or two. In fact both call and put open interest has quadrupled since mid May, while UNG itself has tanked.

Au Natural Gassed

2009-07-08T06:58:00.001-04:00

Brief halt in UNG yesterday as the creators of the fund had to run over to Costco to create more shares. Or something like that.

On July 6, 2009, the United States Natural Gas Fund, LP ("UNG") announced in a current report on Form 8-K that only 32,100,000 of its units registered with the Securities and Exchange Commission (the "SEC") were available for purchase by UNG's Authorized Purchasers. As stated in its current prospectus, UNG creates and redeems units in blocks of 100,000 units called "Creation Baskets" and "Redemption Baskets," respectively. Only Authorized Purchasers may purchase or redeem Creation Baskets or Redemption Baskets.
As of July 7, 2009, UNG has issued all of the remaining outstanding units to its Authorized Purchasers. As a result of these issuances, UNG will temporarily suspend the issuance of additional Creation Baskets until the SEC declares effective the registration statement on Form S-3 (333-159772) which was initially filed on June 5, 2009 and registers an additional 1,000,000,000 units. This registration statement is currently subject to review and comment by the SEC, the Financial Regulatory Industry Association ("FINRA") and the National Futures Association ("NFA").

The suspension of the issuance of Creation Baskets has no effect on the ability of Authorized Purchasers to redeem baskets of units.

We posted on UNG back on May 13th, basically linking to a linked post from Abnormal Returns, which contained this nugget from Olivier Jakob at Petromatrix.

Early in the year, the super contango was for a big part the result of the extravagance of the United States Oil Fund ETF (USO) but their positions have been trimmed closer to the Nymex accountability level and they are now less a factor in the crude oil spread.

The managers of the USO are also running the United States Natural Gas Fund (UNG) and the recent position increases in that ETF are as troubling as what they did on WTI in the first two months of the year. Positions in the UNG have grown 4.5 times since the end of March and the positions held in the UNG could represent as much as 80% of the June Nymex NatGas Open Interest. The four day roll of the ETF starts tomorrow (today) and to avoid the risk of being hanged by the UNG we would already move any NatGas length from June to July. The positions in the UNG are more than 7 times what would be the Nymex accountability limit, the problem is however that they holding the majority of the position in “swaps” rather than Futures.

We do not know the exact nature of those “swaps” and whether they are a swap on the Futures or a monthly pricing swap. The latter would have less of rolling impact than the former but we will assume the former for risk assessment, especially since we sincerely doubt that whoever sold those swaps to the UNG is a charitable organization.

So it just sounds like they use swap products to get around futures positions limits. But clearly someone somewhere in the chain has to hedge with futures in size that dwarfs the actual market.

And remember, this is data from 2 month's ago, it could be twice as large now, who knows. But apparently word got around that something was messed up with UNG as this talk has made the rounds lately.

I guess the question is, if they limit issuance here for good, is that bullish on a reduced supply basis? The one thing for sure is nervousness as volatility almost 70 now pretty close to the 52 week highs.

Ur So Reverse Splitting

2009-07-07T14:34:00.000-04:00

In a move that will send tremors throughout all of Cramerica, we have some exciting developments in FAS and FAZ land, via Index Universe.

Direxion will execute a reverse split of its leveraged and inverse financial ETFs on July 9, after the two funds’ share prices fell so much that they became overly costly for investors to trade.

The Direxion Daily Financial Bull 3X Shares (NYSEArca: FAS) will execute a 1-for-5 reverse split, meaning shareholders will receive one share of the new FAS for every five shares they own today. For the Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ), the ratio will be 1-for-10.

Investors won’t lose any money on the deal of course, because each share will become more valuable. Based on yesterday’s closing prices, the reverse splits will raise the per-share cost of FAZ from $5.12/share to $51.20/share and boost the price of FAS from $8.34/share to $41.70/share.

The reason for the reverse split is simple: With the share price so low, FAZ and FAS had become uneconomic to trade.

Now in theory, this is as meaningful as all the tech stock splits in 1999. In practice though no matter how silly this will sound, I just don't like single digits names, so this will get me to look at these pups again.

The big difference between these pups and Juniper or JDSU though is that they are pure derivatives, simple trading vehicles. So truthfully it always makes sense to price them at levels where people like to trade them. Which I suspect is anywhere from like 30 to 70.

Obviously this will become a recurring story, the need to reverse split 3x and -3x ETF's. Over time they all drift. It only took FAS and FAZ 8 month's to get to this point. Of course the explosion in financial stock volatility had plenty to do with the speed they got here (ERY and ERX still trade in the mid 20's for example, as do TZA and TNA) so it's highly likely it takes more than 8 month's for the next go around.

NetEase Me In

2009-07-07T11:54:00.003-04:00

Some action in one of the old high-flyers.

NetEase (NTES) is up 84 cents to $34.75 after Citigroup raised its target from $35 to $50! Raised estimates as well. NTES is up and 8,600 calls traded, compared to about 3000 puts. Sep 40 calls are the most actives. Today’s 6,300 contracts includes a block of 6,185 for $1.25 on NYSE (bid-ask was $1.15 to $1.30 at the time). Implied vols little changed at 53 percent.

