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LNKD Surges (LNKD, QQQ, FB) 2.8.2013

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 The options were expecting about a $9.00 move in the stock and according to current prices, the move is going to be outside of that. The ‘at the money’ straddle was just about $9.50 too.  Today’s move was basically unlikely, according to what the options were implying yesterday.  LNKD is probably going to open up at a new all time high. Bullish fundamentals are paired with bullish management.

Analysts are moving around their PTs. BMO Capital Markets maintained LNKD at market perform, but raised its $130 PT. JEF held on to its buy rating and increased its PT to $170.

Salerno.mark.a@gmail.com

Screen shot 2013-02-08 at 7.45.29 AM

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SPY Straddle Fade and QQQ Straddle Long Since 2005 (SPY QQQ) 11.28.2012

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What if one put on a pair trade? What would the results be then? Selling the aforementioned SPY straddle and buying, for example, the QQQ straddle. This is exactly what KOTM did. The thinking behind this strategy could be that SPY volatility is expensive and QQQ volatility is cheap. Another way to think about this trade could be that one is just covering their downside, for if the market crashed the short straddles will get crushed, but the long straddles will be rewarded. A risk to this strategy could be a year 2000 type scenario; where one index acts dramatically different than the other (even if we are indeed long QQQ vol, the idea of uncorrelated markets is a risk).

The results to this study were indeed very interesting. One would think, in theory, the theta (time decay) and long premium would end up being a losing trade, but it was not. The long straddles ended up adding to the net profit. The QQQ total return was a losing trade most of the time, which could be predicted.  The spikes higher and lower were from crashes or spikes. The QQQ made $4.95 since Feb of 2005, in addition to the $48.72 the SPY made. The important part of this exercise is that the long straddles did offset losses during crashes.

The SPY was $116 in Feb of 2005 and is around $140 now, this trade made $48.72 points or around 42% total relative to SPY in ’05 or 35% total relative to SPY now. The QQQ made $4.95. The index was around $40 in Feb of 2005 and around $65 now; 12% total return relative to 2005 and 7.6% total return relative to now.

The trader would have to size the amount of contracts accordingly; relative to the size of both index products in order to do a proper pair trade…along with many other things. Below is a chart of the total return.

Screen shot 2012-11-28 at 10.25.24 AM

KOTM is clearly not suggesting selling an unlimited risk spread, but the data is interesting. More to come on this project.

Feel free to e-mail any comments, feedback, suggestions, or general inquiries to…

Author

salerno.mark.a@gmail.com

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Pregame AAPL Earnings From Every Angle 10.25.12

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The first graphic is a daily bar chart of price’s reaction to the past nine earnings announcements from AAPL. Action after the event is mixed; in most of the sample set, eight of the nine observations, AAPL gapped, but then filled or reversed into said gap. In the other observations, AAPL gapped, but then trended or pinned that Friday. This is indicative of efficient markets and random walk…for each observation is unique and independent of past price action. The gap is the price’s way of adjusting to new news. While this gap may seem inefficient, the derivatives market, in most cases, was expecting said move.

Screen shot 2012-10-25 at 7.11.46 AM

Now to what is implied for the coming event, because the AAPL weekly options only have two days until expiration, they will be an organic way to derive what is implied for the event today after the close.  Using the KOTM implied volatility & time based model, we calculated the one-sigma move (68% probability within) to be roughly $38 up/down or about 68% chance we settle between $654 and $577 by the close on Friday. The two sigma move (95% probability within) is $77 either way or $692  & $539. The implied volatility curve (IV being a measure of risk, supply and demand, relative price, and an input into theoretical models) is displayed below, for it is important to know, especially if one is trading two different months in a spread.

The following chart includes the one and two sigma rolling probability cone, volume profile, and major moving averages (50, 100, 150, & 200).  While the chart may seem noisy, it sure does tell us a lot if you listen! AAPL made its ATH of $700 and has been sifting lower since. Anchoring the breakout on 1/15/2012, AAPL is just about at the 38.2 Fibonacci retracement level. The 150-day moving average at about $614 has proved to be solid support over the last three days. Other than little support levels like prior lows, the next serious support level is the 200-day moving average at $586. Considering the massive OI in the weekly options there is a change it could pin, even though we are not using the monthly cycle options. On expiration Friday, the 50-day will sit at the higher end of the two-sigma rolling probability level, and the 200-day at the lower end.  The 200-day is -4.8% away and the 50-day is 7.5% away.

Screen shot 2012-10-25 at 7.23.33 AM

The ATM (at the money) front month $615 straddle (lifting the offer) is at about $32.10 (5.1% of stock). Because deltas move to one faster near expiration, it is easy to calculate break evens on the straddle; $582.9.75 & $647.06… IV crush, large gamma, and time decay.

IV is actually expensive however, historically speaking, given the average is 68% and Wednesday closed at 86%. The average % move and net change are about 5.5% & $26 respectively…see excel sheet for all data. Considering AAPL’s price, the ATM straddle will cost about $3,200. This is where the AVSPY will come in handy, while this is not a pure AAPL play, it does lower the relative cost.  The $220 ATM AVSPY straddle is about $15, about 6.8% of that product, and only $1500 per one lot.

