What Can Bryant Gumbel Teach Us About Options?

Our long national nightmare has ended.

Bryant Gumbel is leaving his position as the play-by-play voice of live games on NFL Network, it was announced today.

Both parties said it was Gumbel’s decision to step aside.

He was a curious choice; he gave the impression he never watched a football game before. He probably has scant familiarity with any financial markets, so expect to see him popping up in the Gold pit for CNBC someday soon.

Speaking of Pundit Wisdom, I don’t mean to pick on Bill Griffeth, but the other day he noted that he wanted to see the VIX under 20. Why? Because the market apparently does better when the VIX is under 20.

And that is likely a true statement, but we have a bit of a cause and effect mix up. The market would not rally because the VIX is under 20, rather the VIX might dip under 20 because the market is rallying.

It’s exactly like a Gumbel-ish football observation we hear all the time that, say, the Giants record in games where they rush 40 times is 50-1. They did not win because they ran so often; if that was the case they would just hand the ball off the first 40 plays of the game. Rather they ran because it was working, and they were winning.

Same with the VIX. It would decline below 20 if option writers felt comfortable selling there. What would make them comfortable? Likely a quiet and steadily uptrending market.

Now on some level volatility is predictive. And not perfectly inverse to the market direction, after all it is pretty flat in 2008 with the market down a good amount. But I would suggest that 20 is not some sort of magical number, and that if we see it there for any length of time it’s probably just a better market all around, and you wouldn’t need the VIX to confirm it.

Black Hawks win…. well, just this contest.

So here’s Lenny’s disclosure on his original super savvy BA recommendation.

At the time of publication, Dykstra was long BA.

Fine, nice to see he eats his own cooking. Here was his recommendation.

Therefore, I will place a limit order to buy 10 November $60.00 deep-in-the-money calls (BAKL) for $16.10, or better. This will give me the ability to control 1,000 shares of Boeing common stock if my order is filled.

The calls had Zero open interest pre-Lenny. Which means he went long some way other than the one he recommended.

After his call, the open interest went up to 78, I’ll venture to say, all were following Lenny. So word of advice to those sheep. Lenny doesn’t even trust his own advice, lmao, he most likely just buys stock, apparently in GRMN also.

Just for the record, volatility remains pathetic for a rather ugly Friday, despite how impressed Bill Griffeth is with today’s 5% “moonshot” in the VIX. It is 23, that’s unimpressive. Rick Santelli is apparently the only GE employee who seems to notice that the VIX is actually way closer to the low end of our current “normal”.

So earlier this morning, they had a feature on what options may be telling you about earnings reports.

The guests (Dennis Davitt, and someone named Rebecca) did something radical. They each pointed out the magnitude move predicted on the options board. Intel “expects” about 5%, EBAY the same, Google 7%, and so on. They were very good imho.

Mark found this info rather useless. He just wants direction. It’s a pretty typical exchange when options get mentioned; option bets are more complex than simple up and down opinions. Even if it is merely a directional play, you are gaming time frames and stock volatility.

The magnitude of an expected move can be infered from the options board. You see the volatility on the screen now and make an educated guess as to where volatility will go after the number (not as difficult as it sounds). And then you infer how far the stock would have to move to essentially break even on non-directional option *bets*. In other words, delta-neutral straddles and strangles. And voila, you have an expected range for the stock after the number.

Guessing the direction of a move based on options flow is pretty tricky. There are pay sites that do a great job tracking option money flow, but divining the meaning is in the eyes of the beholder. What if you see a jillion near money or OTM puts trading at spiked volatility. Is that bullish (contrarian view….nervous stock holders) or bearish (smart money buying the puts)? Could be either one, and that’s the point.

Bottom line is the magnitude of the move is pretty objective, direction is pretty subjective. I realize for CNBC’s purpose, they would rather guests just go on and guess; no worries if you get it wrong, they literally never remember it anyway. But as far as usefulness goes, magnitude expectations are more valuable.

Sometimes charts miss something, and this volatility chart in FSLR is one of those times.

The standard volatility measure is a 30 day normalized reading. Since there are no options with exactly 30 days to go right now, the system blends the Aprils and Mays.