.....If you are interested in more info like this, check out WhatsTrading.com

And yes, Lenny is truly everywhere. I was telling my son about the famous Mets-Braves July 4th game of 1985, the one that went 19 innings and ended at 4AM, followed by the fireworks show for all 10 remaining fans. Lenny played, and was apparently upset he'd likely sleep thru the market open the next day.

For the bottom of the eighteenth, the Braves had to send pitcher Rick Camp to the plate because they were out of both pinch hitters and pitchers. Tom Gorman quickly got ahead in the count, 0-2 to the Braves pitcher, who was later revealed to own the lowest batting average in the league, .036. Nevertheless, Mr. Gorman threw a weary, hanging forkball to Mr. Camp who swung with all his might and sent the ball over the outfield fence! Danny Heep, the Mets left fielder covered his head with his hands and the center fielder Len Dykstra threw his glove high into the air.

Battle of the Network Fear Indices

2009-07-07T10:16:00.001-04:00

As we well know, VIX is not the only measure of Fear in town. CSFB has one too, based on the skew of the SPX options board. Can we glean anything when the two tell different stories? Jason Goepfert suggests yes.

So CSFB created a new index that compares the premiums in calls versus puts, digging a layer deeper than the VIX does. When the index was first unveiled, its movements didn't make a lot of sense when compared to the VIX, but recently an article on Bloomberg highlighted one potential use for it - identifying times when the VIX is masking underlying sentiment.

We're seeing that now:

.......There have been four other times during a bear market when we've seen a divergence like this, when the VIX is at a multi-month low, but the CSFB Fear Index is at a multi-month high. Over the next three months following those four instances, the S&P averaged -9.2%, and with a risk that averaged more than 6 times greater than the average reward.

Now here's the problem. This CSFB Index does not behave as one would expect. So much so that I misread it when I first saw it written up in Barron's. As Jason noted back in April, this "Fear" Index actually peaked in March/April 2007 when the VIX was very low, and troughed in October 2008 when the VIX spiked. I almost think this pup works in reverse and no one realizes it as by any reasonable subjective judgement, Fear exploded last Fall.

In other words, I don't believe the CSFB Index shows divergence now, I believe it just does not measure Fear the way we think it does.

Some Sonar

2009-07-07T06:09:00.000-04:00

Interesting day in the VIX yesterday as it popped as much as 7% or so before settling up 4%. VXX underperformed as we noted, and closed down 1.25%. Which translates into a blah day in the VIX futures, which held pretty steady.

But that didn't stop the VIX call speculators. Again. As Andrew notes here, a buyer paid $1.17 for 20,000 Sep 47 calls.

Now perhaps I should not refer to them as speculators, since I have no idea the thought process behind the trades. Everyone assumes it's someone either taking a shot at a crash or slapping on a rather large portfolio hedge. Who knows though, maybe some big variance risk out there and it's merely a trading shop of some sort locking something in.

What I do know is this. For anyone outside a hedge fund or derivatives desk/floor operation, the best "insurance" is the simplest: Index or simple ETF puts. VIX is a trendy product, but keep in mind a lot has to happen to get these calls truly in play. Remember that VIX futures will lag a VIX move higher (they're almost parity now already, like 2 days into a rally). And the further out in time, the bigger the lag.

For argument's sake, let's say Sep. VIX needs to get to the upper 30's to really start moving the calls. You may need to see the actual VIX get to the mid or high 40's to do that. Which is very far away, I mean you're talking a 50% lift. Obviously anything can happen, but just saying it requires a big event or big sustained market move to see that any time soon.

Repros Man

2009-07-06T13:56:00.003-04:00

Here's some interesting options action for you, via Schaeffer's.

Traders have flocked during the past week to buy call options on Repros Therapeutics Inc. (RPRX). During the past five days, option players on the International Securities Exchange (ISE) have bought to open 8,689 calls on RPRX, compared to just 10 puts. In other words, speculative investors have purchased nearly 869 times more bullish bets than bearish.

In fact, traders on this exchange have rarely shown a greater preference for calls over puts when it comes to RPRX. The stock boasts a seriously skewed 10-day ISE call/put volume ratio of 635.36, which ranks just 1.25 percentage points from a 52-week high.
Likewise, the equity's Schaeffer's put/call open interest ratio (SOIR) has backpedaled from its June 22 near-term peak of 1.24 to its current perch at 0.71. This downtrend reveals that traders are adopting a more upbeat attitude toward RPRX

The recent skew toward calls is rather unexpected, since the shares of RPRX fell off a proverbial cliff last Wednesday. The company said it would discontinue clinical studies of its 50 mg dose of Proellex after a number of users experienced adverse effects, with no appreciable increase in efficacy as compared to a lower dose.

Now this is a perfect example of when options order flow can tell you something. Trading against the flow. A big put push would kind of make sense, but a flock to calls? We'll see. Now it's a small biotech so could also be just reducing the dollars on the *bet* (i.e., switching stock to calls(.

