What's On Our Minds...

Be clear about your goal but be flexible about the process of achieving it.  (Brian Tracy)

It can be challenging to change our way of thinking.  Naturally, we form opinions about people, events and expectations and move forward based on our own logical answers.

But, what if we are wrong?  Is that defeating?  Are we too set in our ways to make changes, stuck in the mud and unable to do what is necessary?  What if the road is blocked on the way to your destination – do you sit there and stare at it or move?

How about Eli Manning reading a defense.  If he sees something ‘odd’ he may call an audible.  To help our bodies become more flexible we may go to the gym for some classes or just even stretch.

The ability to change and do something different when the obstacles are too much to overcome is not a sign of defeat, rather a sign of strength, having the power and willingness to make the adjustments to get ahead.

Stay committed to your decisions, but stay flexible in your approach. (Tom Robbins)

Trading requires flexibility and nimbleness.  Have a bad trade result?  Happens too often, doesn’t it?  How do you handle it?

How about an unfortunate circumstance where you thought you had checked your risk but some ‘outlier’ hits your P/L hard.  How do you make the adjustments to make this work for you?   I have been in many painful situations, as have you.

On Jim Cramer’s Mad Money last Friday he stresses some important lessons learned over the years at his hedge fund and prior.  I enjoyed the show immensely, I highly recommend this one to you.  He learned to be flexible, admit when he was wrong but NOT defeated and to change the shape of his thoughts to be more accommodating to the occasional surprises.  This change seems to have served him well.

Be firm on principle but flexible on method. (Zig Ziglar)

As a trader I use some simple methods of technicals and charts to enter/exit my trades.  I have survived and thrived for years using the tools in my toolbox, but it’s far from the best.

You’ve heard me say many times that trading is not a game of perfect, and it is so true.  What allows me to continue on in the trade, grow and survive is my ability to change and admit when wrong.

Success requires discipline, flexibility but also humility.  A big ego is destructive to your mind and your bottom line.  Marry yourself to one way of thinking and you’ll eventually find yourself on the short end of the stick.

That which yields is not always weak. (Jacqueline Cary, from Kushiel’s Dart)

Bob Lang is the founder of Explosive Options
http://explosiveoptions.net

Volatility as an asset class
 
Brocade (BRCD) closed at $5.50 prior to guiding Q2 EPS 11c-12c, compared to consensus 13c. Overall option implied volatility of 55 is below its 26-week average of 58.
 
Dell (DELL) is recently down $1.21 to $17 in the premarket on the company expecting the first half of FY13 to be "challenging." Overall option implied volatility of 33 is below its 26-week average of 38.
 
NASDAQ 100 (QQQ) overall implied volatility at 19; 26-week average is 23.

Russell 2000 (IWM) overall implied volatility at 26; 26-week average is 27.
 
 
Active options at CBOE

LNG 3/17/2012 12 25K contracts
CSCO 4/21/2012 22 22K
CHTP 3/17/2012 4 16K
AAPL 2/24/2012 510 11K
SWN 3/17/2012 36 10K
JPM 3/17/2012 40 9K
INTC 7/21/2012 25 7K
MSFT 3/17/2012 30 7K 

U.S. equities are mixed to lower as investors are sceptical of Athens’ ability to enact reforms.  Dell miss didn't help.  Hewlett announces after the bell.

Volatility as an asset class
 
VIX methodology for Amazon (VXAZN) at 35.53, below 50-day moving average of 41.83.
 
VIX methodology for Google (VXGOG) at 26.31; below 50-day moving average of 28.25.
 
VIX methodology for Apple (VXAPL) at 33.70; above its 50-day moving average of 29.64
 
VIX methodology for IBM (VXIBM) at 19.86; below its 50-day moving average of 22.03.
 
