Oil Option Boom?

OK, here’s some vaguely interesting options behavior.

Tech stocks are seeing pretty much “normal” volatility behavior around earnings. Options pump before The Number, number comes out, stock’s move, options get plowed.

And so far the moves I have followed were all near the range’s implied by the options. BIDU, AMZN and ISRG (OK, not actually a tech stock, but it acts like one) had big pops, but were pretty accurately priced in. Same in AAPL on the downside. GOOG a bit out of range, but not as much as would seem. Gamma buyers and gamma sellers pretty much fighting to a draw.

On the other hand, energy and mining sort of names are seeing similar magnitude moves in their stocks, but not the expected option drops.

Take this POT. On the above chart, it sure looked like once the news was out, volatility would dip into the 40’s. At least it looked that way to me. Wrong! Stock didn’t have a big net move, but gapped up to 209 and then dropped as low as 186 before ultimately settling at 194, down 3% on the day. Options however closed at a 60 volatility, so despite the non-exceptional net move, option owners likely scored a nice win, between the trading range of the stock and the lack of volatility implosion.

And it’s not just POT. FCX had similar option behavior the other day, and with much tamer action. Ditto for AEM yesterday

So what gives?

I think I let the little picture (earnings) obscure the bigger picture. Energy and mining volatility is just very strong across the board. I do believe that is vulnerable, as if/when they rally, we will have a very defined trading range between here and the recent highs. But for now, option owners have “hand”.

Remember the fortune that the Evil Financial Short Cabal and the Equally Evil Oil Speculators were minting? The one that inspired 1000 Congressional hearings?

Not to worry, nothing to see here, they have given it all back the past week and a half, as per Jimmy Ray (hat tip AllanF).

OK, I will say it, this is the greatest short squeeze I have ever seen, and it is based on the coming dramatic drop in gasoline. There’s just no place for it, no place to put it. And it is entirely unexpected. No hedge fund was prepared for this.

………The stuff that is down, which has no bottom: ag, oil, gas, oil service, coal, minerals, steels.

We are seeing the unwinding of everything that has been going on for the last year. It is vicious, and it overwhelms the fundamentals like Washington Mutual (WM) — a really bad quarter — or Costco (COST).

These are gigantic moves, and they relate to a hedge-fund community that has completely and utterly been on the wrong side of the trade.

I have never seen anything like it. So much money, so wrong, so poorly positioned, producing an exact inversion of the gains that were made for the last year.

Just repealed.

First off, we need to investigate all the Naked Shorting that has clearly gone on in the Energy patch the past week. Secondly, we need to reign in this irresponsible speculation in the financials. They’re using play money to drive up the cost of all the financial capital raising secondaries I plan to load up into this strength. I was going to finance it by siphoning out the gas in our cars and re-selling it, but that market has literally gone dry.

OK, seriously, could this be a tad hyperbolic, to say the least? Kind of speaks to why the complaining about the shorts (however merited the complaints about the actual cheating may be) missed the bigger picture. Namely, those same shorts eventually get squeezed and chase us the other way. Always.

I realize there is a very real herd mentality, but I’m fairly certain some hedgies rode the long energy/short financial train well and are still way up. And others jumped in way too late. And still others didn’t have it on in any meaningful way. Or faded into it too soon. Or got long financials and short energy at a very good time. Point being, like anything, there are winners and losers. Clearly we had a major squeeze going on, but even of that subset, some still booked major profits and are just giving a little back, while others just got whipsawed every which way.

OK, enough Voldemort, how ’bout that VIX? Got 10% below the SMA. And kept going before it turned a bit. Again, I would look more to the market behavior WHEN the VIX gets overbought and oversold as the important takeaway, as opposed to seeing the VIX go overbought/oversold and fading against that. In a pathetic bear market rally, an oversold VIX will stop a rally in it’s tracks. All we’ve seen so far on this though is maybe a slowing of the pace of the rally. 

If this volatility chart looks familiar, it’s because it is almost an exact replica of AAPL heading into earnings.

FCX reported yesterday morning, basically the same time in options world as AAPL. And disappointed, or at least didn’t meet some whisper or something. And got hit, as much as 8%.

But that’s where the similarities end. FCX got caught in the wrong industry in yesterday’s “sell all energy and mining” blast. And whereas AAPL volatility did almost precisely what the graph suggested, and went down from the mid 50’s to the high 30’s, FCX volatility amazingly didn’t budge. It closed near 60.

Kind of cries out for some options sales, which then makes you wonder if there’s another shoe to drop or pop.

Very conflicting forces right now as far as volatility is concerned.

On one hand, it’s a big earnings week, and the chance of having the next GOOG find you will put a bid under many names. And we have a genuinely shaky market.

On the flip side, the first week post expiration is the single worst time to own any options paper. Buy writes get rolled, the dollar premiums in the near month now look good, et. al. And it’s summer, in which the default setting is always on Slow. Add in that we have A Bottom down below, and it’s a recipe to sell options now and hedge later if something gets violated.

AAPL yesterday was interesting ahead of the number. The stock did not behave well at all, yet August volatility actually ticked down a bit ahead of the number, from the mid to the low 50’s. The breakeven numbers I looked at were pre-open, and suggested about a 10% was priced in. But by the end of the day, it was probably more like 8%, so the move was pretty close to in line.

Remember though, the goal is not to predict how far the stock will move, just to give a guideline as to what the market expects. So as much as I like to bathe in all sorts of credit adulation and act like I got everything right (sarcasm intended), all I did was interpret what the screen told us. The value added is to give a pre-earnings options play a clearer risk/reward picture.

Drifting volatility ahead of the numbers on this particular week in the cycle was a common pattern in the bubble aftermath. QCOM and some of the Semi Stars used to do this all the time, if memory serves me correctly.

So just be forewarned, prices may get to the point where the risk/reward of selling gamma ahead of earnings may make no sense. I rarely buy gamma ahead of numbers, but if you are into that, some opportunities should arise.

I can barely get a coffee these days without hearing a rumor about which financial companies are on Bill Gross’s “Do Not Trade With” list, so kind of easy to forget we are actually right in the middle of earnings season.

But hey, Apple tonight. I have not gone anywhere near a mall in a while, but I’m hearing the line’s outside the Apple store for the new IPhone is insane. Apparently it was in the stock already though, as it’s gone nowhere lately.

Really not a crazy options bidup ahead of The Number. Aug. near money’s are trading at about a 55 volatility. 40 volatility looks like a reasonable target after the report. Especially since that’s where it’s gone every other time in the past year.

If it happens again, the “over/under” move tonight is about 10% in either direction.

What this means is that a delta neutral options play will likely break even if AAPL moves 10%. Below that, the sellers presumably win. It speaks nothing of direction. And just to remind this is a ballpark estimate, not gospel.

Anybody remember the VIX?

Getting slammed like a Naked Short. Another point or so down gets it 10% below it’s 10 Day SMA.

How about Expiration, haven’t mentioned that much.

You don’t want to play for pins in a volatile and high volume tape, so I’d be a bit careful to say the least.

Also keep in mind that directional moves can feed upon themselves around expiry, as trapped options shorts have to cover as stocks blow through strikes. And then put the next strike into play. It’s not a stretch to say these financials have seen a historic whipsaw this week.

This effect often lingers through Monday post-expiration.

Just something to keep in mind.