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Major hedge funds have suddenly turned bullish, reportedly buying massive amounts of OTC call...

Major hedge funds have suddenly turned bullish, reportedly buying massive amounts of OTC call options on the S&P 500 (SPY). The purchases have been large enough to send the VIX (VXX) higher even as stocks continue to gain. An important milestone - the implied volatility of S&P calls is now greater than that of puts, a true rarity since 2007.
Comments (19)
  • wapiti
    , contributor
    Comments (698) | Send Message
     
    Sure its not the FED buying calls???? I bet it is!!
    21 May 2013, 03:51 PM Reply Like
  • DeepValueLover
    , contributor
    Comments (8132) | Send Message
     
    This is why I've been enjoying the steady rise in (XVZ).

     

    God bless herd mentality!!
    22 May 2013, 08:41 AM Reply Like
  • ceriba
    , contributor
    Comments (61) | Send Message
     
    Is the FED allowed to buy options? I know they are not allowed to buy stocks in most countries, including the US.
    21 May 2013, 04:17 PM Reply Like
  • mobilemoney891
    , contributor
    Comments (8) | Send Message
     
    As you suggest the FED is buying fixed income instruments. The Fed has been buying mortgages and long dated bonds in an attempt to lower long term interest rates.
    22 May 2013, 12:21 AM Reply Like
  • Ryan Sullivan
    , contributor
    Comments (16) | Send Message
     
    Be fearful when others are greedy, and greedy when others are fearful.
    21 May 2013, 04:25 PM Reply Like
  • Ryszard59
    , contributor
    Comments (4) | Send Message
     
    OTC call options? Should this be OTM call options? I don't know what OTC stands for. Can someone explain? Thx
    21 May 2013, 04:25 PM Reply Like
  • ChrisGriffith
    , contributor
    Comments (104) | Send Message
     
    Over the counter
    21 May 2013, 04:35 PM Reply Like
  • Seegood
    , contributor
    Comments (9) | Send Message
     
    OTC=over the counter
    21 May 2013, 04:36 PM Reply Like
  • talld
    , contributor
    Comments (527) | Send Message
     
    I thought the FED could buy stocks. I could swear I read in an article in 2010 that the FED was reporting 50 billion dollars in dividend income for the quarter. I am pretty sure it was stock dividend. Does anyone know for sure?
    21 May 2013, 04:38 PM Reply Like
  • Michael Nau
    , contributor
    Comments (972) | Send Message
     
    I believe that was dividends on preferred and common stock from TARP etc. Only bailed-out companies, not equities in general. The Fed isn't buying stock these days.
    21 May 2013, 06:34 PM Reply Like
  • Charlie54
    , contributor
    Comments (36) | Send Message
     
    Over the counter derivative gambling vehicle...notice I did not say investment vehicle....the market is getting a bit frothy...the sharks are whipped into a feeding frenzy .....it may be time to put some lotion on and get out of the water unless you have shark repellant

     

    http://bit.ly/14uztMQ
    21 May 2013, 04:40 PM Reply Like
  • MILESCFA
    , contributor
    Comments (178) | Send Message
     
    "OTC" is over-the-counter and was used when some options were not standardized (in the early days of options, contracts were actually "contracts", which spelled out the specifications of the transaction; however, options became "standardized".... but you can still occasionally hear of non-standardized options, such as Buffet's SP500 options bet that I'm 99% sure were "NOT OTC").

     

    Nonetheless, I see that this comes from Barrons but I don't agree. First, it's more likely that hedge funds would deal in SPX options (1670 vs 167 value, or 10x leverage). Second, I see more volume in SPX options than SPY options. Third, and the "biggest problem", is that 2 different sources of implied volatility BOTH show puts still have the higher IV.
    21 May 2013, 04:42 PM Reply Like
  • Ryszard59
    , contributor
    Comments (4) | Send Message
     
    OK, thanks Chris. Does the fact that these are OTC options mean anything? I am a beginner in options trading so please forgive my, perhaps, questions with fundamentally easy answers.
    21 May 2013, 05:00 PM Reply Like
  • rbreiten
    , contributor
    Comments (3) | Send Message
     
    Agreed with the last post that downside put implieds are higher than upside call implieds so I am not sure what the original poster is talking about. Having traded and sold both OTC and listed options for years, I can tell you that the amount of OTC options business continues to thrive. In fact, it is arguably multiples of what we see trading listed on a daily basis. Why do investors go this direction, plain and simple, lack of transparency .... they want to keep their transactions secret from the market. While the SPX is one of the most liquid and cheapest prodcuts to trade in the world, the customization ability and secrecy are the most salient reasons for trading OTC.
    21 May 2013, 05:00 PM Reply Like
  • MILESCFA
    , contributor
    Comments (178) | Send Message
     
    "lack of transparency" - I didn't realize OTCs traded in big volumes. Is there anywhere to find info (apparently the Barron's writer found some info, even if it appeared flawed)?
    22 May 2013, 04:29 PM Reply Like
  • Ryszard59
    , contributor
    Comments (4) | Send Message
     
    I love this place. Thank you all for the answers and pointers, I appreciate it!
    21 May 2013, 05:00 PM Reply Like
  • mobilemoney891
    , contributor
    Comments (8) | Send Message
     
    Could you give some context on other instances where "the implied volatility of S&P calls is now greater than that of puts". You mention that it is a rarity since 2007 but no context other than that. Would love to know whether this is a solid market top signal, or just something to consider as a sign of a bull market.
    22 May 2013, 12:20 AM Reply Like
  • drgeezer
    , contributor
    Comments (3) | Send Message
     
    The United States Corporation on the back of each and every dollar bill can buy or sell anything it wants.
    22 May 2013, 01:04 AM Reply Like
  • ericchh
    , contributor
    Comments (2) | Send Message
     
    Signaling a period of backwardation for CBOE implied volatility futures?
    22 May 2013, 06:18 PM Reply Like
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