VIX methodology for Goldman Sachs (VXGS) at 33.77; below its 50-day moving average of 40.93

Barron’s –

Steven Sears writes about a stock replacement strategy in the Striking Price column.  The gist of the strategy is that investors will sell high priced stocks, or stocks that have had a bullish run, and replace the shares with low priced call options.  The example he cites is Apple (AAPL – 502.12) which ran to 526.00 last week before backing off to as low as 490.00 before settling in for the long weekend around 500.00.  A stock mentioned as a candidate for this sort of trade is Disney (DIS – 41.75) which is up over 15% this year.

Options Action -

In the introduction it was noted that the financial stocks have taken a breather in the midst of the recent market rally.  This is a precursor for the first recommendation that is in Goldman Sachs (GS – 115.91) stock.  As the stock has advanced nicely in 2012, the suggestion is to initiate a butterfly using April call options.  Using the April options is suggested so that the trade may benefit from GS earnings due out in April before expiration.  The butterfly would be constructed buying the GS Apr 120 Call at 4.00, selling 2 GS Apr 130 Calls at 1.30 each and buying a GS Apr 140 Call at 0.40 for a net cost of 1.80.  To be profitable GS should fall between 121.80 and 138.20 at April expiration.  The best outcome would result with the stock at 130.00 at expiration with the resulting profit coming in at 8.20.  Finally, the worst case involves GS below 120.00 or above 140.00 at expiration.  In either of these situations the result is a loss of 1.80 on the trade.

The next recommendation is on Priceline.com (PCLN – 582.52), a company that has made me personally angry since killing off Shatner from their commercial series last month.  Although Shatner is no more, the recommendation is bullish in the form of a calendar call spread.  This trade sells the PCLN Mar 620 Call @ 13.80 and buying the PCLN Apr 620 Call at 20.50 for a net cost of 6.70.  The goal of this trade is for the stock to trade up to 620.00 around March expiration.  Also, PCLN reports earnings before March expiration and the March options are pricing in higher implied volatility than April options so there is a time decay benefit from this trade structure.

Over the next five years, some projections indicate that the annual GDP of Brazil could surpass that of both France and the United Kingdom, and that Brazil could rise to become the fifth largest economy in the world.

More investors now are concerned with the issue of managing Brazilian volatility.

Today CBOE Holdings announced today that the following products will be launched in the coming weeks:

•     CBOE Brazil ETF Volatility Index security futures (VXEW) - Tuesday, February 21 on CFE

•     CBOE Brazil ETF Volatility Index options (VXEWZ) - Tuesday, March 6 on CBOE  www.cboe.com/VXEWZ

STOCK INDEX PRICES SINCE 2000

30-DAY HISTORIC VOLATILITY

Since February 2001, the average 30-day historic volatility has been about 25.6 for the MSCI Brazil Index and 18.9 for the S&P 500 Index.

30-DAY IMPLIED VOLATILITY

Some analysts prefer to look at real-time updates of implied volatility indexes that are designed to reflect intraday customer sentiment.

CBOE calculates and disseminates the CBOE Brazil ETF Volatility Index (ticker VXEWZ), which reflects the implied volatility of the EWZ ETF. www.cboe.com/vxewz

The price history for the VXEWZ Index begins in March 2011.  The peak daily closing value for the VXEWZ Index was 63.49 on Oct. 3, 2011.

At mid-day today (Feb. 17), the VXEWZ Index was at 30.89 and the VIX was at 18.14.

Delayed quotes table is updated at www.cboe.com/VXEWZ

CORRELATIONS

As noted in the table below, the daily changes in the VXEWZ Index had a negative 0.85 correlation to those of the EWZ ETF during the time period covered.

In light of the negative correlations in the above table, some investors are exploring the possibility of using volatility products as diversification tools.

TRADABILITY AND FUTURES AND OPTIONS

If you believe that the VXEWZ Index is mean-reverting, and you believe that there is a good chance that VXEWZ might rise significantly in upcoming weeks or months, four strategies that you might consider in the future include –

1. Long VXEWZ call options
2. Long VXEWZ call spreads
3. Short VXEWZ put credit spreads
4. Long VXEWZ futures.

Before investing in any volatility-based product (futures, options, or ETP), please do your homework regarding the unique pricing of volatility-based products.  You can visit www.cboe.com/VIX for some information regarding pricing, and www.cboe.com/VXEWZ for more information on the VXEWZ Index.

