Debit Spreads and Credit Spreads – Similar.

(Editors Note. We would like to welcome Dan Keegan as a contributor to the CBOE.  Dan is a well known and experienced trader.  Dan started as a runner at the CBOE in 1978, moving up to act as a Floor Broker for 5 years and then a Market Maker for 17 years.  He does mentoring for investors and sends out a weekly newsletter to subscribers.  His web-site is optionauthority.com.    Welcome Dan!)

Selling credit spreads is a very popular starting point for many retail options traders. A call credit spread is a bearish trade and a put credit spread is a bullish trade. Both of them involve selling an option with a higher premium and buying an option with a lower premium. But many investors only look at credit spreads.  We’ll show two credit spread examples but compare them to debit spreads.

Let’s look at a call credit spread first. Apple Computer (AAPL) is trading at $130.15. You can sell the  July 135 (all regular expiration, July 17th, and transaction costs not included) call at $2.43. In order to define your risk you buy the July 140 call at $1.13, thereby creating a credit of $1.30. The maximum value for a vertical call spread is the difference between the two strike prices, in this case $5.00.

The maximum profit is $1.30 With AAPL at $135 or lower, where both options are out-of-the money (OTM). The maximum loss is $3.70 with AAPL at $140 or higher. The breakeven point occurs at $136.30. Losses rise with AAPL between $136.30 and $140, capping out at a loss of $3.70. The July 140-145 call spread can be sold for a credit of $0.62. That would bring in less than half of the credit of the July 135-140 call spread but with much less chance of the short call becoming in-the money (ITM).

An alternative to the AAPL 135 -140 call credit spread for a $1.30 credit is the AAPL July 140-135 put debit spread for $3.70. You can buy the July 140 puts for $10.90 and sell the 135 strike puts for $7.20. The maximum profit is $1.30 with AAPL at 135 or lower. The maximum loss is $3.70 at 140 or higher. The breakeven point is $136.30. If you could buy the put spread for $3.65 versus selling the call spread at $1.30 then you choose the debit spread due to a $0.05 advantage.  The credit spread and debit spread show an almost identical risk / reward.DK  2  5 27 15

 

 

 

 

 

Now let’s look at a put credit spread.  Facebook (symbol FB) is trading at $81.01. You can sell the July 77.50 put at $1.35. To quantify your risk, buy the July 72.50 strike put at $0.45, thereby creating a credit of 0.90. The maximum value for a vertical put spread is also the difference between the two strike prices, in this case $5.00.  The maximum profit is $0.90 with FB $77.50 or higher, where both options are out-of-the money (OTM). The maximum loss is $4.10 with FB $72.50 or lower. The breakeven point occurs at $76.60 ($77.50 less $0.90 credit). Losses rise as FB drops below $76.60 all the way to $72.50, capping out at $4.10. The FB July 67.50 – 72.50 put spread can be sold for a credit of $0.33. That would bring in less than half of the credit of the July 72.50 – 77.50 put spread but with much less chance of the short put becoming ITM.

DK 1    5 27

An alternative to the FB July 72.50 – 77.50 put credit spread for $0.90, is the July 77.50 – 72.50 call debit spread for $4.10. You can buy the July 77.50 calls for $9.20 and sell the 72.50 calls for $5.10. The maximum profit is $0.90 with FB $77.50 or higher. The maximum loss is $4.10 at $72.50 or lower. The breakeven point is FB $76.60. If you can buy the call spread for $4.00 versus selling the put spread at $0.90 then you choose the debit spread due to a $0.10 advantage.

The common mis-perception for rookie traders is to trade a credit spread because credit spreads “make money.” For example the FB 72.50 – 77.50 put spread brings in a $0.90 credit. Actually, you only make money when the spread trades lower than $0.90. If it’s trading at $0.80 you’re up $0.10. If it’s trading at $1.00 you’re down $0.10. A credit spread is only superior to a debit spread if it conveys some sort of advantage.  Both the AAPL and FB positions show the debit spread could show a slightly better risk / reward than the credit spread.

