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IB Market Brief
| As of: Thu, 9 Sep 2010 03:58 PM EDT |
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The IB Options and Futures Intelligence Report presents vital market information that is extremely useful to serious traders based on Interactive Brokers Group's experience of professionally trading the markets for nearly three decades. Option and futures pricing data has built-in information that provides the option and futures markets’ consensus outlook for subsequent activity in the markets. These leading indicators can provide a guide to traders and investors before news is widely disseminated to the public at large or reflected in underlying prices.
One of the most important of these indicators, implied volatility, represents the markets’ view of uncertainty associated with future price movements. When the current implied volatility is compared to the prior day’s implied volatility, a large increase can foretell unexpected news developments and provide an opportunity to adjust positions accordingly. This gain indicates that option market participants anticipate greater price movement than in the past, possibly because of information that is not yet readily available. Conversely a large decrease in implied volatility indicates the expectation of subsiding price movements, possibly because all recent news has been reflected in current underlying prices. Large premium or discount of implied volatility to historical volatility over the past 30 days is frequently not justified and may represent significant trading opportunities. Other options market data presented in our report such as volumes, and call/put ratios also plays a role in undersaanding sentiment in the markets.
For futures markets we present two measures: Synthetic EFP Rates and Futures Arbitrage Premium/Discount Index. The Synthetic EFP Rates highlight financing opportunities where entering into an Exchange for Physical (stock for single stock future swap) will provide a lucrative investment return or a very low borrowing rate. The Futures Arbitrage Premium/Discount Index highlights discrepancies between major index future contracts and their underlying fair value.
For the purpose of the tables, those options symbols with less than a $5 stock price, and less than 200 options contracts traded, and whose company has less than $1 billion in capital are screened out to eliminate symbols whose information may be more indicative of lack of liquidity in the markets. All tables, except the Fut Arb table, are posted hourly on each trading day from 11:45 to 15:45 ET (with a 15-minute market data delay) under normal circumstances. Tables are also posted at 16:15 ET to capture the market close. The Fut Arb table is updated every 15 minutes (with a 15-minute market delay), 12:00 AM Monday through 11:59 PM Friday. To view volatility and volume as well as other market summary statistics in real-time within our premier direct access trading platform, Trader Workstation, you must have an account with Interactive Brokers. Click "Open an Account" at the top right of the page.
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Table Definition
Top Twenty 30-day (V30) Implied Volatilities
Implied volatility is the options market's prediction of how volatile a given underlying will be in the future. It is calculated by inputting all known information into an options pricing model (i.e. option price, interest rates, dividends, strike price, and expiry date) and backing out the unknown parameter, the implied volatility.
Twenty symbols with the highest implied volatilities are ranked in descending order and displayed on an annualized basis. Implied volatility is calculated using a 100-step binary tree for American style options, and a Black-Scholes model for European style options. Interest rates are calculated using the settlement prices from the day’s Eurodollar futures contracts, and dividends are based on historical payouts.
The IB 30-day volatility (V30) is the at market volatility estimated for a maturity thirty calendar days forward of the current trading day. It is based on option prices from two consecutive expiration months. The first expiration month is that which has at least eight calendar days to run. The implied volatility is estimated for the eight options on the four closest to market strikes in each expiry. The implied volatilities are fit to a parabola as a function of the strike price for each expiry. The at-the-market implied volatility for an expiry is then taken to be the value of the fit parabola at the expected future price for the expiry. A linear interpolation (or extrapolation, as required) of the 30-day variance based on the squares of the at market volatilities is performed. V30 is then the square root of the estimated variance. If there is no first expiration month with less than sixty calendar days to run we do not calculate a V30.
Closing price, and change in price from the prior day are also displayed.
Top Twenty Volatility Gainers and Losers
The current trading day’s 30-day Implied Volatility is divided by the prior trading day’s 30-day Implied Volatility to determine the change in volatility for the day and the top 20 gainers and losers are posted. Gainers are those symbols which the options markets believe will have the greatest up or down price movement in the future as compared to the past, and losers are those symbols which the options markets believe had a large up and down price movement and will stabilize in the future. Implied volatility, closing price, and change in price from the prior day are also displayed.