Settlement value for the February SPX this morning is 1363.80  The symbol to find this on most platforms is SET.

Marty Kearney

Volatility as an asset class:

Campbell Soup (CPB) is recently up 44c to $32.5o in the premarket on the company reporting Q2 adjusted EPS 64c vs. consensus 62c. Overall option implied volatility of 22 is above its 26-week average of 18.
 
Heinz (HNZ) is recently up $1.30 to $53.40 in the premarket on the company reporting Q3 EPS 95c ex-items vs. consensus 86c. Overall option implied volatility of 16 is below its 26-week average of 19.
 
General Mills (GIS) is recently down $1.26 in the premarket on the company seeing Q3 adjusted EPS 54c-56c vs. consensus 60c. Overall option implied volatility of 16 is below its 26-week average of 17.
 
SPDR Gold Trust (GLD) overall implied volatility at 19; 26-week average is 23.

Stocks with significant put volume increases;

YHOO 7/21/2012 14 22K contracts

BAC 5/19/2012 7 15K

CMCSA 3/17/2012 28 13K

AAPL 2/18/2012 490 12K

GE 4/21/2012 18.0000 12K

FCX 3/17/2012 40 103K

U.S. equities are mixed to slightly higher in the first 45 minutes of trading.  Still uncertainty of the timing of the

Greek bailout.

Long weekend could have volume slow this afternoon.  Option expiration today.  "Pitchers and catchers report" tomorrow, that has a good ring to it. 

I know I’m not alone on this.  Apple (AAPL) stock looks cheap to many investors.  Here’s why:

• First quarter revenue was more than twice that of Microsoft.
• First quarter income exceeded Google’s.
• Earnings expectations this year continue to be robust.
• Potential dividend later this year.

So through options, is there a possible trade to try and capitalize on bullish expectations?  Buy calls?  Sell puts?  How about a spread?

You will notice that both the calls and puts listed on AAPL are rather pricey and they are expensive for a reason.  High option prices imply (Implied Volatility) significant movement in the underlying.  So if you are a call buyer with lofty expectations maybe you could consider entering into a bull call spread with realistic expectations and at the same time reduce the cost of getting into the trade. 

This spread would be the purchase of one call and the sale of another call with a higher strike price targeted for AAPL stock by March expiration.  You are looking for a gradual rise of the stock to the short strike to maximize your profits.  But remember, your profit potential is limited with the sale of the higher strike option.

 
Volatility as an asset class
 
General Motors (GM) is recently up $1.81 to $26.74 on strong U.S. performance and guidance compared to losses in Europe. March and April put option implied volatility of 35 is below its 26-week average of 41.
 
TRW Automotive (TRW) is recently up $5.41 to $46.88 after reporting Q4 adjusted EPS of $1.84 vs. consensus $1.55. March and April put option implied volatility is at 36 is below its 26-week average of 48.

J.M. Smucker (SJM) is recently down $7.44 to $70.72 after reporting Q3 earnings fell 11% on a sales volume decline of 10%. March and April put option implied volatility of 21 is below its 26-week average of 23.
 
CBOE Volatility Index-VIX recently down 1.45 to 19.69; S&P 500 recently up 1.01%.

The CBOE Volatility Index^® (VIX^®) has become so well known that for many investors the VIX is the primary barometer or virtual proxy for volatility.  The VIX is designed reflect market expectations of 30-day implied volatility conveyed by S&P 500 stock index option prices. www.cboe.com/VIX

In recent years I often have heard the following questions --

1. Are there other indexes that use the VIX methodology to create implied volatility indexes for options on other asset classes and other stock indexes?
2. How does the volatility of the S&P 500^® Index compare to the volatility of other asset classes?

The answer to question number 1 above is that there now are dozens of indexes worldwide that are legally authorized to use the proprietary VIX methodology (for a sampling of some volatility indexes created by CBOE, including the CBOE Crude Oil ETF Volatility Index (OVX), please visit www.cboe.com/volatility).

