Sigma Options

Blogging At A New Space

2012-01-05T12:37:00.000+00:00

I have recommenced blogging and for various reasons have started a new blog called

Options - The Naked Truth

Visit me there at optionsthenakedtruth.blogspot.com

November Soothsaying... Or Not.

2009-11-02T00:44:00.003+00:00

As October trading is over it's time to look forward to the next month with reference to our new monthly pivots now set in stone, with the last trading day in October adding a fair bit of interest to the equation.

The monthly pivots have been very influential on the resistance side of the equation, but with scarcely any relevance at all on the support side. This is fairly expected in a stong uptrend.

click to enlarge

First line of resistance is 1085 and my guess is that that would well and truly contain this market based on the last few day's action.

Maybe we see the support pivots coming into play... maybe. First support at 1003. Anyway, they're my points of reference to watch out for.

The 20dma of the equity only put/call ratio is still dragging it's ass along the lowest levels of the last 3 years and that still says to me that the market is toppy.

But those low readings can and do drag on.

VIX is the interesting one having hit 30 on Friday. VIX gave a pretty reliable short term buy signal that manifested itself on Thursday of last week, but that all turned to crap on the Friday. The VIX is about 50% higher than current realized vols (on a 20 or 30 day lookback basis); I don't know whether that means options are a sell, because realized vols could just pick up a canter from here... perhaps even gallop off into the sunset.

All in all a pretty interesting week and month ahead. No soothsaying from me at this point apart for not expecting new yearly highs in the month of November... but I don't really think the market is ready to sell of in a major way just yet.

Discuss this and other topics at International Stock Forums. Help our new forum grow with your input.

Cashing In My Chips

2009-10-30T20:06:00.005+00:00

The big news of the day in optionstraderblogoshere is the VIX pumpage.

Usually I would try to come up with some insightful market maxim, or a chart with pretty lines highlighting some statistical gobsmacker.

Today I offer none of that. The only thing that mattered to me was that VIX HIT 30!!

...and I won the bet. :)))

Perhaps I should gloat, or give Mark a digital hard time and poke fun ad nauseum. Instead, it is relief that it got there first and saves me some embarrassing payout on my bet with Mark.... fear of loss or some such psychobabble.

It was a bit of a hoot, but I'm cashing in my chips and quitting while I'm ahead.

High Stakes VIX Bet

2009-10-29T00:27:00.007+00:00

The story of the day from the options trader's perspective is not the crimson red condition of the stock indexes, it is the VIX pumpage into extremely oversold levels as detailed by Bill Luby.

Adding poignancy to the situation I have been lured into a wager with Mark over at Option 911. The bet is that VIX will hit 30 before it hits 17. Convinced I would have my ass handed to me, I obtained very favourable odds; the payout, something moderately embarrassing if I lose compared to something really really REALLY embarrassing if Mark loses.

Right now, I'm feeling quietly and unexpectedly confident. :)))

N.B. - Neither Mark nor I are likely to be fooled by the randomness of such a wager, just a bit of frivolity folks.

Whither Gold?

2009-10-28T00:05:00.005+00:00

Although gold option volatility has settled into what looks like a base of around 20%, it is still usefully above realized vols at around 15-16%... useful depending which side of the trade your on and presuming realized vols don't startle us all into a dither.

Aside from what has become the normal 4 or 5 points premium, there doesn't seem to be a lot of buying interest in gold options (specifically calls), despite the gold-bug's scaremongering and ramping.

Price action on the other hand looks to be approaching an interesting point at the old resistance becomes support observation and this is still in a technical uptrend. Countering this is a few voices such as Roubini who have been talking Gold down.

I've exited my option trades now, so nervously contemplating my next move. I don't want to miss a good party thrown by the gold bugs, but on the other hand, I can't help feeling a bit skeptical about $5,000 gold or whatever number get pulled out of people ass.

Short gamma doesn't excite me right now.

So, whither gold?

