IB Market Brief

As of: Tue, 9 Feb 2010 12:32 PM EST

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The IB Options and Futures Intelligence Report presents vital market information that is extremely useful to serious traders based on Interactive Brokers Group's experience of professionally trading the markets for nearly three decades. Option and futures pricing data has built-in information that provides the option and futures markets’ consensus outlook for subsequent activity in the markets. These leading indicators can provide a guide to traders and investors before news is widely disseminated to the public at large or reflected in underlying prices.

One of the most important of these indicators, implied volatility, represents the markets’ view of uncertainty associated with future price movements. When the current implied volatility is compared to the prior day’s implied volatility, a large increase can foretell unexpected news developments and provide an opportunity to adjust positions accordingly. This gain indicates that option market participants anticipate greater price movement than in the past, possibly because of information that is not yet readily available. Conversely a large decrease in implied volatility indicates the expectation of subsiding price movements, possibly because all recent news has been reflected in current underlying prices. Large premium or discount of implied volatility to historical volatility over the past 30 days is frequently not justified and may represent significant trading opportunities. Other options market data presented in our report such as volumes, and call/put ratios also plays a role in undersaanding sentiment in the markets.

For futures markets we present two measures: Synthetic EFP Rates and Futures Arbitrage Premium/Discount Index. The Synthetic EFP Rates highlight financing opportunities where entering into an Exchange for Physical (stock for single stock future swap) will provide a lucrative investment return or a very low borrowing rate. The Futures Arbitrage Premium/Discount Index highlights discrepancies between major index future contracts and their underlying fair value.

For the purpose of the tables, those options symbols with less than a $5 stock price, and less than 200 options contracts traded, and whose company has less than $1 billion in capital are screened out to eliminate symbols whose information may be more indicative of lack of liquidity in the markets. With the exception of the Fut Arb table, all tables are posted every trading day on the hour from 12:00 to 16:00 ET under normal circumstances. The Fut Arb table is updated every 15 minutes, 12 AM Monday through 11:59 PM Friday. To view volatility and volume as well as other market summary statistics in real-time within our premier direct access trading platform, Trader Workstation, you must have an account with Interactive Brokers. Click "Open an Account" at the top right of the page.

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Mouse over tabs below to view tables. Detailed explanations for each tab can be viewed in the text box below the tables.

Table Definition

Top Twenty 30-day (V30) Implied Volatilities

Implied volatility is the options market's prediction of how volatile a given underlying will be in the future. It is calculated by inputting all known information into an options pricing model (i.e. option price, interest rates, dividends, strike price, and expiry date) and backing out the unknown parameter, the implied volatility.

Twenty symbols with the highest implied volatilities are ranked in descending order and displayed on an annualized basis. Implied volatility is calculated using a 100-step binary tree for American style options, and a Black-Scholes model for European style options. Interest rates are calculated using the settlement prices from the day’s Eurodollar futures contracts, and dividends are based on historical payouts.

The IB 30-day volatility (V30) is the at market volatility estimated for a maturity thirty calendar days forward of the current trading day. It is based on option prices from two consecutive expiration months. The first expiration month is that which has at least eight calendar days to run. The implied volatility is estimated for the eight options on the four closest to market strikes in each expiry. The implied volatilities are fit to a parabola as a function of the strike price for each expiry. The at-the-market implied volatility for an expiry is then taken to be the value of the fit parabola at the expected future price for the expiry. A linear interpolation (or extrapolation, as required) of the 30-day variance based on the squares of the at market volatilities is performed. V30 is then the square root of the estimated variance. If there is no first expiration month with less than sixty calendar days to run we do not calculate a V30.

Closing price, and change in price from the prior day are also displayed.

Top Twenty Volatility Gainers and Losers

The current trading day’s 30-day Implied Volatility is divided by the prior trading day’s 30-day Implied Volatility to determine the change in volatility for the day and the top 20 gainers and losers are posted. Gainers are those symbols which the options markets believe will have the greatest up or down price movement in the future as compared to the past, and losers are those symbols which the options markets believe had a large up and down price movement and will stabilize in the future. Implied volatility, closing price, and change in price from the prior day are also displayed.

Top Twenty Options Volumes and Volumes Gainers

Options volumes for the day are displayed for the top twenty symbols with the highest volumes.

The trading day’s options volumes are divided by the previous ten trading day’s options volumes average and the top twenty gainers are posted by symbol.

