Pump Up The Volatility
Futures are lower this morning as are the overseas markets.
The markets were left in a negative technical condition following Fridayâ€™s sell-off.
We are now entering the â€œmeatâ€ of the earnings season with many reporting this week, including Intel
PowerRating) and IBM
implied volatility will get â€œpumpedâ€ before the earnings announcement and then get creamed after the announcement. This provides investors with a
wonderful opportunity to sell call options against their holdings and slip into a buy-write.
This time there has not really been any kind of volatility â€œpump.â€ This
be because Q4 earnings have been made more or less irrelevant because
expectations are so low. Nonetheless, should any â€œpumpâ€ occur, I would
encourage holders of stock to write calls against their stocks.
Although Greenspan/Microsoft provide a convenient excuse, it was
the big reversal on Wednesday that set up todayâ€™s sell-off. The hook
on the false breakout of the COMP/SOX/GSO, and anxious longs were
hanging on hoping Greenspan would bail them out.
Once again I would like to remind subscribers that the January
tends to be volatile. This is because the January options have been in
existence for approximately 2.5 years, first as LEAPs, then as regular
options. This leads to a larger than normal build up of open interest
As I have noted before, a large open interest tends to act as an
force during expiration week (if it is sufficiently close to the
stock price). As positions are unwound, the stock is forced toward the
strike price through the effects of arbitrage.
Take a look at the open interest of the options in the stocks you trade
actively or in which you have positions. If there is an unusually large
interest at a particular strike, there is a chance that the stock might
â€œpulledâ€ there over the course of the week.
April 25 calls, selling the April 15 puts) for $.40 credit (50%).
GENZ — Continue Gamma scalping the GENZ straddle.
BBBY — Continue Gamma scalping the BBBY straddle.
AMD — Buy the April 25/15 reverse collar (buying the April 25 calls,
selling the April 15 puts) for $.40 credit (50%).
Recap of open
Airline calendar spreads
holding Jan. 25 calls, looking like rip-ups.
the Jan. 12.5 puts) @ .05 average. Note: We have covered the Jan.
puts at $.05. This effectively leaves us long the Jan. 15 calls at
eliminating the need for a stop.
March 15 puts) at $1.50 credit average (50%).
15 puts) at $.40 (50%).
Jan. â€™03 10 buy-write @ 5.15 (100%) — hold.
Jan. 12.5 buy-write @ 9.60 — hold.
Jan. â€™03 40/May 45 call calendar @ $2.75 — hold.
— Long 1 unit of the Jan. 10 calls at $.90 credit. (Due to
GENZ — Long the Jan. 60 straddle at $5.95 average cost,
(100%) — hold.
BBBY — Long the Jan. 35 straddle at $2.85
(100%) — hold.
Call Spread Positions
— Long the March 17.5/22.5 call spread at $.80 credit average
(50%). Note: This spread is a result of a reverse collar roll.
Put Spread Positions
TLAB: Stop @ 11.95 close only.
*Options trading involves substantial risk and is not suitable for all
investors. Also note that spread strategies involve multiple
are not risk-free. Most spreads must be done in a margin account.
*Because of the importance of tax considerations to all options
the investor considering options should consult with a tax advisor as
taxes may affect the outcome of contemplated options transactions.
*Supporting documentation for claims, comparisons, recommendations,
statistics or other technical data will be furnished upon request. One
more of the contributors to these commentaries may have a position in
more of the securities mentioned.
It is important to note that the options strategies discussed herein
suitable to all investors. Options are complex investment tools and
substantial risk. Moreover spreading strategies do not eliminate risk
involve multiple commissions.
Note: All individuals must have read the ODD carefully before trading
options. To obtain the document, click on the OCC link: https://www.theocc.com/publications/risks/riskchap1.jsp