Top Twenty Options Volumes and Volumes Gainers
Options volumes for the day are displayed for the top twenty symbols with the highest volumes.
The trading day’s options volumes are divided by the previous ten trading day’s options volumes average and the top twenty gainers are posted by symbol.
Closing price, and change in price from the prior day are also displayed.
Implied vs. Historical Volatilities
The 30-day Implied Volatility is divided by the 30-day historical volatility. This ratio highlights those symbols in which the market prediction of future volatility is much different from the volatility in the market over the last 30 days. The formula for historical volatility as defined by Garman-Klass. The top twenty symbols with the highest ratios as well as the top twenty symbols with the lowest ratios are displayed.
Implied volatility, historical volatility, closing price, and change in price from the prior day are also displayed.
Top Twenty Put/Call Volume Ratios and Call/Put Volume Ratios
Put option volumes are divided by call option volumes for the trading day, and the symbols for the twenty highest ratios are displayed. For the put/call ratio, the HIGHER the value, the more negative the sentiment since it would indicate more puts traded than calls. A ratio of less than one indicates more call volume than put volume.
Call option volumes are divided by put option volumes for the trading day, and the symbols for the twenty highest ratios are displayed. For the call/put ratio, the HIGHER the value, the more positive the sentiment since it would indicate fewer puts trading than calls. A ratio of less than one indicates more put volume than call volume.
Closing price, and change in price from the prior day are also displayed.
Top Twenty Put/Call Open Interest and Call/Put Open Interest
Put option open interest is divided by call option open interest, and displayed for the top twenty symbols with the highest ratios. This ratio may indicate negative sentiment in the options market.
Call option open interest is divided by put option open interest, and are displayed for the top twenty symbols with the highest ratios. This ratio may indicate positive sentiment in the options market.
Open Interest ratios reflect a longer time period than Put/Call and Call/Put daily volume ratios and therefore tend to be less volatile.
Closing price, and change in price from the prior day are also displayed.
Synthetic EFP Rates
An Exchange for Physical (EFP) allows the swap of a long or short stock position for a Single Stock Future (SSF). SSFs have an interest rate built into their price that is determined competitively by numerous market participants. Like Repos and Reverse Repos in the debt markets, EFPs provide a cheap and efficient financing vehicle. The EFP transaction is one where you sell the stock and buy it back for future delivery by buying the SSF future, or you buy the stock and sell the SSF.
There are several reasons to use this type of transaction:
- If you carry a long stock position on margin, the EFP gives you the opportunity to reduce your financing cost because you will likely be able to sell the stock and buy the forward at a premium that is lower than your margin rate.
- If you are short the stock, you receive interest on the credit balance generated by your short sale, but this interest is less than the premium you would receive by selling the SSF and buying back the short stock.
- If you have excess cash in your account and would like to earn a higher return, you could buy stock and sell it forward at a premium higher than the interest your cash generates.
The tables above highlight the highest (investment opportunity) and lowest (borrowing opportunity) synthetic EFP rates available in the market. These synthetic rates are computed by taking the price differential between the SSF and the underlying stock, netting dividends, to calculate an annualized synthetic implied interest rate over the period of the SSF. All SSFs are settled through the Options Clearing Corporation, an AAA rated entity, making any interest earned through implied interest safer than with many other interest earning alternatives.
Futures Arbitrage Premium/Discount Index
The fair value of an index futures contract is computed by combining all the underlying values, adding an interest cost of carry for the duration of the futures contract, and subtracting any dividends that are paid during the duration of the futures contract. The table above compares near futures contracts with the fair value of the underlying representing a contract. When a futures price is greater than the fair value, there is a premium, indicating that the market believes there is a potential for increase in the underlying price or a decrease in the futures price. When a futures price is less than the fair value, there is a discount indicating the market believes there is a potential for a decrease in the underlying price or an increase in the futures price.
