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Linkedin recently reported their 3rd quarter earnings, or rather losses.   The good news however was that their revenue growth surprised analysts on the upside, more than doubling from last year’s numbers.   LNKD was trading around $80 this morning, and the  November 19th $70 puts were at  1.0 bid / 1.2 asked.   The implied volatility on those puts was around 83, which seemed pretty high for a company that just reported its earnings, and the down-side risk, at least for company related news, seems low.

For an option with 12 days to run, this seemed like a reasonable bet to me.  I sold S70 puts at $1.1.  I offered at the mid price and the order filled immediately.

The prices of SPY from this year and the same date 6 years ago continue their intertwining.  For the last two years, just using the old SPY chart has been a better predictor than any number of CNBC commentators—too bad I haven’t been able to convince myself to use this as my market strategy.

SPY six years ago and this year, click to enlarge

Today’s closing price of $122, was only $1.5 different from the $120.49 close on November 1st, 2006.

Volatility on the other hand is much higher this time around. The availability of volatility based products, starting with futures in 2004 certainly doesn’t appear to be dampening market volatility.

It’s tough right now to get returns above 1% a year right now without taking significant risks. For example ten year treasuries are running around 2% without much upside and a lot of downside.  Stocks paying dividends of 2% or more are common, but they will track a general downturn. Typically quality high dividend stocks won’t  decrease as much as other stocks in a downturn, but the losses can still be very significant. Individual stocks also carry company specific risks like lowering a guidance number, loss of a CEO or CFO, an analyst’s downgrade, etc.

High dividend paying stock ETFs are interesting because they offer relatively high yields (e.g., SDY, SPDR’s high dividend ETF is currently yielding around 3.5%) and have greatly reduced dependence on the ups and downs of individual companies.  I sold S44 Jan 2012 puts in my IRA at $0.95 for SDY when it was trading around $51.50.  If held to expiration this premium received would be the equivalent yield of around 1.85% per quarter.   Since these were sold in my IRA,  they required 100% cash reserve for the strike price value, or $4400 per put sold.

The risk of this approach is of course a market crash. It would take an additional 10% correction before the puts went in the money. If my puts were in-the-money at expiration I would probably let them be exercised and take the shares.  At that price the effective yield of SDY would be around 4%

The bid / ask spread when I made the trade was quoted as as 0.8 / 1.10. I put in a limit order at .95—the midpoint price—and it sold after a couple of minutes.

Nassim Taleb crosses over into foreign affairs with The Black Swan of Cairo.  He takes the position that in political, as well as financial matters that attempting to eliminate volatility increases the likelihood that nasty Black Swan events will occur.

I sold a S122/S123 spread today with 14-Oct SPY calls this morning for a credit of 0.20. SPY was trading around $118.65 at the time.   $122 is about at the top of the trading range we’ve been in since August.

The put spread that was equidistant from market price, the S115/S114, was offering a significantly lower credit—0.14.   This is not surprising because of the typical volatility skew on OTM puts,  but from an overall risk standpoint of market dynamics this seems backwards.  Because of the “stairs up, elevator down” behavior of markets,  the  put credit spread seems like a higher risk than the call spread, and yet the return is lower.

Normally risk and return are well correlated.  Is selling OTM put vertical  spreads an especially poor investment, or do call spreads offer a better than average risk-return?

It hasn’t been a good ride for Barclay’s IVOP.   It was introduced September 16th at $20, and now 19 days later it is trading at $11.4— a 43% drop.   Since IVOP is a effectively a short on volatility instead of tracking daily percentage moves like its competitors (e.g, VelocityShares’ XIV) it has a variable leverage behavior.   With VXX currently at 58.5 IVOP’s leverage is a heady 2.4X and it is  getting dangerously close to its $10 termination point.  It will only take a 6.5% move up on VXX to kill IVOP.

XXV, IVOP, XIV leverage vs VXX, click to enlarge

It appears that UBS is getting ready to introduce six more volatility ETNs—2X leveraged long funds to match their existing 1X long funds.  Their website is back to normal, but for a few days it was showing six new funds.  See below.  The fact sheets and prospectuses all pointed to XVIX, so I couldn’t get more details.

UBS preparing 2X long volatility ETNs, click to enlarge