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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

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

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

Betting on fear to fade

Tuesday, May 18th, 2010

Bought VIX June  puts at 4.6,  the VIX index was around 31 at the time.   Barring another bear market I think we will see the VIX pull back from the recent spikes.

For related posts see:

Posted in Options, VIX, all | View Comments

Options symbols transition completed

Monday, May 17th, 2010

This last weekend the option symbol transition coordinated by The Options Clearing Corporation completed, with the last set of symbols, starting with underlying symbols of  S through Z, switched over to the new system.   In almost all cases the 3 to 5  letter underlying symbol now works as the option identifier.    I think the new system is a real improvement.   I wish all the brokers had implemented it the some way, but I guess that would be too much to ask.  Click here to see the Schwab, Fidelity, and the generic approaches.

Posted in Advanced Topics, Options, all | View Comments

Lots of premium available on SPY options

Thursday, May 13th, 2010

There is a lot of premium available on SPY options that will expire at the end of next week due to the recent market gyrations.   I created a covered call, buying SPY at 117.26, selling-to-open May 117 calls at 1.69 for a net investment of 115.57.   The Theta (time decay) on these options is $8 per day.

Posted in Covered Calls, Options, all | View Comments

Doubling up on Oil, betting on VIX dropping

Tuesday, May 11th, 2010

Did covered calls on Oil — bought USO at 37.19, sold-to-open May 37 calls at 1.02 for a net investment of 36.18.

Created a bear spread on VIX options today.   Betting on VIX going down is forecasting that the market in general will be flat or positive.  I sold-to-open June VIX 16 calls at 10.26, bought  June  VIX 32.5 calls at 1.88 for a net credit of  8.38.  I was able to approximately split the bid/ask prices with my combo order.   At the time of the order the spreads were approximately 10.00 / 10.60 on the June 16 options and 1.80/1.95 on the June 32.5 calls.  Going with the published bid/ask prices leaves money on the table.

The VIX cash index was around 28.5 at the time my order filled.   I initially tried to go short on VXX, but Schwab had VXX in the “hard to borrow” category this morning.   I suspect lots of people were trying to short the VXX today.   I went with June options rather than May because there are only 7 days left on the May VIX options–I wouldn’t be surprised at all to see one more down leg in this correction.    I expect the June options will move much down much slower than the VIX index as the market moves away from fear mode.

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

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