So with some experience trading spreads, it will only take a few more seconds to compare a debit spread to the credit spread you’re looking at. In most cases they will be similar, but occasionally one might by at a slight advantage over the other.

Blogging Options: CBOE Morning Update 5.27.15

Continuing uncertainties about Greece debt payments due this weekend have overseas markets jittery.  US stock futures look to rebound after yesterdays 1%   correction.  US option volume of ~15m contracts pretty average yesterday, with SPX trading 900K contracts and VIX 360K.  10-year near 2.15%.  What? Corruption at FIFA?  I’m shocked I tell you, shocked!  BlackHawks with elimination game tonight or their season shockingly over.  Volatility as an asset class:

Michael Kors (KORS) is down $8.80 to $51.79 in the premarket on over 3m shares, as the company sees Q1 EPS 74c-78c, compared to consensus $1.03.  May weekly call option implied volatility is at 102, June is at 47, August is at 36, November is at 33; compared to its 90-day average of 33.

Toll Brothers (TOL) is flat at $37 after reporting Q2 EPS of $0.37, $0.02 better than analyst estimate of $0.35. Revenue for the quarter came in at $852M versus the consensus $861M. TOL narrowed FY15 home delivery guidance to 5,300-5,900 homes. May weekly call option implied volatility is at 49, July is at 27, September is at 26; compared to its 90-week average of 23.

Tiffany (TIF) is up $5.52 to $91.05 in the premarket after reporting Q1 EPS 81c, compared to consensus 70c. June call option implied volatility is at 28, July is at 26, November is at 25; compared to its 26-week average of 26.

VIX methodology for Apple VXAPL at 22.76, 52-week range 19.48 to 45.76 cboe.com/VXAPL

Equities options volume @ CBOE 731,884 calls, 538,147 puts, 1,270,031 total cboe.com

Options expected to be active @ CBOE: TOL WDAY COST CHS DSW TIF KORS SPLK

CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (TYVIX) at 6.15 stks.co/h2GXo

CBOE S&P 500 PutWrite Index $PUT @ 1501.58 CBOE.com/PUT

‏CBOE Nasdaq-100 Volatility Index (VXN) at 15.12, compared to 10-day moving average of 14.36.

CBOE S&P 500 Short-Term Volatility Index (VXST) at 13.32, compared to 50-day moving average of 12.84 VXST is a market-based gauge of expectations of 9-day stks.co/r0CS2

Velocity Share VIX Short Term ETN (VIIX) at 26.18, compared to 10-day moving average of 26.56

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CBOE Mid-Day Update 5.26.15

Volatility as an asset class

Time Warner Cable (TWC) and Charter (CHTR) volatility decreases on Charter purchasing Time Warner Cable for $55B

Time Warner Cable (TWC) is recently up $7.78 to $178.96 on Charter (CHTR) agreeing to purchase for $195.71 a share, with $100 in cash and the remainder in its own stock. June volatility is at 17, compared to level of 30 from last week and its 52-week range of 12–44.

Charter (CHTR) is recently down 30c to $175.04. June volatility is at 23, compared to a level of 32 from last week and to its 52-week range of 18–47.

First Solar (FSLR) is recently down $4.04 to $50.99 after RBC Capital downgraded the shares to Underperform and sharply cut its price target to $34. May weekly call option implied volatility 42, June is at 35, September is at 40; compared to its 26-week average of 46.

Active calls @ CBOE: MRK 1/20/17 60 AAPL 5/29/15 133 PSX 1/15/16 82.50 IWM 5/29/15 126 APC 8/21/15 85

Active puts @ CBOE: XLF 6/19/15 24.50 EEM 5/29/15 42.50 SPY 5/29/15 210 IWM 5/29/15 119 QQQ 5/29/15 110

CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (TYVIX) up 5.78% to 6.35 co/h2GXo

CBOE Emerging Mkt ETF Volatility Index (VXEEM) up 14.8% to 18.23 cboe.com/VXEEM

CBOE Crude Oil Volatility Index (OVX) up 11% to 34.77, WTI oil trades near $59.  cboe.com/OVX

