Pump Up The Volatility
Futures are lower this morning as are the overseas markets.
The markets were left in a negative technical condition following Friday’s sell-off.
We are now entering the “meat†of the earnings season with many reporting this week, including Intel
(
INTC |
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PowerRating) and IBM
(
IBM |
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Generally,
implied volatility will get “pumped†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 “pump.†This
may
be because Q4 earnings have been made more or less irrelevant because
expectations are so low. Nonetheless, should any “pump†occur, I would
encourage holders of stock to write calls against their stocks.
Although Greenspan/Microsoft provide a convenient excuse, it was
really
the big reversal on Wednesday that set up today’s sell-off. The hook
was set
on the false breakout of the COMP/SOX/GSO, and anxious longs were
hanging on hoping Greenspan would bail them out.
January Expiration
Once again I would like to remind subscribers that the January
expiration
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
in
these options.
As I have noted before, a large open interest tends to act as an
attracting
force during expiration week (if it is sufficiently close to the
current
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
open
interest at a particular strike, there is a chance that the stock might
get
“pulled†there over the course of the week.
Updates:
(
AMD |
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PowerRating)
— Still working to buy the April 25/15 reverse collar (buying the
April 25 calls, selling the April 15 puts) for $.40 credit (50%).
(
WCOM |
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PowerRating)
— We were stopped out of our WCOM Jan. 12.5 calls at $2.00, a
$.40
loss.
Gamma Scalping
(
GENZ |
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— Today’s sigma’s: 53.25 – 57.00.
(
BBBY |
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PowerRating)
— Today’s sigma’s: 32.20 -34.07.
Current
Recommendations
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%).
Rolls/Adjustments
None
Recap of open
trades:
Long-term
Airline calendar spreads
(
AMR |
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— Sold 50% of the Jan. 25 calls for $1.50, leaving us long the
balance
for free.
(
UAL |
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News |
PowerRating) Jan./Oct. 25 call calendar @
.70 — Oct.’s went out worthless,
holding Jan. 25 calls, looking like rip-ups.
Reverse Collars
(
AWE |
Quote |
Chart |
News |
PowerRating)
— Jan. 12/15 reverse collar (long the Jan. 15 calls, short
the Jan. 12.5 puts) @ .05 average. Note: We have covered the Jan.
12.5
puts at $.05. This effectively leaves us long the Jan. 15 calls at
$.10,
eliminating the need for a stop.
(
TLAB |
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— March 17.5/15 reverse collar (long the March 17.5 calls, short
the
March 15 puts) at $1.50 credit average (50%).
(
AMD |
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PowerRating)
— April 25/15 reverse collar (long the April 25 calls, short the
April
15 puts) at $.40 (50%).
Buy-writes
*[AMZN|AMZN]
Jan. ’03 10 buy-write @ 5.15 (100%) — hold.
*[JDSU|JDSU]
Jan. 12.5 buy-write @ 9.60 — hold.
Proxy buy-writes
(
BA |
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PowerRating)
Jan. ’03 35/May 45 call calendar @ $4.75 — hold.
BA
Jan. ’03 40/May 45 call calendar @ $2.75 — hold.
Complex Strategies
JDSU
— Long 1 unit of the Jan. 10 calls at $.90 credit. (Due to
“roll.â€)
GENZ — Long the Jan. 60 straddle at $5.95 average cost,
(100%) — hold.
BBBY — Long the Jan. 35 straddle at $2.85
(100%) — hold.
Short-term
Call Positions
None.
Call Spread Positions
(
DYN |
Quote |
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PowerRating)
— Long the March 30/40 1:2 call ratio spread @ $1.50 (100%) — hold.
TLAB
— 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 Positions
(
TGT |
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Chart |
News |
PowerRating)
— Long the Jan. 35 puts @ 1.15 (100%) — hold.
(
WMT |
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PowerRating)
— Long the Jan. 55 puts @ 2.35 (50%) — hold.
Put Spread Positions
(
AZO |
Quote |
Chart |
News |
PowerRating)
— Long the March 55/65 put spread @ 2.125 (100%) — hold.
(
BBY |
Quote |
Chart |
News |
PowerRating)
— Long the Jan. 60/70 put spread @ 3.00 (50%) — hold.
STOPS
TLAB: Stop @ 11.95 close only.
|
Click |
*Options trading involves substantial risk and is not suitable for all
investors. Also note that spread strategies involve multiple
commissions and
are not risk-free. Most spreads must be done in a margin account.
*Because of the importance of tax considerations to all options
transactions,
the investor considering options should consult with a tax advisor as
to how
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
or
more of the contributors to these commentaries may have a position in
one or
more of the securities mentioned.
It is important to note that the options strategies discussed herein
are not
suitable to all investors. Options are complex investment tools and
involve
substantial risk. Moreover spreading strategies do not eliminate risk
and
involve multiple commissions.
Â
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