Screen shot 2012-10-25 at 7.55.51 AM

Alpha options explained here LINK

http://www.keeneonthemarket.com/blog/1562-goog-aapl-spy-alpha-option-review-avspy-a-goosy-10172012

Feel free to e-mail any comments, feedback, suggestions, or general inquiries to…

Author

mark@keeneonthemarket.com

Data courtesy of Thinkorswim

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Don’t Google for Profits, Just Read This: Pregame GOOG Earnings From Every Angle (GOOG, GOOSY, SPY, QQQ) 10.18.2012

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The first graphic is a daily bar chart of price’s reaction to the past nine earnings announcements from GOOG. Action after the event is mixed; in most of the sample set, six of the nine observations, GOOG gapped and pinned on expiration (red vertical line). In the other observations, GOOG gapped, but then filled or reversed into said gap. This is indicative of efficient markets and random walk…for each observation is unique and independent of past price action. The gap is price’s way of adjusting to new news. While this gap may seem inefficient, the derivatives market, in most cases, was expecting said move.

Now to what is implied for the coming event, because the GOOG October options only have two days until expiration, they will be an organic way to derive what is implied for the event today after the close. Using the KOTM implied volatility & time based model, we calculated the one-sigma move (68% probability within) to be roughly $44.17 up/down or about 68% chance we settle between $799.67 and $711.31 by the close on Friday. The two sigma move (95% probability within) is $88.35 either way or $843.85 & $667.13. On Wednesday, October 17th 2012, the stock had a 1.5% pop while the market was only up 0.5%…1% alpha (we will touch on GOOSY alpha options later). The implied volatility curve (IV being a measure of risk, supply and demand, relative price, and an input into theoretical models) is displayed below, for it is important to know, especially if one is trading two different months in a spread.

The following chart includes the one and two sigma rolling probability cone, volume profile, and major moving averages (50, 100, 150, & 200). While the chart may seem noisy, it sure does tell us a lot if you listen! GOOG broke out of its June-July range on 7/5/12 and has yet to seriously look back. The recent pullback tested the trend line and 23.6% Fibonacci retracement level. Other than little support levels like prior lows, the next serious support level is the 50-day moving average at $710. On expiration Friday the 50-day will sit at the lower end of the two-sigma rolling probability level. The rolling probability levels and the KOTM probability levels differ for inputs like IV were not the same. The rolling used a lower IV, an average of the whole IV curve, which says there is a 2.5% chance we test the 50-day by expiration Friday (nearest red vertical line) vs the KOTM probability of 16% we test the 50-day by expiration Friday. The KOTM model is only used for the next two days, for it would not be appropriate to input 80% IV over the long term, as this one is only used before an earnings announcement. Additionally, we are currently sitting at the point of control on the upper, yet small, distribution. The other moving averages sit about 15% below us.

The ATM (at the money) front month $755 straddle (lifting the offer) is at about $39.50 (5.2% of stock). Because deltas move to one faster near expiration, it is easy to calculate break evens on the straddle; $715.75 & $794.25… IV crush, large gamma, and time decay. It is vital to note that given the ATM straddle, it is estimated that GOOG will need to expire one standard deviation away from where we are now, or move + or – $44, either way, just to make about 10% on the trade (using the KOTM sigma model).

IV is actually cheap however, historically speaking, given the average is 102% and Wednesday closed at 79%. The average % move and net change are about 7% & $40 respectively…see excel sheet for all data. Considering GOOG’s price, the ATM straddle will cost about $4,000. This is where the GOOSY will come in handy, while this is not a pure GOOG play, (see link below for alpha options explanation), it does lower the relative cost. The $88 ATM GOOSY straddle is about $4.10, about 4.6% of that product, and only $410 per one lot!

Alpha options explained here LINK

http://www.keeneonthemarket.com/blog/1562-goog-aapl-spy-alpha-option-review-avspy-a-goosy-10172012

Feel free to e-mail any comments, feedback, suggestions, or general inquiries to…

Author

salerno.mark.a@gmail.com

Data courtesy of Thinkorswim

 

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Pregame IBM Earnings From Every Angle (IBM, QQQ) 10.15.2012

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Screen shot 2012-10-14 at 3.14.24 AM

Now to what is implied for the coming event, because the IBM October options only have this week to trade, they will be an organic way to derive what is implied for the event on the 16th after the close.  Using an implied volatility & time based model, we calculated the one-sigma move (68% probability within) to be roughly $8.74 up or down and the two sigma move (95% probability within) about $17.47 either way. On Friday, October 12th 2012, the stock had a 1% pop while the market was slightly down. The implied volatility curve (IV being a measure of risk, supply and demand, relative price, and an input into theoretical models) is displayed below, for it is important to know, especially if one is trading two different months in a spread.

The following chart includes the one and two sigma rolling probability cone and a volume profile.  The upward channel from mid July to now has been solid support and resistance. Additionally, we are currently sitting at the point of control on the upper distribution.  Massive support will sit, specifically on this expiration Friday (red vertical line), at $202.25.  The 150 day moving average will sit around there along with the volume profile’s value area high, and this level is at the lower end of the one sigma move (68% probability within). 

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The ATM (at the money) front month $210 straddle (lifting the offer) is at about $7.36. Using a theoretical model, and adjusting time and implied volatility, in order to break even IBM must move up $9.34 (4.5%) or down $4.32(-2%) the next morning to offset the IV crush and time decay. We estimated front month IV to be 28.4%, for that was the average IV post earnings over the last six observations. It is interesting to note that as of the close on Friday, 10/13/12, front month IV was relatively cheap historically speaking, see excel sheet for data…average of 51.37% pre earnings IV while the current IV is at 38%.

Screen shot 2012-10-14 at 4.28.02 PM

Feel free to e-mail any comments, feedback, suggestions, or general inquiries to:

mark@keeneonthemarket.com

Data courtesy of Thinkorswim