CBOE Volatility Index-VIX methodology for Energy Select Sector SPDR (VXXLE) up 6% to 19.80  cboe.com/micro/VIXETF/VXXLE/

Active options at CBOE: AAPL BABA AMZN FB TWC BAC TWTR TSLA AMZN

Options with increasing volume @ CBOE: GFI EAT DSKY CHTR BID ADTN BLMN EXPR YCS NUVA

CBOE Volatility Index (VIX) up 2.08 to 14.21, day range 13.34 – 14.52 cboe.com/VIX
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Bullish Levels Getting Entrenched – Weekly Market Outlook

It wasn’t a pretty or a convincing bullish move, but stocks did make forward progress last week, putting some distance between them and a huge hurdle that had otherwise been holding it back since February. Still, no later than it cleared that ceiling another possible one developed.

We’ll take a closer look at this new market situation, right after we review last week’s and this week’s economic numbers.

Economic Data

It may not have been a terribly busy week last week on the economic front, but it was an important one. We got doses of some pretty heavy-duty news, especially on the real estate and construction front. Specifically, we learned that housing starts ticked higher in April, from a pace of 944,000 to 1.135 million, while building permits rose from an annualized rate of 1.038 million to 1.143 million. We also learned later in the week that existing home sales for last month fell from a pace of 5.21 million to only 5.04 million.  Still, starts and permits hit multi-year highs, and the overall existing home sales trend is pointed broadly higher. A lack of inventory is a large part of the reason sales of existing homes isn’t even stronger.

We also heard last month’s industrial productivity information as well as the nation’s level of capacity utilization (of our manufacturing-output potential). Both fell for a fifth straight month. A lack of oil and gas drilling is the key culprit, but it’s still an adverse impact on the overall economy.

Capacity Utilization/Industrial Production Chart
PH 52415-capacity-productivity
Source:  Thomson Reuters Eikon

 

 

Last but not least, we also received April’s inflation data. It was tepid – again. For the month it was up 0.1% overall and up 0.3% on a core (ex-food and energy prices), but on an annualized basis the overall inflation rate is still a negative pace… or deflation. It stands at -0.2%. Both producer price inflation as well as consumer inflation now stands at negative levels on an annualizes basis, but it’s all due to oil/energy. Outside of those two categories (and mostly just oil), inflation rates are hovering just under a nominal 2%.

Last but not least, though there’s no data to plot or chart from it, the minutes from April’s Federal Reserve meeting were posted on Wednesday. Rates didn’t change, but there was some color offered regarding when that might happen – it’s very unlikely to happen in June. But, it’s still apt to happen by December, with a small possibility of it materializing in September. 

Everything else is on the following grid:

Economic Calendar
PH 52415-econ-data
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Blogging Options: CBOE Morning Update 5.26.15

Trains fairly empty this morning as traders return to a holiday shortened week.  April Durable Goods with a 0.5% drop (off 0.4% expected), after March revised higher.  Several housing reports and Consumer Confidence numbers later this morning. Nothing resolved in Greece over the weekend, European markets still jittery.  ~11.5K VIX Futures trade during early session.  10-year under 2.2%, Thrilling (not good) end to BlackHawks overtime loss last night.  Volatility an asset class:

Time Warner Cable is recently up $11.12 to $182.30 in the premarket on Charter (CHTR) agreeing to buy for $195.71 a share, with $100 in cash and the remainder in its own stock.  Market getting mixed signals on how regulators will look at this mega-merger.
Time Warner Cable (TWC) and Charter (CHTR) volatility flat into $55B acquisition. TWC June volatility is at 30; compared to its 52-week range of 12–44.  Charter (CHTR) June volatility is at 32; compared to its 52-week range of 18–47.

EMC (EMC) closed at $26.84 (indicated fractionally higher), into acquiring Virtustream, a cloud software and Infrastructure company for $1.2B. EMC June call option implied volatility is at 17; compared to its 52-week range of 14-33.