VIX Stirring From its (Relative) Slumber

2009-10-26T17:04:00.005+00:00

Do I detect just a modicum of concern of this market via the VIX?

Yes we are off a few points today and this invariably causes at least a bit of a rally in the VIX. Nothing startling there. But watching VIX over the last few days I was beginning to wonder whether they were going to plough volatilities into the mid teens, come what may.
We all parrot the standing wisdom that VIX is mean reverting and I certainly think that's true. The nature of volatility and how it is measured makes it deterministically so... with an infuriatingly chaotic dualism so we can never really time volatility except by accident.

('cept when I nail it right on the day. That is unquestionably skill )
What is this mean VIX must revert to anyway? Having not really paid attention during may statistics classes, I never realized there was more than what type of mean. Sparing me the embarrassment of intellectual incapability of calculating other sorts of mean, I am quite sure it is the arithmetic mean of some defined lookback period, AKA a simple moving average.
Easy enough to work out, but even that simple task has been wrested from us via software.

But it begs the question, what lookback period should be used to determine the mean? In other words, what length moving average?

There is a school of thought that uses the 10DMA. Fair enough... whatever. But the lookback period used can deliver vastly different "means". Also the mean is a moving target. The mean today scarcely resembles the mean 8 months ago. By the ten day measure, VIX is probably already overbought (whatever that means). By other measures, there is still some reverting to do.

Whatever the case, the VIX mean is heading lower, unless Roubini's 2nd crash scenario unfolds; and don't see that happening in the near future.

What I'm basically saying in an extremely convoluted way is - VIX has finally bounced, but I have no idea where it, and the market, is going next. But my guess is some degree of retracement.

Discuss this, and other topics at International Stock Forums.

The New VIX Reality

2009-10-21T18:33:00.002+01:00

An excellent post over at VIX And More about anchoring and expectations etc, anyway, Bill talks about the new VIX reality at it tanks towards 20%.

Previously, I've spoken about using technical analysis on the VIX, so long as it is only about creating boundaries of prove and disproof. Well, a solid break below what seemed to be a base of around 23% certainly disproved the 23% base hypothesis.

The new one is to expect declining average VIX levels. Despite every bit of negativity in the real economy - green shoots or not - stocks just want to grind upwards.

Some are prompted to predict a multiyear bull on that basis... whatever. But right now, folks are comfortable with buying stocks.

Selecting Condor Strikes - A Study

2009-10-21T18:00:00.003+01:00

As I have outlined in another thread, people who trade iron condors are usually taught to select short strikes at one standard deviation from the current price action.

As I am developing a conversation elsewhere, I think extrapolating option volatility to "monthized" levels is not optimal.

What I want to do in this thread is select hypothetical strike levels, assuming that an iron condor is put on on the expiry Friday of the previous cycle. Some people like to initiate ICs with 2 months to expiry, so we'll have a look at that too.

I'll be using historic volatility, just so it can be automated.

I'll report on how these strikes are threatened or not as time goes by, to test how well this selection process works.

Note that this does not represent any trades I may be doing, it is just an exercise.

On the chart the red lines are 1 standard deviation (68% theoretical probability of staying inside).

The Blue lines are 1.28 SDs (68% theoretical probability of staying inside), which you would probably never get enough premium to trade.

The Green lines are at 0.6 SDs and represent what a low probabilty condor trader might select. It is presumed this trader is prepared to adjust more aggressively.

The top chart with heavier dotted lines is to represent a trade initiated 16 Oct with Nov expiry. (1 Month)

The 2nd chart with lighter dashed lines is to represent a trade initiated 17 Sept with Nov expiry. (2 months)

The 3rd chart lighter dashed lines is to represent a trade initiated 15 Oct with Dec expiry. (2 months)

I have also posted this at http://www.internationalstockforums.com/index.php/topic,29.msg64.html#msg64 That will be an easier place to follow allong as time goes by. Comments most welcome there.

Click to expand image.

S&P500 Soothguessing

2009-10-19T11:00:00.004+01:00

(Also posted at International Stock Forums.)