The Calendar Strikes Back

2009-07-06T10:19:00.003-04:00

You know those calendar quirks in the VIX I often mention? The early action today provides a good example.

We have a VIX up 7% or so as I type. Which sounds reasonable given the weak market. But at the same time we see VXX up only about .40%. Again, VXX is a perpetual 30 day VIX future. On an average day, it moves about 50% of the VIX move.

It suggests either VXX had a bad close Thursday, or it simply preanticipated an uptick in VIX after the holiday. I would strongly suggest the later. And I would also strongly suggest there was no profit to be made seeing that. All it did was predict VIX was a bit understated Friday, it didn't predict VIX would lift per se, just that the relationship between the two would converge. Really a convergence of VIX and VIX July and August futures. That convergence also could have been VIX unch. or up small and VXX or VIX futures down.

Because after all, there's no arb here, you can't actually buy or sell the VIX, only VXX.

What we have right here, right now is that for the first time in eons, VIX July futures are at a discount to the VIX (August VIX has a small premium).

Timing is Sort of Everything

2009-07-05T22:29:00.002-04:00

The best time of year to own options is right about.........now.

Seriously, by one measure I used for my book. I compared median/mean IV's for each cycle to typical realized volatility in the SPX for that same cycle.

I don't want to be specific because I'd rather you first buy my book and then be underwhelmed by my methodology. But if you've survived the July cycle volatility melt, you now are at a point where options come closest to fair pricing for the stock volatility about to come. Options always overprice relative to stock volatility, but the 2nd half of the July cycle is the lowest overpricing of the year.

Now that doesn't mean go buy everything. I must add some caveats. Earnings season has moved back a bit. Whereaas 5-10 years ago, a bevy of companies reported before July expiration, now many have moved to the 1st or 2nd week of the August cycle. So if you buy, stick to August options. And keep in mind that they're only worth owning into next week as the next "event" is expiration and options of the next cycle out start caving right before the previous expiration.

So to sum up, I'd say options volatility should hold steady to stronger over the next 1-2 two weeks as stock volatility likely picks up.

Moneybrawl?

2009-07-05T10:07:00.000-04:00

So the he said/she said/he said saga behind why Moneyball:The Movie got scrubbed continues. This, from Deadspin.

The Sony Pictures executive who pulled the plug on Moneyball says that Steven Soderbergh changed the original script because he didn't want anything in the movie that didn't actually happen. So Billy Beane isn't a sweaty, foul-mouthed, Hooters waitress slayer?
Everyone loved Steven Zallian's version (he's an Oscar-winner, you know!), because it had jokes and snappy dialogue and actually made sabermetrics non-mind numbing. But Soderbergh wanted realism so much, he was determined to only film events that took place in real life. He also scrapped the conceit of having Bill James as the "Greek chorus", bookending the film with his anecdotes with and wise old man stories. The verdict:

Part of the realism? Lenny Dykstra as himself. Seriously.

But whatever the reason, I had this thought. The idea of this as a movie never made any sense. Stats geekery is boring. And it's debatable the A's ever accomplished much to begin with. We're not talking Hoosiers here. They basically finished first or second in the smallest division in baseball for a few years, never actually beating the Yankees or Red Sox at anything. Then the Angels, doing all that saber-heads disdain, got permanently good and the A's never win any more.

The story about the making/not making Moneyball however is interesting. Make a movie about that. It's Entourage without the sex. So just .......turn Brad Pitt into a Vinnie Chase sort of character. The guy has the whole Jen and Angelina thing going on, how tough a stretch is this?

This sounds like a joke, but I'm totally serious. How different are the twists and turns of making Moneyball from making Escobar?

History's About To Change......

2009-07-04T10:21:00.000-04:00

Looks like TheStreet has not missed a beat since giving Lenny the heave ho. Enter Ron Insana, fresh off his wildly successful stint as a fund of funds maven. This, from Michael Commeau.

I’ve always viewed Ron as a pretty thoughtful and even-handed guy, so I was pretty baffled at what I found in his Market Movers newsletter. Let’s dig in!

Here are two key excerpts from the disclaimer section of the inaugural issue of the newsletter published on Monday, June 29th:

The service consists of, among other things, a portfolio of securities chosen and actively traded by Mr. Insana, initially capitalized on March 13, 2009 with $200,000 of Mr. Isana’s personal funds.

and:

Mr. Insana manages investment portfolios separate from his portfolio in TheStreet.com Market Movers.

Now take a look at Ron’s performance since March 13th, which is a bit better than the S&P 500 over the same time period:

Well, you have to click thru to see it. But Michael find one small issue.

The problem is that Market Movers is taking credit for investments made BEFORE IT EVEN LAUNCHED. Sorry Ron, but that’s just not how investment newsletters work. Your subscribers did not receive the recommendations (since the newsletter didn’t even exist) that drove your alleged performance, so you have no basis for claiming this return.

So let me get this straight. On July 1st he announces he magically started a newsletter very close to the market bottom. AND he outperformed since the bottom? Where can I sign up? And slap some money on the 2008 Cards to make the Super Bowl?