Equities options volume @ CBOE 758,622 calls, 488,171 puts, 1,246,793 total cboe.com

Options expected to be active @ CBOE: TWC CHTR WDAY KORS TIF TOL PANW COST FSLR

CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (TYVIX) at 6 stks.co/h2GXo

CBOE S&P 500 PutWrite Index $PUT @ 1509.97 CBOE.com/PUT

‏CBOE Nasdaq-100 Volatility Index (VXN) at 13.23, compared to 10-day moving average of 14.41.

CBOE S&P 500 Short-Term Volatility Index (VXST) at 9.60, compared to 50-day moving average of 12.87 VXST is a market-based gauge of expectations of 9-day stks.co/r0CS2

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The Week in VIX – 5/18 – 5/22

The VIX futures curve was lower last week with June losing more than the index or other futures as it was awarded the official title of “Front Month” with May VIX futures and options settling on the open Wednesday. Below I’ve changed things up a bit and the comparison is a year over year look at VIX and the VIX futures from Friday and a year ago on the Friday before Memorial Day.

Term Structure Plus Table

I was visiting the VIX pit with the attendees of the May version of The Option Institute’s Investing and Trading for College Students program shortly after the open on Friday. I actually heard this trade executed as an open outcry negotiation and knew what trade I was going to write about this weekend. There was a sale of 2725 VIX Jun 13.50 Puts at 0.47 combined with a purchase of 2725 VIX Jun 17.00 Calls at 0.57 (mostly at 0.57 – but this was the highest price so we’ll go with it). The net cost for this trade was 0.10 and a payout at June settlement that looks like the diagram below.

VIX PO

Note that there is risk below 13.50 due to the short put, but some real benefit if we get a spike in VIX between now and June VIX settlement which I have a feeling is what the l

The Week in Volatility Indexes and ETPs – 5/18 – 5/22

The S&P 500 moved up a little last week and the volatility curve moved lower. On the shorter dated end of the volatility term structure chart, there was the three day weekend effect which helped push VXST and VIX a tad bit lower than would be expected in front of a normal two day weekend. Just for the heck of it, I took a look at the curve 52 weeks ago and added it to the diagram below. I expected the 2015 pre-Memorial Day weekend curve to be higher than the 2014 version, but was surprised at the magnitude of the difference.

VXST - VIX - VXV - VXMT Curve

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Weekly Market Commentary 5.22.15

Everything is grinding to a halt in this market, and that is probably a sign that an explosive
move lies in the not-too-distant future. $SPX has support at the old highs (2120).
If that should fail, there should be a good support level at 2070.

 LM 5 22 15  spx

Equity-only put-call ratios remain on sell signals, according to the computer programs we use to analyze these charts.  However, it is obvious that these ratios have just been trending sideways for the past few days.

Market breadth has been something of a problem since last summer.
At the current time, these breadth oscillators are barely clinging to buy signals.

Volatility remains the most bullish technical area. $VIX dropped to its lowest levels since December. As long as $VIX is low and is not trending higher, stocks can continue to rise.

 

LM 5 22 15  vix

 

In summary, the move to new highs by $SPX has not been confirmed by most of our other indicators, nor by most other broad-based indices.  Still, that doesn’t seem to deter the market.  As long as $SPX holds above the support at 2120, there is no reason to get bearish.

http://www.optionstrategist.com/weekly-charts

Block Trade Analysis – $RUT 850 / 1160 Bull Put Spread

Author’s note – this is an updated blog from last week correcting the strike of the short put.   Thanks to Robert Shen for the catch.

Volume continues to rise in the Russell 2000 (RUT) option arena and my choices among block trades to discuss are on the rise as well. A trade from this past Tuesday caught my eye for three reasons. First, it was not a short dated deep out of the money credit spread – most of the trades I’ve come across and discusses recently in this space fit that description. Second, it is focused specifically on an outlook that matches the end of the first quarter which gives me a good chance to highlight quarter end options. Finally, it is what I consider a retail version of a cash secured put.