As we head into the new week, once again I pull out my crystal ball (which I'm thinking of sending back for a refund) and look for signs of a top in this market. Ahhhh life is so tough for bearish prognosticators. Once again I'm going to have a look at those leading indicators than markets are so adept at ignoring.

Firstly, VIX. As I said in a previous post, I have no challenge with technical analysis on the VIX, so long as it is about creating boundaries of proof and disproof. My thesis was that VIX had bottomed for now at ~23%. This has now been disproved with Friday's close at around 21.4%. VIX watchers are postulating that it is now oversold on whatever their favourite basis is for such opinions. I'm inclined to agree.

Even if we get a mean reverting bounce in the VIX via a retracement in the Spooz, you'd have to think there is generally lower levels in the VIX's cards as the market grinds upwards.

My old favourite, the 20dma of the put/call ratio is still dragging its ass along some of the lowest levels of the past three years. Clicking down a couple of gears to the 5dma of the put/cat ratio and we are at new lows as of Friday's close.

Nobody wants to hedge their portfolio any more.

This gives us a picture of complacency and this is generally regarded as a contrarian signal. It should be noted however, that complacency can last for some time.

The case for resistance can be made by the monthly pivots. These have shown areas of interest in the past few months and as we are at R1, I'm looking for some genuine signs of resistance. We've had a bit of a pause there during the latter part of last week, but I've yet to be convinced we don't grind higher. Markets have opened up a tick or two as I write, so waiting to see definitive signs of direction for this week.

Good luck

Gold Volatility 14 Oct '09

2009-10-14T21:46:00.004+01:00

Gold volatility went into the tank today and with gold not far off those all time highs one has to wonder why. Below is the Chart of GLD with CBOE's $GVZ (The gold VIX).

The $GVZ plonked to 20 and a bit and while that is still a fair way above 30 day historical volatility at 16%, it represents a fall to close to the "normal" premium of IV over HV in gold options.

You'd have to suspect at least a pause/retracement from here if that means anything at all. Perhaps the talk is some quarters of a bottom in the dollar is easing concerns, though the dollar is still taking it where it hurts.

Countering that is the seasonal tendency in gold which resumes an upward bias right up to Christmas (depending whose dodgy data you use).

I'm still bullish after some sort of pull back. Markets just want to go up right now, but option traders seem skeptical.

The Intel Torpedo

2009-10-14T11:13:00.003+01:00

The bulls will be feeling all warm and fuzzy this morning as it looks as though Intel earnings will be giving the Spoooz a leg up over resistance and to a new high for the year, if the futures right now are any guide.

Of course it means my double top scenario has taken a torpedo to the magazine case... a direct hit. Never mind, I'll keep my guru robes in the bottom drawer just in case I get a market call right one day. I should have just taken the Abbey Joseph Cohen line and basked in my correctness.

This also means the VIX will sink below the 23% water line, in fact has already closed below yesterday.

Man the lifeboats and board the good ship PollyAnna LOL. I give up, I'm turning bullish.

(Which could just be a great sell signal).

However, worry not for my finances. Realizing how crap I am at market calls, I continue to be delta neutral on the indexes. All this stuff is for amusement only.

I love options :).

(VI)X Marks the Top?

2009-10-12T20:17:00.005+01:00

So the S&P500 just about touches the high of the year from last month and slowly backs away. At this point I'm not going to remind you of my top call from September 30, just in case it blows straight through to new highs and trashes my reputation as market soothsayer and guru. LOL

The point of focus for me is now VIX. The finer points are expertly covered by Adam Warner and Bill Luby (and others), but I'm looking at the 23% level and wondering whether that is the base level for right now.

Which begs the question. Is the VIX predictive or reactive... or both. I lean on the side of reactive, but the mean reverting characteristics are well known, hence indicating as least some predictive implications.

The next question is "can technical analysis be used on the VIX?"

I say why not?