For the remainder of this blog, I will focus primarily on the volatility of two very important indicators – the S&P 500 Index and the dollar price per barrel of WTI crude oil. 

An answer to question number 2 above is that crude oil prices often have been much more volatile than the S&P 500 Index.

CRUDE OIL SPOT PRICES

As one can see n the first chart below, the prices for crude oil have had dramatic swings over the past 6 years.

30-DAY HISTORIC VOLATILITY

If an analyst prefers a longer time frame over which to view volatility, the use of historic volatility of commodity spot prices could be preferable (options on commodity-based ETFs were not available in the 20^th century).

The 30-day historic volatility for crude oil peaked at over 125 in January 2009, but it has fallen to around 20 this month.

Here is the average 30-day historic volatility since January 1993 for three key barometers --

• 36.5    Crude oil spot (WTI)
• 17.0    S&P 500 Index         
• 14.9    Gold spot                 

The 30-day historic volatility for the USO ETF peaked at around 88 in December 2009.

The approximate average 30-day historic volatility for six ETFs over the past 5 years was --

41.7          EWZ - iShares MSCI Brazil Index ETF

49.3          FXI - iShares FTSE China 25 Index ETF

36.5          USO - US Oil Fund ETF

43.8          EEM - iShares MSCI Emerging Markets Index ETF

21.0          GLD - SPDR Gold Trust ETF

22.7          SPY - SPDR 500

30-DAY IMPLIED VOLATILITY

Some analysts prefer to look at real-time updates of implied volatility indexes that are designed to reflect intraday customer sentiment.

The CBOE Crude Oil ETF Volatility Index (OVX) has a price history back to May 2007, and its peak daily close was 100.42 on December 11, 2008. The OVX Index is designed to reflect the 30-day implied volatility of USO ETF options www.cboe.com/OVX

The average daily closing values from May 10, 2007 through February 14, 2012 were –

41.9    CBOE Crude Oil ETF Volatility Index (OVX)

26.5    CBOE Volatility Index (VIX)

CORRELATIONS

As noted in the table below, the daily changes in the OVX Index had a negative 0.73 correlation to those of the USO ETF during the time period covered.

There were three days in August 2011 in which the USO ETF fell by more than 6% and the OVX Index rose by more than 26%.

TRADABILITY AND FUTURES AND OPTIONS

Some CBOE customers have expressed an interest in a future launch of OVX futures and options.  Please check www.cboe.com/OVX for an update on the status of possible OVX futures and options.

If OVX futures and options are launched in the future, and if you believe that the OVX is mean-reverting and you believe that there is a good chance that OVX might rise significantly in upcoming weeks or months, four strategies that you might consider include –

1. Long OVX call options
2. Long OVX call spreads
3. Short OVX put credit spreads
4. Long OVX futures.

Before investing in any volatility-based product (futures, options, or ETP), please do your homework regarding the unique pricing of volatility-based products.  You can visit www.cboe.com/VIX for some information regarding pricing, and www.cboe.com/OVX for more information on the OVX Index.

Volatility as an asset class

NetApp (NTAP) is recently up $3.37 to $43.25 in the premarket following the company reporting double-digit sales growth. Overall option implied volatility of 62 is above its 26-week average of 47.
 
Blue Nile (NILE) is recently down $9.83 to $32 in the premarket following Q4 earnings dropping 32% as the online jeweler saw weak U.S. engagement sales. Overall option implied volatility of 61 is above its 26-week average of 56.
 
Nvidia (NVDA) is recently down $1.10 to $15.07 in the premarket following a Q4 profit decline of 32%. Overall option implied volatility of 50 is below its 26-week average of 56
 
CBOE Volatility Index-VIX closed at 21.14, 10-day moving average is 18.77, 50-day moving average is 21.63.
 
 
Stocks with significant put volume increases;

FCX 2/18/2012 41 20K contracts

AAPL 2/18/2012 500 18K

BAC 5/19/2012 7 15K

RIMM 2/18/2012 15 10K

U.S. equities are mixed to lower on Greece and Moody’s Investor Services review of global banks.