The specific trade was done in three lots mid-day on May 19th when the Russell 2000 was hovering around 1253. The size and option prices are approximations with the math being kept simple so we can focus on the concept behind the trade. About 3,000 RUT Jun 30th 1160 Puts were sold for 5.24 while the same number of RUT Jun 30th 850 Puts were purchased at 0.22. The net result is a credit of 5.02 and a payout at expiration that matches the diagram below.

Updated PO Diagram

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The Weekly Options News Roundup – 5/22/2015

The Weekly News Roundup is your weekly recap of CBOE features, options industry news and VIX and volatility-related articles from print, broadcast and online and social media outlets.

EUREKA!!!!
Earlier this week, CBOE announced it has entered into an agreement with Eurekahedge, a hedge-fund research and data collection company, to collaborate on the development of a series of new benchmark indexes designed to measure the performance of hedge funds that use volatility-based investment strategies.

“CBOE, Eurekahedge To Develop Vol Fund Benchmark Indexes” – Robert McGlinchey, EQ Derivatives
http://bit.ly/1HmHZyq

“CBOE to Develop Hedge Fund Benchmarks with Eurekahedge” – CBOE Press Release
http://ir.cboe.com/press-releases/2015/may-20-2015.aspx

One Step Further
Last month, CBOE launched options on the MSCI Emerging Markets and MSCI EAFE Indexes, bringing an added global dimension to CBOE’s index option franchise.  Included in the CBOE-MSCI partnership is the potential creation of volatility products on these new CBOE MSCI Index options.

“CBOE Scouts MSCI Options Future Vol Products” – Daniel O’Leary, EQ Derivatives
http://bit.ly/1PAUNuE

VIX FIX
This week’s “VIX FIX”…. the VIX Index dipped to near 2015 lows this week and the launch of new VIX Weeklys futures and options contracts is on the horizon.

“The Absence of Fear: How Low Can the VIX Go?” – Saumya Vaishampayan, Wall Street Journal
http://on.wsj.com/1K9bFlG

“Bored Volatility Traders Given Another Option With VIX Weeklies” – Callie Bost, Bloomberg
http://bit.ly/1F1yWl4

 

 

“Thanks to a Fine Canadian Doctor…”

(Editors Note: The following are thoughts from a floor trader friend on Memorial Day, who wishes to remain anonymous.  We have edited in this year’s dates and times. We ran this blog the last few years going into Memorial Day and received several nice comments.  We hope you enjoy it).

“Memorial Day” was called “Decoration Day” many years ago. It originated after the Civil War to commemorate Union and Confederate soldiers who died in the Civil War. I guess they figured out, over time, that all the other soldiers in other wars needed to be remembered.

I will visit my father’s grave site and see his military issued grave marker with his name, rank, date of birth/death, unit and conflict. In 1873, Secretary of War William Belknap adopted the first design for grave markers to be erected in cemeteries for soldiers who fought in that war. “Civil War”, “Revolutionary War”, “War of 1812″, “Spanish American War”, “World War I”, “World War II”, “Korea”, “Vietnam”, “Lebanon”, “Grenada”, “Panama”, “Persian Gulf” and “Somalia” are a few of the conflicts named on the stones.

If you are in Belgium this weekend, you can stop at Henri-Chapelle American Cemetery and my uncle, James K. McNulty is buried in plot f, row 11, grave 8. They have a ceremony Saturday at 4:00 pm CEST May 23, 2015 to honor the fallen heroes of the Battle of the Bulge. The townspeople will literally meet you at the train and guide you to the site with all the pride and dignity as if it happened yesterday.

There will also be a ceremony at Flander’s Field American Cemetery in Waregem, Belgium on Sunday at 3:00 pm.  We found 22 ceremonies in Europe that US service men and women will participate in to commemorate Memorial Day this year.

Major John McCrae, a Canadian military doctor, wrote the famous poem to honor the fallen and is why a red poppy is the symbol of Memorial Day:

in Flanders Fields the poppies blow between the crosses, row on row, that mark our place; and in the sky the larks, still bravely singing, fly scarce heard amid the guns below.

We are the dead. Short days ago we lived, felt dawn, saw sunset glow, loved and were loved, and now we lie in Flanders Fields.