I say you can, so long as you're not trying to make predictive assumptions with pretty coloured lines and purely mathematical constructs. To me TA is about create boundaries of proof and disproof. This fits in with VIX analysis for me.

IOW a break below 23% disproves my basing hypothesis. A bounce above supports it.

Adam and a few others use the "10% above or below the 10dma" method to spot potential points of over/undersoldedness (to invent a new word). I'm far too lazy for that so I've tacked a 3,10,16 MACD on the bottom to essentially arrive at similar conclusions. It works adequately for that purpose.

Do we see an oversold VIX? Yes. Does it mean anything? Who the hell knows. But there is that divergence on the bog standard MACD.

The upshot is that I'm trying to convince myself of the chance of a double top right here.

Yes, I'm fighting for my guru call's survival...

...somehow I fear it may be in vain. This market just wants to go up.

Making Plans For 2013

2009-10-12T15:31:00.002+01:00

It seems the lucky ones amongst us will be graced with a few more years past 2012.

Yep it seems that the end of the world has been postponed and not going to be in 2012 after all, LOL. That's according to Mayan elder Apolinario Chile Pixtun.

Bugger! I was going to party hard until then, now it seems I'll have to nurse my liver for a bit longer.

2012 is not the end of the world, Mayan elder insists

The year 2012 will not bring the end of the world, a Mayan elder has insisted, despite claims that a Mayan calendar shows that time will "run out" on December 21 of that year.
Published: 9:49PM BST 11 Oct 2009

Apolinario Chile Pixtun is tired of being bombarded with frantic questions about the end of the world. "I came back from England last year and, man, they had me fed up with this stuff," he said.

A significant time period for the Mayans does end on the date, and enthusiasts have found a series of astronomical alignments they say coincide in 2012, including one that happens roughly only once every 25,800 years.

But most archaeologists, astronomers and Mayans say the only thing likely to hit Earth is a meteor shower of New Age philosophy, pop astronomy, internet doomsday rumours and TV specials such as one on the History Channel which mixes "predictions" from Nostradamus and the Mayans and asks: "Is 2012 the year the cosmic clock finally winds down to zero days, zero hope?"

2012 is likely to be an interesting tear on the stock market however... just like every year.

Guru S&P500 Prognostications

2009-10-09T16:51:00.006+01:00

In the absence of anything notable to report re my current obsession with gold, I'll have a look today at my guru call from Sept 30. (N.B. all the guru stuff is tongue in cheek and a bit of self derogation.) as you will recall I Went Out On A Limb and called a medium term top on the S&P500.

Well the bulls are putting that call under some serious pressure after some smugness inducing down days immediately succeeding my call. As of now, the yearly highs still have not been taken out, so I haven't cancelled my guru robe order just yet. I'm speculating on a double top and that divergence (for whatever that is worth) in the MACD does its freakin' job of psyching traders into a sell-off.

The 20day MA of the put call ratio I keep posting in the hope someone takes notice, is still highlighting extreme complacency.

So I'm sticking to my guns for now. Still no money on the outcome here, just managing a delta neutral trade. That means that don't want be toooooo right, sideways consolidation would be good.

Gold Volatility 8 Oct '09

2009-10-08T17:36:00.003+01:00

OK, so I have a thing about Gold at the moment. There is nothing unusual about that as half the universe has a thing about it at the moment. With gold grinding out new all time highs every day, there is nothing to be surprised about.

For me it is more about finding option opportunities, hence the prelection with gold option IVs.

I had an idea that with new highs in the underlying, we'd see new highs in implied vols as punters bought calls with their ears pinned back. This is not how it's playing out at this stage. This IV peak is lower than the IV peak in early September, even though the "actual" volatility of this move is slightly greater than the early September one. So, what this tell us?

Probably nothing.

But if any delusions can be derived from this, it is that option traders are toning down their expectations of more upside in gold. It should be noted that implied is still miles higher than realized with 20 day HV at about 17.5%, but this seem to be a chronic situation. IVs have consistently been higher than realized for quite some time.

