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More SPY weeklies while Schwab plays catch-up

Wednesday, July 28th, 2010

When SPY dropped to 111 this morning I started feeling better about writing some calls.  All my weekly options from last week were assigned and I was not unhappy about being in cash earlier this week.   I bought SPY at 111.07 and wrote SPY 111 calls at .85 —they expire Friday.  My breakeven point is 110.22 and my best case profit is .78 per share  which is 0.7% on my investment.

I called the Schwab options desk recently (877-673-7959) and they said that they do plan to offer weekly options, but not for a while.   The person I talked to said it would probably be a month or two.

Posted in Advanced Topics, Covered Calls, Options | View Comments

Dealing with risk

Tuesday, July 20th, 2010

I’ve been thinking about various strategies for dealing with limiting losses.   Many investment strategies exhibit moderate upside potential, with large exposure to downside risk.  For example, on average the broad equity markets have shown annualized gains in the range of 10% over the long term, but these gains are often punctuated with large downside risks (market panics) that are deep and fast. This asymmetric behavior has discouraged many investors over the years–when a quick sequence of  losses overwhelms years of building slow profits.   This post on self evident shows that other people are thinking about this, and that the CBOE is developing a product that will attempt to counter the “black swan” events that the Longs dread.

Posted in Advanced Topics | View Comments

Playing the weeklies…

Monday, July 19th, 2010

Created a covered call position today with SPY at 106.89 and 107 SPY calls expiring this Friday–the 23rd.   The calls sold (to open) at 1.18, giving a 1.2% best case profit for the week if SPY closes Friday above 107.   Fidelity supports trading these weekly options, but apparently Schwab does not.

Posted in Covered Calls, Options, all | View Comments

Weekly options for the masses–SPY, QQQQ, IWM, DIA and others

Wednesday, July 7th, 2010

Anyone that trades options knows that the pace quickens the last few days before expiration.   The delta (the change in option price relative to the underlying)  for the ATM option is still around .5, but instead of gradual changes for the deltas on the strikes in / out of the money, the curve starts resembling a step function, going from zero for out-of-the-money, to one for in-the-money at expiration.   The time decay of the option premium (theta) also accelerates, with perhaps 50% of the decay in the last month happening in the last week of the option’s life.

Taken from http://www.option911.com/blog/option-education/how-option-time-premium-decays-over-the-weekend/, click to enlarge

Taken from http://www.option911.com/blog/option-education/how-option-time-premium-decays-over-the-weekend/, click to enlarge

All of this is of course modulated by any changes in the volatility of the underlying, and the market in general.

Some traders avoid options close to expiration because of these factors–and others flock to them.    As a covered call writer I am really attracted to the accelerated time decay of short term options.   I’m not taking any more risk than normal holding the underlying, and I am getting an accelerated decay in the price of the options I am short on.    I will often wait until there is only two or three weeks are remaining on the options to create the position.

Now it can be expiration week, every week for the following Stocks / ETFs (taken from this CBOE posting):

Weeklys on Exchange Traded Funds and equities. As of July 5, 2010, these included the following::

  • SPY – Standard & Poor’s Depositary Receipts
  • QQQQ – Nasdaq-100 Index Tracking Stock
  • IWM – iShares Russell 2000 Index Fund
  • GLD – Options on SPDR® Gold Shares
  • XLF – Financial Select Sector SPDR
  • EEM – iShares MSCI Emerging Markets Index
  • C – Citigroup Inc
  • BAC – Bank of America Corp
  • AAPL – Apple Inc
  • BP – BP PLC
  • F – Ford
  • GOOG – Google Inc.

Fidelity supports trading on these new weekly options, but Schwab does not appear to.   Beware of the listed greeks on these options, the software may not be using the correct time until expiration.

The volume, at least on the SPY weeklies has been substantial (20K today on the 105’s expiring 9-July), so I think the options providers have a winner.

For more information see this options clearing house post.