Take up our quarrel with the foe: to you from failing hands we throw the torch; be yours to hold it high. If ye break faith with us who die we shall not sleep, though poppies grow in Flanders Fields.

have a great Memorial day Weekend…

Henri_Chapelle-memorial

CBOE Mid-Day Update 5.21.15

Volatility as an asset class

Best Buy (BBY) is recently up $1.78 to $35.46 after reporting Q1 adjusted EPS 37c, compared to consensus 29c. May weekly call option implied volatility is at 42, June is at 28, September is at 31; compared to its 90-day average of 32.

NetApp (NTAP) is recently down $4.19 to $31.45 after reporting less than expected Q4 report. May volatility elevated into Q4 and outlook. May weekly call option implied volatility is at 34, June is at 23, July is at 21; compared to its 90-day average of 28.

Lumber Liquidators (LL) is recently down $3.76 to $21.51 after announcing the resignation of CEO Robert Lynch. May weekly option implied volatility is at 105, June is at 73; compared to its 26-week average of 63.

Active calls @ CBOE: SPY 7/17/15 221, USO 8/21/15 22, GSK 8/21/15 50, TRQ 1/15/16 5, BABA 5/22/15 95, AAPL 5/22/15 130, HALO 6/19/15 19 $DAL 5/22/15 45

Active puts: NTAP 5/29/15 30.50, LQD 9/18/15 110, JBLU 7/17/15 21, TRQ 1/15/2016, YOKU 6/19/15 21, SPY 5/22/15 212.50, LULU 6/19/15 52.50

CBOE/CBOT 10-year U.S. Treasury Note Volatility Index (TYVIX) down 1.6% to 6.12 co/h2GXo

CBOE Emerging Mkt ETF Volatility Index (VXEEM) up 1.2% to 17 cboe.com/VXEEM

CBOE Crude Oil Volatility Index (OVX) down 4% to 32.41, WTI oil trades near $60.  cboe.com/OVX

CBOE Volatility Index-VIX methodology for Energy Select Sector SPDR (VXXLE) down 3% to 18.89 cboe.com/micro/VIXETF/VXXLE/

Active options at CBOE: AAPL BABA FB JPM YHOO AMZN AAL DAL BAC HPQ TWTR RAD QCOM

Options with increasing volume @ CBOE: MTZ LQD LBTYA AGEN OCR CVC NTAP BBY BRKR VOC

CBOE Volatility Index (VIX) down 48c to 12.40, day range 12.40 – 13.09 cboe.com/VIX
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CBOE, C2 & CFE Memorial Day Holiday Trading Schedule

We have another long weekend coming up.  Next Monday, May 25th, is Memorial Day in the U.S.

Tomorrow, Friday May 22st, CBOE, C2 and CFE  will have regular trading hours for all products.

On Sunday evening May 24th, CFE opens its extended trading session at 5:00pm CDT for VIX (VX) Futures and VXT, and will close at 10:30am Monday May 25th.

Monday May 25th, CBOE and C2 are closed for business, so there will be no Stock, ETF or Index option trading on that date.  Regular trading will resume Tuesday morning.

CFE Extended trading hours return to their regular schedule Monday evening at 5:00pm.
Trades in both the Sunday and Monday extended sessions will be submitted for clearing on the Business Day of Tuesday, May 26, 2015.

To recap, regular trading hours on Friday May 22nd on everything.  No option trading Monday May 25th at CBOE or C2.  Trading in extended hours sessions at CFE Sunday night and Monday morning in VX & VXT.  All extended hours CFE trades clear in Tuesday session. 

Have a good Memorial Day.

Earnings Next Week – 5/26 – 5/29

Next week is a short week, but there are ten companies reporting their earnings.

As always Max is the biggest gain in response to earnings, Min is the biggest drop, Abs Average is the average magnitude of the moves, and Last Q is what the stock did last quarter in response to earnings.  Finally, all numbers represent three years unless italicized which is this case is PANW and WDAY which both have 2 1/2 years of history to work with.

Earnings