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  • Swing and Swap
     
     
    Sorry for the belated post, I failed to hit the publish button this morning and then had to run out for a meeting, so here is a combo plate of my opening thoughts and an adjustment to out bearish SPYDR Gold Trust (NYSEARCA:GLD) position. 
     
    Stock futures have reversed overnight losses and are now poised to open moderately higher but will have basically only recouped the late day sell-off that occurred Friday afternoon.  Thin holiday trading should lead to these type of intraday price swings and  swoops, the kind of environment in which the HFT and algos can run rampant and wreak havoc.   In that vein technicals should hold sway during the next few days.  Last Thursday and Friday may have provided the type of downward whoosh that washes out enough people to create an intermediate term bottom.  The market is oversold by a variety of measures and one would have to pretty aggressive to initiate new shorts down at current levels.
     
    Even those that are in the bearish camp, especially technicians, those that employ some form of Elliott Wave theory, are now anticipating a rebound back to the 1060-1080 level before the S&P 500 turns to a new leg lower.  The VIX provided a potentially bullish signal on Thursday when it turned lower on the day even as the S&P 500 was making session and new 7 month lows.  This divergence could be a sign that the bulk of selling had culminated in that investors were no longer felt the need to rush and pay up to buy put options. 
     
    This morning I may be looking at slapping on some iron condors in the Spyder Trust (NYSEARCA:SPY) on the belief that it will remain between 102 and 106 for the next week and their will be an accompanying decline in implied volatility and the time decay of a shortened week will impact premiums.  I’ll send an Alert with any action taken.
     
    In the meantime I am taking some money off the table in the GLD buy rolling down the $119 puts to the $116 strike for a $1.70 net credit.
     
    -Sold to close 10 July $119 puts at $3.20  a contract
    -Bought to open 10 July $116 at $1.50 a contract
     
    This takes $1,700 off the table, and gives us a free bearish exposure- actually locks in a minimum of $250 profit. 


    Disclosure: SPY, GLD
    Tags: GLD, SPY, Options, Gold, Vix, Put
    Jul 06 10:59 PM | Link | Comment!
  • Use a Ladder to Navigate a Big Drop

    Now that the S&P 500 Index has materially cracked the 1040 level traders are beginning to eye just how far the next step down can take us.  Even though the first sign of support comes at the 980 level numbers such as 930 and even 875 seem to be growing in popularity as possible downside targets. But given the steep slide and spike in implied volatility that has already occurred buying puts right here can be a risky prospect. If the market stabilizes or bounces even moderately the loss of premium could be quick and substantial.  One strategy that could be employed to gain downside exposure but at minimum cost and risk is called a ladder.  

    A ladder involves selling a closer to the money option, then buying two options that are both at further out-of-the-money strikes.   Think of as selling a credit spread to help finance the outright purchase of an out-of-the money option. 

    Step on Down 

    Let’s look at the Spyder Trust (NYSEARCA:SPY) as an example.  Tomorrow’s jobs data could certainly provide a catalyst for an acceleration of the decline the impetus for a snapback rally. With the SPY trading at $102.25 one can: 

    -sell 1 July $104 put at $3.80 a contract

    -buy 1 July $100 put at $2.10 a contract

    -buy 1 July $98 put at $1.50 a contract 

    This three legged position is down for a 20c net credit (The amount received from the sale of the $104/100 spread –minus the cost of the $98 put.)  This is a low cost way to establish a long gamma bearish position. It is similar to a ratio spread.    

    If stocks rally back above $104 you collect and keep that 20c, no damage done. If you stocks plummet down through the $98 level you are net outright long the $98 put and profits will accrue as prices decline. The risk or maximum loss is limited to $3.80 and would be incurred if the SPY is above $98 and below $100 on the expiration day.  Essentially the area between $98 and $104 is the dead zone in which a loss, the amount depending on the price of the underlying would be incurred. 

    But for those anticipating a large downside move, or wanting to gain low cost protection, without losing anything should stocks stage a rebound, using a ladder is a safe way to navigate a decline

     

    Disclosure: Short SPY
    Jul 01 11:20 PM | Link | Comment!
  • Financial Worries
    The options market is showing an increase in bearish activity in the financial sector as jockeying for passage of a FinReg heads into the final days before the summer recess.  The spread between the historical volatility an the implied volatility has also been widening; over the past four weeks the Spyder Financial Select (NYSEARCA:XLF) has seen its 10 day HV contract from 45% down 26% but the IV has held steady at around the 33% meaning options, which could have been considered cheap a month ago are now relatively rich premiums.  Implied volatility has ticked up another 6% this morning suggesting traders are bracing for a price move of about 9% over the next 30 days.
     
    Yesterday, the XLF saw a notable bearish trade as one strategist employed a combination of selling calls and buying put spreads to establish downside protection.  The trade involved the sale of 15,000 of the August $16 calls to help finance the purchase of 20,000 of the August $14/$12 put spread.  That action is continuing today with over 400,000 puts traded thus far.  The notable trade is a ratio spread in which someone bought 70,000 of the August $14 puts and sold 140,000 of the $13 puts for a a 5c net credit for the 1x2 ratio spread.  Though this is bearish it is a bit tempered as it profits from a 9% decline but would begin to lose money on anything greater.
     
    This morning individual names such as Bank of America (NYSE:BAC) and JPM are seeing notable bearish order flow with calls being sold, especially in later dated expirations, and puts being bought across multiple strikes and expiration periods.  

    Disclosure: None
    Jun 25 9:15 AM | Link | Comment!
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