But May is an earnings month, and it carries a mid 80’s volatility. Which sounds nice, and looks fine on the chart. But FSLR is a stock that can soar 50 points on earnings, so it’s actually not that high.

And then there’s April. Yes, there is only a week and a day left, or just a week if there’s a surprise Good Friday next week. But Aprils are only trading at a mid 50’s volatility. That’s about as low as you ever see anything in FSLR, whatever the time frame, and tantamount to an expectation that the “market” anticipates that one of the last leaders left standing to do virtually nothing on Expiration week.

OK, lame POT joke.

So here’s Voldemort late Monday afternoon.

This is the first time that it didn’t pay to pay up in what seems like ages. These reversals feel so awful and make everyone think, “Hmmm, that was stupid.”

That’s why it doesn’t pay to put all of your money to work. If you bought a little of Potash (POT) when it was up big, you can either kick it out and start all over again, or you can wait until tomorrow and get it a little lower, which would be my bet.

POT was in the mid 173’s then. It then traded higher all day Tuesday, save the opening tick. Sounds like great advice…..in Bizarro World.

Weakness when you have tremendous strength doesn’t necessarily mean “when they go down big.” I am thinking yesterday about the sudden decline in everything momentum after Arch Coal’s (ACI) so-called preannouncement that created an opportunity provided you don’t do it all at once in the usual suspects: Devon (DVN), Anadarko (APC), Potash (POT) and the like.

If you use my method and you get started, you have a nifty little trade today. If it turns out that the dip was the beginning of something big, your first buy was not so hot

What exactly was his methold that got us that nifty little trade? If you bought high (I mean bought high in the stock) Monday and kicked it out you had nothing on. Then you were waited for it to be lower Tuesday, his bet. Which happened for like 3 minutes. And then it was off to the races again. Unless you somehow divined his opinion to mean buy the Tuesday open down small and sell it out at the days high, you just watched.

It’s not a bad call, he’s just taking a victory lap on something that realistically would not have produced a trade. And truthfully it’s subtle stuff like this that is far more insidious than over-the-top calls that happen to not work out, like SGP.

There is a school of thought that says today, the Thursday pre-expiration, is Misdirection Day. Whichever way we go today will run counter to the Expiration week direction. I have never seen a study proving or disproving that, so just throwing it out there.

More good news? Well, I’m not big on put/call numbers, but if you are, Rob at Quantifiable Edges offers up this.

The market finally broke its consolidation on Wednesday. One intermediate-term positive I’m seeing right now is the action in the CBOE put/call ratio. Today (yesterday) it closed at 1.16. Over the last 4 days it has averaged 1.12. High put/call ratios are normally associated with market selloffs, yet the market made a 20-day high as recently as Monday.

Relatively high levels of put buying are indicative of worry on the part of traders, which is why they are more common during selloffs than during upmoves. I looked back to check other times when the 4-day put/call ratio was above 1.10 and the market was within three days of a 20-day high. Looking back to 1995 I only found three instances: 8/23/06, 2/23/07, and 5/25/07.

Which highlights a point we have touched on before, but not lately. Put volume is relatively strong in recent month’s, especially when compared with the VIX. Normally you would expect put demand and increasing volatility to go hand in hand, but not so much any more. My favorite culprit is the prevalence of Inverse Funds, the theory being that owners of these now have a pocket full of Downside that lets them meet the put buyers at relatively lower prices.

Anyway, whatever the explanation, it doesn’t particulary matter. Rob continues.

….It should be noted, though that the put/call ratio has been significantly higher over the past couple of years than it was in the beginning of the decade. To adjust for this I normalized the data by using the 100-day moving average.

I once again looked at any time the S&P 500 had made at least a 20-day high in the last 3 days. This time I only required that the four-day average put/call ratio was above its 100-day moving average. After eliminating overlap and looking out at least 20-days I found 47 instances going back to 1995. 33 of these led to positive returns over the next 20 days and 14 of them led to declines – a 70% win rate. The average win was 2.7% and the average loss was 2.5%. The average trade was 1.1%. Not overwhelming numbers by any stretch but not bad, especially considering the market was already at a 20-day high.