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What kind of inverse fund is Barclays’ new XXV offering?

Sunday, August 1st, 2010

We know that Barclays’ XXV is intended to be an inverse fund of VXX, but there is some confusion regarding what kind of inverse it will be.   Will it be the equivalent of shorting VXX, or will it be an inverse percentage fund—trying to deliver the inverse percentage moves of VXX day to day?   I’m hoping for the former, because the inverse percentage funds are inferior over the long term to the performance of a short style position, especially in choppy markets.   I’m sure the Barclays’ strategy is correctly stated its EDGAR filing, but smarter people than I have looked at it and come up with different answers.

With a whopping 10 days of data it looks like the shorts probably have it.   The percentage chart below has the sign inverted on the XVV results to make it easier to compare to the VXX moves.   If XXV is trying to be an inverse percentage fund its performance on the 26th and 30th was pretty poor.  On the other hand, it was pretty good performance in order to emulate a VXX short.

The second chart shows the difference in results between 100 shares of XVV bought on its first day of trading (19-July-2010) vs a simulated inverse VXX percentage style fund.

VXX vs XXV daily % moves, click to enlarge

VXX vs XXV daily % moves, click to enlarge

Comparison of a true VXX short vs XXV, and inverse % style VXX approach, click to enlarge

Comparison of a true VXX short vs XXV, and inverse % style VXX approach, click to enlarge

Posted in Advanced Topics, VIX, all | View Comments

CBOE adds more weekly options—and drops a few

Friday, July 30th, 2010

Looking at the 30-July version of  AVAILABLE WEEKLIES spreadsheet on CBOE’s weekly page shows that next week adds some interesting options (USO, CSCO, DNDN, GE) , and drops some that were offered the week before (ABX, POT, XOM).   Evidently the clever folks at CBOE are adding options for some stocks just for the week when they are reporting earnings.   I suspect that USO, on the other hand will be a permanent resident—one I plan to trade.

Posted in Options, all | View Comments

Recap on SPY weeklies —and some observations

Friday, July 30th, 2010

After creating a position with SPY on Wednesday at 111.07  I added to my covered calls on Thursday, buying SPY at 110.12, selling 110 strike calls  at 0.71.   At one point this morning (Friday) , when SPY was off to about 109.5 my 111 strike calls had dropped from Wednesday’s 0.83 to 0.08.   These strong moves are characteristic of options with only a little time left on them.   With so little premium left on these options I decided to close them out and hope the bounce happening at that point would continue.

SPY obliged, and when it reached the 110 to 110.1 range I re-established my short call position with 110 strike calls at 0.49.   This move capped my upside, but lowered my break even on that lot of stock from 110.22 down to 109.81.   I wasn’t optimistic that SPY would recover all the way back to 111 today, and I prefer to have my stock called away so that I don’t have any exposure to weekend events.

SPY closed at 110.27, so all my stock will be called away.  Most of my 0.375 / share profit came from the Thursday position established at 110.12, but I was pretty pleased to still make a profit on my Wednesday 111.07 SPY purchase—compliments of the small insurance policy provided by the call premiums.

I like the way that short term options provide a little cushion against contrary moves, plus generating respectable returns if the underlying goes up or sideways.  The option time premium eroding away gives me an incentive to stick with a position, rather than being tempted to take quick, small profits, or bail out when the market turns ugly.

I really don’t like the asymmetrical risk behavior of covered calls—it severely limits your upside, while providing only a small amount of down side protection.   The good news is that your overall time exposure on the weekly calls is short and if the market really turns ugly your (now) OTM calls will be pretty cheap, even with elevated IV,  if you decide to completely close out your position.

Posted in Covered Calls, Options, all | View Comments

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

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