The standard wisdom says that either IV drops or realized increases. It ain't necessarily so with gold.

No ideas for a trade *right now* but a few ideas depending on how things pan out

Gold Volatility Popping Again

2009-10-07T10:44:00.002+01:00

As we all know gold is breaching all time highs right now and leading on from my post yesterday http://www.internationalstockforums.com/index.php/topic,4.0.html there is some interesting developments from an option trader's point of view in that implied volatility (vis a vis option premium) is spiking well above current realized volatility.

Here is the last three months of volatility history on GLD (Gold SPDR)

As is obvious, implied volatilities are well over the odds. As you would expect, most of the meat is in the higher strikes as shown by this skew graph:

This means call option buyers, particularly OTM call option buyers need further dramatic rises to turn a profit, whereas on the face of it, writers would have an edge here. That's on the face of it. Who you be game to write call options here? Not this little black duck; not yet. I've got some naked put shorts I wrote at the end of august in anticipation of the seasonal gold bull, plus trading the moves with various strategies, but would I write more puts here?

Well I prefer to write puts at potential pivot point lows and that ain't here. (With the caveat that it has to make statistical sense to do so)

This situation is still developing from my point of view and worth watching for a nice writing opportunity. The $64,000 question is whether realized volatility catches up with implied, or whether gold bugs are just having another "Gold to $5,000 oz" party, are wrong again and IVs collapse back to current reality. We would need some very strong moves, relatively, to justify this IV.

Stay tuned.

Too Far, Too Fast

2009-10-04T19:38:00.003+01:00

So says Nouriel Roubini in an article in Gloomberg today. And even though everybody has already read, and just to display some confirmation bias (with my "top" call of last week), I think it's important enough to post here.

Roubini Says Stocks Have Risen ‘Too Much, Too Soon, Too Fast’

By Shamim Adam and Francine Lacqua

“Markets have gone up too much, too soon, too fast,” Roubini said in an interview in Istanbul yesterday. “I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U- shaped. That might be in the fourth quarter or the first quarter of next year.”Oct. 4 (Bloomberg) -- New York University Professor Nouriel Roubini, who accurately predicted the financial crisis, said stock and commodity markets may drop in coming months as the gradual pace of the economic recovery disappoints investors....

Actually, I'm a bit surprised at his relative bullishness (or the reportage of the same) of late. This more moderate tone is a bit more of what I'd expect from him.

The Thing With VXX

2009-10-02T15:40:00.007+01:00

I'll bet you didn't know it, but the VIX has an ETN too

And if you'd care to take a dare I'll make a bet with you

Now the VXX is a pretty good fiddle boy, but give the VIX its due

I'll bet a fiddle of gold against your soul, that the VXX has negative roll too.

...with humble apologies to The Charlie Daniels Band.

Yep, just like some of the commodity EFTs. Bill Luby at VIX And More highlights the problem with VXX as both a hedging instrument and a longer term play. Anyone thinking of having a play with VXX should read his post.

The bottom line is that when you need it most, VXX is at its worst in tracking the VIX.

Read It Here.

For a bit of true poetry and some amazing fiddle playing:

The Creaking Limb Holds

2009-10-01T18:00:00.003+01:00

The sellers have come in to save my call. Phew, my campaign for gurudom is intact. Of course, having an iron condor to manage, I hope I'm not too blinkin' right.

Some consolidation right about here would be nice.

The greater question is the medium term prospects for stocks. We've come a long way and there is a lot of euphoria about, mixed in with some stubbornly pessimistic outlooks.

I'm doubtful that many of the problems which caused the financial cesspit we're in have been resolved in any way, and the real economy is still struggling. So the question is to what extent stocks will start to reflect reality - or some future version of it?

Which begs the whole gamut of existential and related questions. What is reality? What is value? Inflation or Deflation? etc etc etc

More importantly, when will the dip buyers step up to the plate?

The Limb I Went Out On Is Cracking Already

2009-09-30T18:32:00.003+01:00

Amazing market we're in at this time. There is dip buying, then there is dip buying.