Closing price, and change in price from the prior day are also displayed.

Implied vs. Historical Volatilities

The 30-day Implied Volatility is divided by the 30-day historical volatility. This ratio highlights those symbols in which the market prediction of future volatility is much different from the volatility in the market over the last 30 days. The formula for historical volatility as defined by Garman-Klass. The top twenty symbols with the highest ratios as well as the top twenty symbols with the lowest ratios are displayed.

Implied volatility, historical volatility, closing price, and change in price from the prior day are also displayed.

Top Twenty Put/Call Volume Ratios and Call/Put Volume Ratios

Put option volumes are divided by call option volumes for the trading day, and the symbols for the twenty highest ratios are displayed. For the put/call ratio, the HIGHER the value, the more negative the sentiment since it would indicate more puts traded than calls. A ratio of less than one indicates more call volume than put volume.

Call option volumes are divided by put option volumes for the trading day, and the symbols for the twenty highest ratios are displayed. For the call/put ratio, the HIGHER the value, the more positive the sentiment since it would indicate fewer puts trading than calls. A ratio of less than one indicates more put volume than call volume.

Closing price, and change in price from the prior day are also displayed.

Top Twenty Put/Call Open Interest and Call/Put Open Interest

Put option open interest is divided by call option open interest, and displayed for the top twenty symbols with the highest ratios. This ratio may indicate negative sentiment in the options market.

Call option open interest is divided by put option open interest, and are displayed for the top twenty symbols with the highest ratios. This ratio may indicate positive sentiment in the options market.

Open Interest ratios reflect a longer time period than Put/Call and Call/Put daily volume ratios and therefore tend to be less volatile.

Closing price, and change in price from the prior day are also displayed.

Synthetic EFP Rates

An Exchange for Physical (EFP) allows the swap of a long or short stock position for a Single Stock Future (SSF). SSFs have an interest rate built into their price that is determined competitively by numerous market participants. Like Repos and Reverse Repos in the debt markets, EFPs provide a cheap and efficient financing vehicle. The EFP transaction is one where you sell the stock and buy it back for future delivery by buying the SSF future, or you buy the stock and sell the SSF.

There are several reasons to use this type of transaction:

If you carry a long stock position on margin, the EFP gives you the opportunity to reduce your financing cost because you will likely be able to sell the stock and buy the forward at a premium that is lower than your margin rate.
If you are short the stock, you receive interest on the credit balance generated by your short sale, but this interest is less than the premium you would receive by selling the SSF and buying back the short stock.
If you have excess cash in your account and would like to earn a higher return, you could buy stock and sell it forward at a premium higher than the interest your cash generates.

The tables above highlight the highest (investment opportunity) and lowest (borrowing opportunity) synthetic EFP rates available in the market. These synthetic rates are computed by taking the price differential between the SSF and the underlying stock, netting dividends, to calculate an annualized synthetic implied interest rate over the period of the SSF. All SSFs are settled through the Options Clearing Corporation, an AAA rated entity, making any interest earned through implied interest safer than with many other interest earning alternatives.

Futures Arbitrage Premium/Discount Index

The fair value of an index futures contract is computed by combining all the underlying values, adding an interest cost of carry for the duration of the futures contract, and subtracting any dividends that are paid during the duration of the futures contract. The table above compares near futures contracts with the fair value of the underlying representing a contract. When a futures price is greater than the fair value, there is a premium, indicating that the market believes there is a potential for increase in the underlying price or a decrease in the futures price. When a futures price is less than the fair value, there is a discount indicating the market believes there is a potential for a decrease in the underlying price or an increase in the futures price.