Written Commentary
As of: Thursday September 9, 2010 at 3:45 pm
Put spreader portends near-term erosion in Energy fund’s shares
Today’s tickers: XLE, CROX, COCO, PCX, EBAY, NTAP, MW, ARG & AXL
XLE - Energy Select Sector SPDR ETF – A massive put spread purchased on the XLE, an exchange-traded fund designed to correspond to the performance of the Energy Select Sector of the S&P 500 Index, points perhaps to one investor’s expectation that the price of the fund’s shares are set to decline ahead of September expiration day. Shares of the fund are currently up 0.40% at $54.06 as of 3:45 pm ET. It looks like the pessimistic player picked up approximately 40,000 puts at the September $53 strike for an average premium of $0.21 each, and sold about the same number of puts at the lower September $52 strike at an average premium of $0.44 a-pop. Net premium paid to purchase the spread amounts to $0.23 per contract. The investor responsible for the transaction stands ready to make money if shares of the XLE fall 2.4% from the current price of $54.06 to breach the effective breakeven point at $52.77 by expiration next Friday. Maximum potential profits of $0.77 per contract – for a total of $3,080 million – are available to the trader if the XLE’s shares drop 3.8% to slip beneath $52.00 by expiration day.
CROX - Crocs, Inc. – The footwear firm’s shares plunged 15.5% in afternoon trading to touch down at an intraday low of $11.68. Sharp share price erosion spurred put buying by options traders expecting the stock to continue lower ahead of October expiration. Investors purchased approximately 5,100 now in-the-money puts at the October $12 strike for an average premium of $0.85 each. Put players make money if shares fall another 4.5% from today’s low of $11.68 to breach the average breakeven point at $11.15 by expiration day next month. Options implied volatility on the shoe maker shot up 26.7% to 66.39% as of 3:40 pm ET.
COCO - Corinthian Colleges, Inc. – Shares in for-profit university, Corinthian Colleges, Inc., shot up 14.5% to an intraday high of $5.61 this morning on speculation the company may be acquired. Options traders were quick to initiate bullish stances on the stock in case the rumors end up having some truth to them. COCO’s shares cooled slightly in afternoon trading and are currently up 9.8% on the day to stand at $5.38 as of 2:50 pm ET. Speculators hoping to see shares continue higher picked up 1,300 now in-the-money calls at the September $5.0 strike for an average premium of $0.41 each. Buying interest spread to the higher September $6.0 strike where some 4,300 calls were coveted for an average premium of $0.12 a-pop. Investors long the September $6.0 strike contracts make money if COCO shares rally another 9.1% over today’s high of $5.61 to exceed the average breakeven price of $6.12 by expiration day next week. Investors also purchased approximately 4,700 call options at the October $6.0 strike for average premium of $0.29 apiece. Traders holding these contracts are prepared to profit if the for-profit university’s shares gain at least 12.1% to surpass the average breakeven point to the upside at $6.29 ahead of October expiration. Takeover chatter, unconfirmed rumors and increased demand for COCO call options helped lift the stock’s overall reading of options implied volatility as much as 19.6% to a high of 92.44% today.
PCX - Patriot Coal Corp. – Coal producer, Patriot Coal Corp., attracted bullish options investors during the session with the value of its shares rallying as much as 4.65% in morning trading to touch an intraday high of $11.69. Positioning in PCX calls across several expiries today suggests some traders are hoping to see the price of the underlying stock continue to rebound. Patriot’s shares, using today’s high of $11.69, are still down 51.8% since April 26, 2010, when the stock reached its 52-week high of $24.25. Bulls hoping to see the coal company’s shares extend gains picked up at least 3,250 calls at the September $12 strike for an average premium of $0.28 each. Call buyers are poised to profit should PCX shares rally another 5.05% to trade above the average breakeven price of $12.28 by expiration day next week. More than 7,240 calls changed hands at the September $12 strike by 1:30 pm ET versus previously existing open interest of 3,113 lots. Optimism spread to the October $12 strike where another 1,000 calls were purchased for premium of $0.72 a-pop. Investors looking for a more significant upward shift in share price scooped up 1,000 calls at the higher October $14 strike for an average premium of $0.25 apiece. Traders holding these contracts make money if the coal producer’s shares jump 21.9% over today’s high of $11.69 to surpass the average breakeven point at $14.25 by October expiration. Shares last traded above $14.25 back on June 23, 2010. The increase in demand for call options on the stock earlier boosted Patriot’s overall reading of options implied volatility 8.78% to an intraday high of 65.48%.