Going Out On A Limb

2009-09-30T15:47:00.005+01:00

No, I'm not embarking on a mission of McLean-esque spiritual discovery, but I am taking the unusual step of publicly calling a medium term top on stocks.

Actually, I don't give a rats, I'm delta neutral and really would love some sideways consolidation ( a top of sorts I guess). I'm really just about managing whatever this ludicrous market throws at me. I just think that if that rich mental map that we traders think we have is worth a cracker (probably not), this really "feels" like it wants a decent retracement.

The $64,000 question these days is - what constitutes a decent retracement? Dip buyers apparently are cashed up and are all over any divot, never mind actual dips.

Lots of sentiment indicators are screaming "complacency", none more so than that 20dma of the put/call index I keep pulling up in the hope of a guru-like market top call. It's still entrenched at around it's lowest level of at least the past three years.

As mentioned in an earlier post, this is a pretty blunt tool, but usually manages to bludgeon the market into some sort of pullback. Add to this the "October Meme" and I think there is a reasonable case for a little bearishness.

N.B. For amusement value only, there is no money riding on this.

Coughing Up For Gold Options

2009-09-28T18:32:00.004+01:00

The recurring theme in stock index options over the last few months has been the chronic overvaluation as measured by implied volatility over the eventual realized volatility. Theoretically, this has been an excellent time for index option writers, except that the indexes have been running a long way from their mean. Any sellers writing fairly close to the money (like moi :-0) have been as busy as a one armed taxi driver with crabs, making adjustments.

We've had to work pretty hard for our money.

Index options haven't been the only ones in more or less chronic overvaluation. Gold options have been in a similar situation. I like the futures and their options, but the gold ETF, GLD and its options pretty much mirror the futs.

Check out the IV/HV chart for the last six months.

Even ignoring the IV spike earlier this month, those buying options have been paying well over the odds. Writing options here seems the no brainer. I liked the idea of selling premium with some long delta with a couple of different ideas leading into September, due to the pretty reliable seasonal tendency. That's worked out pretty well, but who's game to write unhedged on the call side in this market?

Not this little black duck!

Runaway gold markets don't happen that often, but the bulls can go berserk if *something* happens. Nevertheless, there is a bit of short gamma fun to be had here in this market... just cap the risk IMO.

The Big O(s)

2009-09-28T15:50:00.003+01:00

There was an interesting article floating around a few of the trading message boards on Friday regarding OptionsXpress, Optionetics and George Fontanills.

I wanted to post the excepts then but couldn't find the source. Thanks to Don Fishback who has posted on the same subject with correct attribution, I am doing likewise today at last...

From Barrons:

There is reason to be skeptical about claims made by Optionetics, a trading-seminar outfit that optionsXpress hopes will lure customers.

A cracking read for seminar skeptics.

Homeless

2009-09-28T15:21:00.002+01:00

As of the weekend I am officially homeless as we start our exodus to a new country. I am still in the UK for a few weeks, but staying with family. My trading desk is now a makeshift affair consisting of... well, never mind, use your imagination. lol

Posting may be sporadic, but I'll try and keep the blog idling along so-as not to lose my three readers completely.

An interesting point about trading businesses is that I am able to keep my trading business ticking along during this period of travelling... not exactly in a hammock at the beach in the Bahamas like some of the seminar clowns like to portray, but nevertheless possible to do so on the move.

A nice advantage.

I must admit that I prefer my own cave to trade from however. I'm looking forward to settling down again.

More on That Oil Option Skew

2009-09-22T15:46:00.004+01:00

The Bloomberg oils option article I mentioned yesterday has caught a couple of other options bloggers attention today.

Don Fishback has a closer look at the directional implications of the downside skew and concludes it doesn't really mean a lot.

Adam Warner makes substantively the same points as me and takes a swing at Bloomberg clichés, but is also skeptical of any directional signals.

Looks as if Bloomberg has been pwned by the blogosphere on this occasion.