Volatility Du Jour, PNRA

Question: Should I take my money out of Panera?

Answer: No, no, no Panera is fine. It’s sitting nicely above the MA lines. Might as well hold with a stop. Taking money out now would be silly. And you don’t want to be silly.

And let me be very clear. Your money at Panera is safe. They make muffins. And soup. And coffee drinks. Yes, they are vulnerable to a run of like 20 people demanding the 1/2 sandwich and salad special at once, but the Fed has their back. If JPM guarantees the first $1 billion of Asiago Cheese bagels, the Fed will backstop the next $29 billion (which is actually not all that many bagels any more).

But that’s just your money, how about the stock and options?

Volatility is on the high end, despite the fact the stock has sat between $42 and $45 for 3 weeks now. I don’t see any particular reason to bother with this name. Or go in one of the stores. The product is neither particularly cheap or particularly good. Their ad campaign could be “Mediocre Food and Coffee and Starbucks Prices”.

Beautiful day at Shea yesterday. Until the Mets Award Winning Bullpen took over. Ouch.

Anyway, after arduous negotiations, Dave informs me that Jim Cramer has apparently re-signed Jim Cramer.

Many people think of Jim Cramer as being MAD MONEY on CNBC now, but his full-time gig is still at TheStreet.com, Inc. (NASDAQ: TSCM). The company gave an SEC filing this morning that shows the company has secured his contract ahead. After all, he is the co-founder and chief voice of the company. Many would argue that he IS the company.Jim Cramer has entered into a new employment agreement with a retroactive effective date of January 1, 2008 to author articles for the ad-supported and paid publications (Action Alerts PLUS) product and to “provide reasonable promotional and other services…”

Cramer will receive an annual salary of $1,300,000, $1,560,000 and $1,872,000, respectively, for the three successive years of the agreement. Cramer will also receive a signing bonus in the amount of $100,000 and will be eligible for an annualized target bonus equal to 75% of salary based upon achievement of company determined financial targets.

So we can look forward to more insightful observations such as these.

Lots of people were curious about my views on Lenny Dykstra when I was interviewed on HBO about him. My thoughts were in line with what I saw yesterday on his call on Boeing (BA). It was just a classic Nails risk-reward, which is why I like Dykstra’s column so much.

That Garmin (GRMN) call last week? The stock is down $7. But we’re not here to talk about the past.

So OK, so let’s check this BA out. He recommends buying 10 Deeps in here yesterday. Here’s his reasoning.

The company said it would provide investors with an update Wednesday on the progress of its 787 Dreamliner. The Dreamliner aircraft uses lightweight carbon-fiber technology to reduce its weight and lower its carbon footprint by burning less fuel. The plane, which can carry between 210 and 330 passengers, is also said to reduce jet-lag.The program has already seen its fair share of delays and has yet to hit the runway. Clearly the setbacks are frustrating for Boeing and its customers. However, while the news Wednesday is not likely to be pretty, it also shouldn’t be unexpected. Several analysts have already altered their projections for the company, with many expecting another six-to-nine month delay. And some of Boeing’s customers have previously said they expect further delays.

But, that doesn’t discount the impressive technology behind the Dreamliner and the importance of its fuel efficiency. And it should be near a bottom.

It was tantamount to a bet on an earnings reaction after a warning. It worked, although I can’t honestly tell whether the calls actually traded that low yesterday. But I assume they did, given they went from 0 to 78 open interest. They opened at $17.90, so presumably IF you bought them there yesterday, you got an extra 80 cent windfall, for a win of $1800. Pick 5 more right and get a little extra somewhere and we’ll offset that one GRMN loss, assuming we don’t compound it.

So what if they threw an earnings season…..I mean Earnings Season……and no one cared?

That’s what it feels like so far. IBM reports next week, and judging by this chart, you would have a tough time deciding when “noise” ends and apprehension begins.

You wouldn’t have that same problem a quarter ago as volatility shot up about 20 points ahead of the number, albeit in shaky early 2008 trading.

Mr. Market not feeling much worry in general this earnings season. Now it’s likely everyone assumes some lousy reports, and is already looking past them to better times. We’re in that sort of zone right now overall.

Just something to keep an eye on though as it won’t leave much cushion if sentiments take a turn for the worse.

On the subject of calendar spreads, just one other thing to keep in mind. There are a bevy of variations to the concept. An idea I like here is a spread where you sell nearer month strangles and buy outer month and wider strike strangles.