EBAY - eBay, Inc. – It looks like one trader may have sold call options on the online marketplace operator as part of a buy-write strategy in the expectation that EBAY’s shares will rebound by October expiration. eBay’s shares commenced the session higher, but quickly reversed course in the first 30 minutes of the trading day, slipping as much as 2.00% to an intraday low of $24.08. The investor appears to have combined the purchase of EBAY shares for approximately $24.12 each with the sale of 3,000 calls at the October $25 strike for premium of $0.57 apiece. Premium received on the sale of the calls effectively reduces the price paid to get long shares of the underlying to roughly $23.55 each. Thus, the transaction positions the investor to reel in maximum gains of 6.15% should shares rally above $25.00 by expiration day next month.
NTAP - NetApp, Inc. – Medium-term bullish trading in NetApp call options appears to be the work of an optimistic investor expecting the price of the underlying shares to rally sharply, perhaps even to new all-time highs, by the end of 2010. Shares of the provider of enterprise storage and data management software and hardware products and services increased as much as 3.15% at the start of the session to secure an intraday- and new 52-week high of $47.89. It looks like the options trader originally took a bullish stance on NTAP back on August 27, 2010, by purchasing approximately 4,000 calls at the December $45 strike for an average premium of $2.34 each. Shares of the underlying stock have rallied more than 15.5% since August 27 when shares closed at $41.45. The surge in NTAP shares boosted premium on the investor’s call options, and today it appears he sold the 4,000 contracts for a substantially richer premium of $5.14 a-pop. Average net profits enjoyed on the closing sale amount to $2.80 per contract. Next, it seems the same bullish player purchased a debit call spread in the December contract to prepare for NTAP shares to extend gains. The trader picked up approximately 4,000 calls at the December $50 strike for an average premium of $2.91 each, and sold roughly the same number of calls at the December $60 strike at an average premium of $0.67 apiece. Net premium paid to establish the spread amounts to $2.24 per contract. Profits start to accumulate for the investor if NetApp’s shares surge 9.1% over today’s high of $47.89 to surpass the average breakeven price of $52.24 by December expiration. Maximum potential profits of $7.76 per contract pad the bullish player’s wallet if shares jump 25.3% in the next several months to trade above $60.00 by expiration day.
MW - The Men’s Wearhouse, Inc. – Shares of the retailer of men’s suits and tuxedos jumped 5.4% at the start of the trading session after the firm posted better-than-expected second-quarter earnings of $0.80 a share versus the consensus forecast of $0.77 a share. MW’s shares are currently up 4.75% to stand at $22.00 as of 12:12 pm ET. The retailer popped up on our ‘hot by options volume’ market scanner after one investor initiated what looks to be a short straddle in the October contract. Selling the straddle indicates the trader expects Men’s Wearhouse shares to settle at $22.00 at expiration. The transaction likely involved the sale of 2,500 calls at the October $22 strike for premium of $1.00 apiece and the sale of 2,500 puts at the same strike at a premium of $1.40 each. Gross premium pocketed by the straddle-seller amounts to $2.40 per contract. The trader keeps the full premium as long as shares are trading at $22.00 at expiration. Wayward shifts in the underlying share price will cut into the investor’s profits. The short stance taken in both call and put options exposes the investor to losses in the event that shares rally above the upper breakeven price of $24.40, or if shares trade below the lower breakeven point at $19.60, ahead of expiration day in October. The overall reading of options implied volatility on Men’s Wearhouse collapsed 22.9% lower to 43.85% as of 12:20 pm ET.