Posted in Covered Calls, Dividend Capture, Options, all | View Comments

Schwab publishes ex-dividend / payout dates for their no-fee ETF funds

Tuesday, June 22nd, 2010

Schwab ETF  2010  Ex-Dividend and Pay date information

Schwab has now published their ex-dividend / pay dates for all of 2010 for their no-fee ETFs.  The published 2010 dates are:

Ex-Dividend:  23-Dec-09   22-Mar-10 21-Jun-10 20-Sep-10    20-Dec-10

Pay Dates:   30-Dec-09  26-Mar-10   25-Jun-10   24-Sep-10   27-Dec-10

Schwab International Equity ETF™ SCHF
Schwab U.S. Small-Cap ETF™ SCHA
Schwab U.S. Large-Cap Value ETF™ SCHV
Schwab U.S. Large–Cap Growth ETF™ SCHG
Schwab U.S. Large-Cap ETF™ SCHX
Schwab U.S. Broad Market ETF™ SCHB

Schwab  posted their second quarter dividend information here.   Schwab’s distribution / pay dates are very timely — only 4 days after ex-dividend with this most recent dividend.

The  SCHX’s dividend has been similar to SPY’s percentage wise — I think SPY’s September payout will be around .55 — with SCHX currently at 26.  I’m assuming SCHX’s dividend will be around $0.13 per share.

The SCHX has 750 stocks in it, but appears to closely follow the S&P 500.

If you don’t see the ETF symbol you want there are a lot more here: Dividend, Ex-Dividend, and Paydate / Distribution Date information for ETFs

Posted in Dividend Capture, all, dividend, ex-dividend | View Comments

SPY dividend capture–June 2010

Wednesday, June 16th, 2010

I bought SPY at 111.64, and sold-to-open SPY 108 June-30 expiration calls at 4.08 for a net investment (debit) of  107.58.     I used the quarterly SPY options because I could go considerably deeper in the money with the calls and still get a premium that is close to the likely SPY dividend for this quarter  (around $0.50).   Schwab does not appear to offer access to this series of  options, but Fidelity does.

If SPY stays above 111 through this Thursday I expect these options will be assigned–because the premium left on the calls will be less than the dividend the stock will payout.   Friday is the ex-dividend date for SPY.   If the calls are assigned I’ll collect $0.42 per share.     If the options are not assigned, I will collect the SPY dividend–lowering my breakeven point to around 107.08.

For more info on this dividend capture strategy see this post

Posted in Advanced Topics, Covered Calls, Dividend Capture, Options, all | View Comments

VXX options now available—some predictions

Monday, May 31st, 2010

On May 28th, options on the iPath S&P 500 VIX Short-Term Futures ETN (VXX) ETN started trading.    Given the popularity of VXX I suspect these options will be popular.   For one, it should give a reliable way to effectively short the VXX —at least on Schwab’s trading platform it has been difficult to short VXX itself.  Most of the time (even during this recent volatility run-up), it has been in the “hard to borrow” category.

It is interesting to conjecture how the VXX options will behave compared to their cousins, the VIX index options.

Similarities:

  • Both based on S&P 500 volatility futures
  • Will show a strong reversion to baseline behavior when the market is behaving itself—the VIX index and VXX will tend to quickly drop to a lower “stable” value
  • Will not track the peaks of the VIX index.  The volatility futures are tied to future values of volatility (duh) , rather than today’s value—so they tend to move significantly less, although pretty much in time synchronization.  The values jump at the same time, just not as much.
  • The spread between bid and ask will be wide for at least in-the-money calls