In other words, let’s say it’s AAPL. What about shorting the May 145 put 165 call combo, and buy the July 135 put 175 call combo. Doing it all 1 up is almost perfectly flat, and would cost a debit of about $1.50.

What’s the play here?

Well, that nearer term volatility is in a bit of a soft patch, while at the same time the longer term volatility remains in this range.

Now AAPL is not the ideal candidate for this sort of trade with earnings on early in the May cycle. Both volatilies will dip from here. Just using this as an example for the sort of play I am looking for in general now.

This from a Guru yesterday.

On the Square of 9 calculator, Apple will be 115 degrees up from the 115 handle, at 161ish, which is approximately 50% of the range.

That price is 90 degrees of April 7th, 8th.

Last week we were told 153 was like 180 degrees off the lows, or 440 Degrees Fahrenheit or something.

Forget the methodology for a sec, I just don’t like the principle of calling something, and then re-calling it higher and assuming you knew to stop out the first one. Eventually it will be a correct call, but where’s my value-added? If this top doesn’t bite, I’m sure 175 harmonizes with the 12th at Augusta.

But hey, as long as we have this pup up, anything interesting in the options? Particularly in the Buying Time theme?

Well, here’s the issue. You have earnings priced into the Mays, which carry a mid 50’s volatility. And you have some spillover into July, which changes hands in the mid-high 40’s.

That’s not the worst calendar spread, but at this point in time, it’s a bit of an earnings reaction bet. Both volatilities will likely dip to 40 at best after the number, but do you actually make money owning it? Depends entirely on the specifics of your trade. You need a few strikes on, and you need AAPL to land on/near one of them. And with a few weeks to go until the number, it’s a bit of a crapshoot.

Ladies and Gentlemen, The Bronx is Burning……

Or not.

Dave informs me that volatility as measured by the VIX is now down on the Year. VXN and RVX down on the year as well. Time to party like it’s ……well only 2007.

Today is a particulary fugly performance for the Volatility Sisters. It’s a Monday (moderate statistical bias to green in vol. stats), the market isn’t up all that much, earnings season is upon us. we’re mid Expiration Cycle (option selling tend to max out near Expiration) and Greenspan is absolving himself from any responsibility from anything (well, that happens every week). Yet options look worse than the Detroit Tigers.

As a reminder, I would note over very short time frames, the market and the VIX move in opposite directions, but lengthen it out and they may not. As evidenced by 2008, as the SPX is still down like 7%. And oversold volatility is a much weaker directional signal for the market than overbought volatility.

And speaking of The Most Trusted Name in Volatility Panic, pretty precient call here by Cramer on April 29th, via Bespoke.

Just when you thought it couldn’t get nastier for the “longs” out there, the people who just play from the long side, the SEC passes the Hedge Fund Relief Act, and it goes into effect Monday. Oh, it’s not called that. It is just the suspension of the “uptick rule.” But it certainly will have that impact, for both the hedge funds and the market.

This rule change, of course, couldn’t come at a worse time. The market’s terrible. Longs are beleaguered, shorts are emboldened. I think it is fair to say that things are about to get a lot worse, a lot faster for the stocks of bad companies without the slowdown circuit breaker of the uptick rule. But the SEC, in its non-infinite wisdom, dreamed this little doozy up and all I can tell you is that you ain’t seen nothing yet.”

OK, here’s the rub. That was from April 29th, 2005.
Of course the market rocketed higher during that stretch. And volatility pretty much meandered in the teens, with one pop in the middle (chart above).

What Bespoke notes, and I did not realize, was the extensiveness of the program before full implementation last July.

Way back in 2004, the SEC announced that it would suspend the uptick rule on designated securities in the Russell 3,000 as a pilot to see how the stocks and the market would react. The pilot ended up consisting of about 1,000 stocks and didn’t go into place until May 2nd, 2005, with an expiration in April 2006.

While the pilot didn’t get much coverage when it was announced or finally put in place, here is an article from the Wall Street Journal back in 2004.

If the no uptick rule was really the root cause of the market’s declines and increased volatility, shouldn’t the market have struggled much more than it did from mid-2005 to mid-2007 when the pilot was in place? The pilot consisted of 1,000 highly-liquid stocks that all had associated options. Below we highlight a chart of the Russell 3,000 from 2004 to present. Had you looked at the chart in July 2007 right before the uptick rule was officially eliminated, one could make the argument that no upticks across the board could make the market go higher!

Bespoke is currently studying whether stocks actually in the pilot program had any sort of abnormal volatility.