ARG - Airgas, Inc. – Shares of the distributor of industrial, medical and specialty gases fell as much as 1.6% in early morning trading to touch an intraday low of $63.55 on news proxy advisory firms recommended that Airgas shareholders vote against Air Products & Chemical Inc.’s attempt to oust the majority of the ARG board. Airgas shares recovered significantly by 11:20 am ET to stand 0.50% lower on the day at $64.28. Yesterday, Air Products upped its offer to buyout Airgas to $5.5 billion, but Airgas rejected the bid, stating the $65.50 offer undervalues the company. Bearish positioning in ARG options took place in the first half of the session. Perhaps some traders are bracing for shares to falter again while the months-long hostile takeover story continues to unfold. One pessimistic player initiated a debit put spread, buying 4,000 puts at the October $62.5 strike for premium of $3.10 each, and selling the same number of puts at the lower October $55 strike at a premium of $1.10 apiece. The net cost of the transaction amounts to $2.00 per contract. Thus, the investor makes money if ARG’s shares fall 5.9% from the current price of $64.28 to breach the effective breakeven point on the spread at $60.50 by October expiration day. Maximum potential profits of $5.50 per contract are available to the trader should the gas maker’s shares plunge 14.4% to slip beneath $55.00 ahead of expiration. The investor responsible for the transaction could be utilizing the spread to protect the value of a long position in ARG shares. Options implied volatility on the stock earlier jumped 12.3% to an approximate intraday high of 41.41%.
AXL - American Axle & Manufacturing Holdings, Inc. – The auto parts supplier attracted bullish options traders this morning when shares of the underlying stock inched up 2.9% to an intraday high of $8.99. Shares have cooled, however, and are currently flat at $8.74 as of 11:35 am ET. Investors feeling confident that American Axle’s shares are unlikely to collapse in the next 5 months sold approximately 3,000 puts at the January 2011 $6.0 strike to pocket premium of $0.35 per contract. Put sellers keep the full premium received on the transaction as long as AXL shares exceed $6.00 through expiration day. The short position in put options suggests these traders are happy to have shares of the underlying stock put to them at an effective price of $5.65 each if the puts land in-the-money at expiration.
Andrew Wilkinson |
Caitlin Duffy |
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The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Mixed bag for forex traders
Thursday September 9, 2010
Following last week’s show of health in the shape of reasonable U.S. job creation, investors find themselves at the start of the same cycle witnessed back in the second quarter. Growth around the world appeared to be picking up at the time, while the punishment ailing the euro began to run out of steam. The risk-on rally reflected the disappearance of clouds on the horizon. As we fast forward to today, a similar picture is emerging. The pressure is once again off the U.S. economy as the modest pace of improvement continues. Decoupling is once again emerging as a theme now that a Chinese slowdown has passed the turning point. Once again the emergence of clouds across Europe surrounding a worrisome sovereign debt crisis is detracting from overall risk appetite as the euro and British pound stand out as heavyweights again today.
| 09-09-2010 04:09 PM EDT | Current Price | Put Open Int | Weekly Change in Put Open Int | Call Open Int | Weekly Change in Call Open Int | Put/Call Open Int Ratio | 30-day Historical Vol (%) | Implied Volatility (%) |
 Euro |
1.2745 | 27,502 | 402 | 17,639 | 658 | 1.6 | 10.3 | 10.9 |
 Yen |
83.8200 | 10,789 | 183 | 2,871 | 162 | 3.8 | 10.8 | 12.3 |
 Pound |
1.5436 | 9,441 | 69 | 3,690 | 27 | 2.6 | 9.2 | 9.9 |
 Canada |
0.9676 | 10,507 | 190 | 10,611 | -90 | 1.0 | 10.8 | 11.0 |
 Aussie |
0.9235 | 9,847 | 62 | 21,627 | -49 | 0.5 | 12.8 | 12.0 |
 Swiss |
1.0150 | 3,703 | 0 | 6,358 | 477 | 0.6 | 12.1 | 10.7 |
