Let’s Get Binary

So, remember those Fixed Return Options we all clamored for? You know, the one’s where you are simply betting on whether an option at a given strike will close in or out of the money on expiration?

By “all clamored for” I mean “someone must have requested them”.

Well, seems a bit of a dud.

They are about a month old, and best I can tell through a quick scan through the screen, there is very little open interest. Intel totals about 1000 contracts. Total. Intel “regular” July 25 calls alone have over 62,000. And Intel is one of the busier ones I can find.

It’s a recurring them here, but they list too many products imho. Adding strikes I like, particularly in lower priced and/or lower volatility names. A stock like Intel, or Cisco, or GE merits $1 strikes for example. Adding concocted hybrid stuff that maybe only a few pro’s have use for will only cause trouble. The more complex, the more likely you are the batter and they are the roided up pitcher with all the shards.

….And just a total non sequitar, but the 2013 Hall of Fame class of first time eligibles as of now features Craig  Biggio, Barry Bonds, Sammy Sosa, Mike Piazza, and his BFF, Roger Clemens. Should be interesting.

Hey, I like the Red Sox too, so welcome aboard to the newest Met.

On Friday night, the Mets acquired 34–year-old OF Trot Nixon from the D’Backs for cash or a player to be named later.

He will wear uniform No. 6, formerly of the Ruben Gotay, Wally Backman collection.

Nixon told reporters that he used to watch the Mets on television as a kid, adding that he ‘loved’ Lenny Dykstra.

NOOOO!!!!!!!!! I wonder if he wants to subscribe to the redubbed “Suttmeier On the Numbers” newsletter.

OK, confession. Lenny was one of my favorite players too. 

Oh, and special thanks to Karl for sending me this link to a site apparently dedicated to the appreciation of French anchoring talent. Yes, goodbye productivity.

Should volatility of a double Inverse (or double regular) be simply double the volatility of the underlying?

Seems like a big yes. At first glance, I thought maybe the price level of each mattered. Then I remembered these Inverse Doubles, and Ultra Doubles are like the “50 First Dates” of ETF’s; they just reset each day.

So it’s pretty simple; volatility is just doubled. End of story.

Which leads to a more important question, namely, is there a coherent options strategy?

Not many Inverse option are particularly liquid. But if it fits directionally, and you can get fills, sure feels like call selling is the way to go.

Developing…….

So work last week suggested the Friday spike in both VIX and oil would likely abate, while it had limited implications for the market as a whole. At least in the very near term (although I suspected it was bullish 1-3 weeks out).

So what happened?

Surprisingly little. The VIX has drifted 10% finally. But really most of it is thanks to today’s Friday “sell before your time decay kicks in” effect. Which really only offsets last week’s “OMIGOD, will the market even open on Monday” options panic.

Oil has drifted too, but very little considering the explosion one week ago today. It fluctuated, but just within a non-exceptional range. USO has basically bounced up and back between 107 and 112.

And the market? Almost nothing. The SPY closed at 136.29 last Friday. You did have some real action in spots though. Lehman imploding. And big decline in AAPL and some other momo, so maybe the index doesn’t give a good picture of the violent undertow.

So yada yada yada, not really the week I expected. A whole lot of churn and burn.

As always, any mention of the VIX is brought to us by VIX Bikini’s, now on sale at Nordstrom. “Increase your risk tolerance as you wonder why no one at the Jersey Shore wears these”.

A tad of noise surrounding oil these days, but not an awful lot of net change in the OIH..

But don’t tell the options marts.

Pretty much 52 week highs in volatility. 

So hey, how about more Inverses?

Again, if you are thinking of shorting an ETF and it’s Double Shot Inverse as an arb., it’s not a risk free layup.

Let’s say on Day 1, IYR and SRS are both 100 and you short both . 100 shares of IYR and 50 shares of SRS for this example.And then by the close, IYR has lifted to 105, while SRS goes down to 90.

You now have a net short position heading into Day 2 as you are short $10,500 IYR and only long the equivalent of $90,000 by virtue of your SRS short. You theoretically should either sell 8 shares of SRS, or buy 14 shares of IYR to flatten out.

So now let’s say at the end of Day 2, IYR has gone back to 100, roughly a 4.7% move. SRS would then only move back to $98.57. So you earn $71.50 on the original position, and lose roughlythat on the extra SRS you sold (or IYR you bought).

Sounds great (not). And considering commissions, slippage, cost of tying up the capital, and the fact I used an idealized and extreme example here, a trade like this does nothing in the real world. Not to mention they fact these are managed ETF’s, and you run the risk it outperforms.

On the other hand, no matter how much you parse these things, Double Expresso Latte Inverses do ultimately underwhelm after Day 1. So my best thought is as a trade, they are liquid and a great product. But as an *investment* they’re not going to be the best alternative over time.

Why does that matter? Think Texas Hold Em. You can play a hand suboptimally and still win bundles. But do that enough and you left money on the table.