Cue up the hyperanalysis, there’s some VIX OTM call trading going on……

The CBOE Volatility Index (.VIX) is down .28 to 20.88, as the S&P 500 (.SPX) has traded in a relatively narrow 10 point range Tuesday. The S&P 500 is nearly unchanged midday. In the options market, VIX July 42.5 calls are the day’s most actively traded contract, with more almost 87K traded. A lot of that volume is due to ratio spread trading, where a strategist was apparently bought 4 July 42 calls for every 1 (short) July 32.5 call. More than 25K July 32.5 calls have also traded today. They paid $1 per 1×4, according to a contact on the floor. The position is tied to VIX futures at 32.6 (might be a roll of long calls).

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

I don’t know.

I like to think as far forward as options expiration, next one is 20th June.   What is my best guess of what might happen until then and how can I make a few profitable trades.

I deeply respect people who can buy GE now and wait patiently for the economy to improve and GE to clean up its balance sheet and grow all its businesses.  I can’t do it.

My last boss at Millennium used to talk to floor brokers all the time and ask them, Why is the market up?  Why is it down?  The stories they told him satisfied him.  “Soros has split a large order among five brokers and it is getting executed …”  Something like that.

Trading shows how well aligned I am with reality.  I like models and finding and testing a trading strategy.  But all trading strategies bother me.  What is left out?  What are the hidden factors that are really driving the profit in the strategy?

In an up or sideways  market, you can do really well selling puts.   It is simple, and with a little technical analysis and no news to move the stock, like earnings, you can get some comfort that the put will expire worthless.  Also, you can use an options calculator to calculate the probability of success  based on the historical volatility.   That is comforting too.

In a down market selling puts will kill you.  So you have to know the difference short term, until the next expiration.

The stock went from $7.50 to $20 when the market opened today. DNDN closed at $16.99.

Quite a run.

If I get good at these trades, I will only have to trade one day a month.

Friday, tomorrow, is the last trading day before March options expire. This gives us a few different day trades that are only possible tomorrow.

Google

Google closed today right at 330. I ran a Monte Carlo calculation that showed that if I sold the 330 strike straddle for $5.60 there would be a 40% chance that Google would finish the day outside the break even mark, and I would lose money.

But there is another force that will keep Google close to the 330 strike. That is the number of puts and calls in the money today. Most of the holders of those options will sell their options tomorrow for a nice profit. As they sell their options, the market makers in Google options will buy them back and unwind their stock position as described in “How Stocks Get Pinned”
. When they buy back the call, they sell stock, lowering the price; when they buy back the put, they buy stock raising the price.

There is a pretty close balance in the number of puts and calls that are in the money. That means that the market makers’ buying and selling should move Google back and forth across the 330 strike without moving it too far from it.

Google traded four million shares today, and the share equivalent of the calls is 1.2 million and the share equivalent of the puts is 1.1 million. That is about half of all the shares that traded today. A pretty big pinning force.

Apple

Apple is another story. It closed today at 101.40, not far from the 100 strike. Looking at the open interest in the calls and puts that are in the money, as we did above with Google, paints a very different picture.

If we add up all the calls that are in the money, we come up with it equivalent to nine million shares. Looking at the puts, it is only 2.9 million shares. A large imbalance. What does that mean for the movement of Apple tomorrow?

Today, roughly 18 million shares traded. So the 12 million buried in the options is a large fraction of that. Since the market makers are net short calls, the must be long the stock. So when the call holders sell their calls back to the market maker, he can sell back his stock to unwind his position. So there is three times as much pent up selling in the options as buying. This means that Apple is more likely to drop tomorrow than rise.

Autozone and CME and Baidu

There are several others that have even greater imbalances. My calculations show that Autozone (AZO) has ten times the number of calls in the money as puts, 1.3 million equivalent shares in the calls compared with 114,000 in the puts. Only 1.4 million shares traded today. So this is equivalent to a full day’s trading volume.

Chicago Mercantile Exchange (CME) has a similar imbalance, but the volume is half of a day’s trading volume.

Baidu (BIDU) has four times the shares imbedded in the calls as in the puts, 1.6 million to 400,000 and the difference, 1.2 million shares is the volume of shares that traded today.