Differences

  • VXX options expire  on Saturdays—the same day as most equity/ETF options, not on the Wednesday that futures expire for that particular month.
  • The VXX settlement value will probably be the closing value of VXX on the Friday before the options expire, not the  once per month VRO settlement value used by the VIX options—which is rarely if ever the same as the Wednesday opening print of the VIX index.
  • The VXX, and hence VXX options will be sensitive to the relationship between the current and next month futures prices on volatility.  The VXX shifts its weighting between these two months on a daily basis.  Generally this results in a price erosion force on the VXX  relative to the VIX index because the further out month is usually higher in value than the close in month (called “contango” in futures parlance)
  • The implied volatility of  the VXX options should generally be lower than the equivalent VIX options, because  it is the mix of two months of volatility futures, not one like the VIX options.   For example, for June expiration the volatility should be about the same the day after the May VIX options expire (because both sets of options are tied to June futures) , and the VXX option volatility should decrease relative to the VIX options as the time remaining on the June options decreases and the VXX picks up more weighting in the July volatility futures.
  • The VXX options quotes/option chains will be easier to find and their greeks will be correct.   VIX index quotes are not even available on Google finance.   Yahoo finance gives VIX index quotes (^VIX), but not option quotes or chains.   And everyone, including Schwab and Fidelity report incorrect greeks for VIX options– LIVEVOL being the only exception I am aware of.
  • The VXX options have American style exercise rather than the VIX option’s European style exercise.  The European style exercise was necessary on the VIX options because the VIX options and VIX index are only guaranteed to line up once—at expiration time.  The VXX and its options will naturally track each other well, so American exercise is ok.  Practically this won’t be a big deal.

In the “no free lunch” category, I predict attempts to use VXX/ VIX options to take advantage of VXX’s historical price erosion compared to the VIX because of futures contango without taking volatility risk will not be profitable.    This might manifest  itself as large bid/ask spreads for some strike prices.

Summary

I think the VXX options will be popular with the retail crowd.  They behave like regular stock options with the same expiration dates, settlement practices, American style exercise, and available/accurate quotes, option chains, and greeks.  I think the pros will contue to use the VIX options because they provide a purer play on S&P 500 volatility.

For more information see:

VIX and More

Daily Options Report by Adam Warner — if your head isn’t spinning yet…

CBOE news release

Posted in Advanced Topics, Options, VIX, all | View Comments

Head fake or bottom?

Wednesday, May 26th, 2010

I’m guessing we are near the bottom of this correction.  Bought USO 32 July (17-Jul-10) calls at 2.16.

Posted in Advanced Topics, Options, all | View Comments

Free VIX option quotes, understanding European exercise on VIX options

Sunday, May 23rd, 2010

Free delayed VIX option quotes are available from:

  • CBOE (Symbol VIX, enter symbol in field on left side of the page), check “list all options” radio button
  • LIVEVOL (Symbol VIX or ^VIX)  Registration required.  This site has the correct greeks for VIX options, the only site I’m aware of that gets them right.
  • freerealtime.com (Symbol VIX.X)
  • Yahoo provides VIX index quotes (symbol ^VIX) and in sometimes options quotes.  As of May 23, 2010 these option quotes are not available.

The VIX option symbols listed in the CBOE option chains have an “-e” at the end.  This indicates they have a European style exercise.  Unlike typical stock options which are American style option exercise, the VIX options can not be exercised before their expiration date.

Exercising options early can be attractive if the underlying stock is distributing a dividend, or if you feel the market is not properly pricing the option.  For example, if stock XYZ was at 101 and you hold a 100 strike price call option for stock XYZ that the market bid is 0.50, you would be better off exercising the option and selling the stock.  Your net, ignoring commissions, would be 1.0 per share in this case rather than the 0.50 would have recieved by selling the option.

This “below intrinsic value” option price might seem an unlikely situation, but with VIX options it happens all the time–usually when the VIX index has had a nice little run up.  VIX options should really be called “VIX Futures” options–because they are based on VIX futures, not the calculated “cash” index updated-by-the-minute that is called the VIX.  Usually if the VIX index runs way up, the futures lag significantly–leaving the options lagging lower in the same way.

The “Futures” was probably left off by the marketing types because they figured (correctly) that it would scare folks off.  Their only defense is that there is one point at time, the moment when the futures and options expire ,that VIX and the VIX options are forced into close alignment.   This alignment point is captured with the monthly VRO quote, which is close to, but not exactly the same as the VIX index value on expiration Wednesday opening.     Given the nature of the VIX index / VIX futures relationship the VIX options folks had no choice but to use European exercise for their options. VIX options are cash settled.

Posted in Advanced Topics, VIX, all | View Comments

More on SPY

Tuesday, May 18th, 2010

Bought SPY at 114.69, sold-to-open 116 May calls at .58

Posted in Advanced Topics, Covered Calls, all | View Comments

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