PPI was up 0.4% which was above estimates. Weekly Jobless claims were slightly lower, Housing Starts were up modestly.  GM earnings matched the previous quarter, but large losses in Europe disappointed.

February VIX Opening Settlement this morning is 20.44.

Some investors who are new to options have asked these questions –

• How can I determine how much premium will be generated by a covered call strategy?
• Is a high VIX level related to high option premiums?
• If VIX is at a high level, does that mean that a covered call strategy will perform well?

Many factors can influence the premiums generated by different covered call strategies, and a high VIX level does not guarantee that covered calls will have great performance. (For more general options education, please visit http://www.cboe.com/LearnCenter)

The CBOE S&P 500 BuyWrite Index (BXM^SM) sells one-month S&P 500 index options at mid-day on the third Friday of every month, while the CBOE Volatility Index^® (VIX^®) is designed reflect market expectations of 30-day volatility conveyed by S&P 500 stock index option prices.

One could use a “Rule of 10” to try gain the following approximation -- if you take the VIX and divide by 10, the resulting number should give you an approximate estimate of the BXM gross monthly premium as a percentage of the S&P 500 Index.  Please see the two charts below for more details.

The two charts above used the term “Gross Premiums” because the numbers shown are not net returns.  Please see the table below to see some relationships between VIX levels and the annual percentage change in value of the BXM and S&P 500 indexes.  Note that in 2008, for example, (1) the VIX had its highest average daily closing values, (2) even though the BXM generated relatively high gross premiums that year, the BXM was down 28.8% that year.  The premiums generated by the BXM Index helped the BXM avert the 37% loss endured by the S&P 500 Index in 2008.

www.cboe.com/benchmarks  www.cboe.com/VIX

NEW PAPER BY ASSET CONSULTING GROUP

This week the investment advisory firm Asset Consulting Group published a new six –page paper “An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns” (available at www.cboe.com/benchmarks).

Exhibit 12 of the paper notes that the BXM call premiums sold averaged about 1.8% per month since June 1988.

Exhibit 13 of the paper notes that “the average value for implied volatility (as represented by VIX) was 20.27 and the average value for realized volatility was 16.38. A number of studies have shown that the implied volatility inherent in index options prices generally has exceeded subsequent realized volatility over multi-year periods (see www.cboe.com/benchmarks). Richly priced index options could provide advantages to

the option seller.”

Visit www.cboe.com/benchmarks for (1) links to several papers that discuss implied and realized volatility, and (2) more information about risk disclosures (e.g., past performance is not a guarantee of future returns).

Volatility as an asset class
 
ZyngaReports (ZNGA) is recently down $1.13 to $13.20 in the premarket on Q4 revenue $311.2M vs. $195.8M a year ago. Overall option implied volatility of 78 is above its 7-week average of 69.
 

Weight Watchers (WTW) is recently down $1.74 to $77.60 in the premarket after reporting Q4 revenue of $401.3M vs. consensus $412.1M. and plans to repurchase up to $720M shares in a "modified Dutch auction." Overall option implied volatility of 76 is above its 26-week average of 53.

Kellogg (K) is recently up $1.70 to $52 in the premarket on the company purchasing Procter & Gamble (PG) Pringles unit for $2.7B. Overall option implied volatility of 14 is below its 26-week average of 18.
 
CBOE Volatility Index-VIX closed at 19.54, 10-day moving average is 18.51, 50-day moving average is 21.76.
 

Significant put volume increases;
 
ZNGA 2/18/2012 12 27K contracts

BAC 1/19/2013 5 14K

ZNGA 2/18/2012 13 13K

YHOO 2/18/2012 15 7K
 
AAPL 2/18/2012 500 5K

U.S. equities are higher on China’s upbeat remarks over European debt issues. Comments from Europe about delaying part of the bailout muddies the water. NY Empire Manufacturing Index exceeds expectations.