Written Commentary

As of: Tuesday February 9, 2010 12:30 pm EST

Biogen profit jump inspires iron condor option trade

Today’s tickers: BIIB, USO, MAC, NLY, NYX, CVS & KGC

BIIB – Biogen IDEC, Inc. – The world’s largest producer of medication used in the treatment of multiple sclerosis posted a 48% increase in fourth-quarter profits today, sending its shares up 2.75% to $54.26. Profit growth, fueled by greater sales of its drug Tysabri, resulted in earnings of $1.06 per share in the fourth quarter, which beat average street estimates by $0.16 per share. One Biogen options trader established an iron condor in the March contract, indicating shares of the underlying may remain relatively neutral through expiration next month. The investor essentially enacted two credit spreads, which can also be thought of as two strangles, in order to pocket the resulting premium. On the put side, the trader sold 4,000 contracts at the March $50 strike for a premium of $0.70 each, marked against the purchase of 4,000 puts at the lower March $45 strike for $0.25 apiece. As for the calls, the investor sold 4,000 lots at the March $55 strike for a premium of $1.50 each, spread against the purchase of the same number of call options at the higher March $60 strike for a premium of $0.45 apiece. The net credit received on the iron condor play amounts to $1.50 per contract. Biogen’s shares must trade between $50.00 and $55.00 through expiration in order for the trader to keep the full $1.50 per contract, or total profits of $600,000. Risks involved in the transaction outweigh total benefits. The parameters of the transaction expose the trader to maximum potential losses of $3.50 per contract, which start to accumulate if shares trade above the upper breakeven point at $56.50, or if the stock trades below the lower breakeven price of $48.50, ahead of expiration.

USO – United States Oil Fund LP – U.S. Oil Fund bulls are positioning for a rally in the price of the underlying stock by the time our nation’s roadways are bumper-to-bumper with summer traffic. Shares of the oil fund are currently up 3.25% to $36.23. Plain-vanilla call buying took place at the July $37 strike where investors paid an average premium of $2.67 per contract for 5,000 call options. Traders holding the calls stand ready to amass profits if the price per USO share rallies 9.50% over the current value to surpass the breakeven point at $39.67 ahead of July expiration.

MAC – The Macerich Company – The real estate investment trust, which owns and leases regional and community shopping centers in the United States, edged onto our ‘hot by options volume’ market scanner today due to put activity in the September contract. Shares were trading lower in the first half of the session, but have recovered to rally 1% higher to $30.91 as of 12:20 pm (EDT). The earlier dip in share price inspired plain-vanilla put buying. It looks like nervous investors purchased approximately 4,000 puts at the September $25 strike for an average premium of $2.50 apiece to secure downside protection. Put-buyers are protected in case MAC’s share price plummets 27.20% from the current day’s value to breach the lower breakeven point at $22.50 by September expiration.

NLY – Annaly Capital Management, Inc. – Bearish investors pawed at put options on mortgage-backed securities investment firm, Annaly Capital Management, today as shares of the underlying stock slipped 2.40% to $17.45. Pessimistic traders bracing for continued share price erosion over the next six months purchased 1,300 puts at the July $12.5 strike for an average premium of $0.21 per contract. These put contracts yield profits to the downside should NLY shares fall another 29.50% from the current price to breach the effective breakeven point at $12.29 by July expiration. Investors who are perhaps expecting an all out collapse in the value of the stock looked to the January 2012 $7.5 strike where 3,000 put options were picked up for an average premium of $0.59 apiece. Long-term bearish put-buyers accrue profits if shares of the underlying stock pare 60% of the current day’s value to fall beneath the breakeven point of $6.91 by January 2012 expiration. We note that shares of Annaly Capital Management have not traded under $10.95 in the past five years.

NYX – NYSE Euronext, Inc. – Shares of the operator of the largest U.S. stock exchange are up 5.50% to $23.73 this morning after the firm reported fourth-quarter earnings of $0.58 per share, which exceeded average analyst expectations by $0.10 a share. Bullish options traders are positioning for continued upward momentum in the price of the underlying stock by purchasing near-term call options. In the first hour of the trading session investor bought more than 2,000 calls at the February $25 strike for an average premium of $0.23 apiece. Individuals long the calls stand ready to amass profits if NYX’s shares rally above the breakeven price of $25.23 ahead of expiration day. The reading of overall options implied volatility on NYSE Euronext contracted 15.19% to 34.43% following earnings.

CVS – CVS Caremark Corp. – The largest distributor of prescription drugs in the United States reported an 11% increase in fourth-quarter profit yesterday, citing an increase in the number of consumers buying 90-day medicine supplies. Shares rallied during Monday’s session on the positive report, but slipped slightly during the current session, falling 0.85% to $32.45 as of 10:30 am (EDT). Options activity in the January 2011 contract this morning suggests one investor expects little movement in the value of the underlying shares through next January. The trader sold a strangle by shedding 5,000 puts at the January 2011 $30 strike for a premium of $2.51 each in combination with the sale of 5,000 calls at the higher January 2011 $35 strike for a premium of $2.57 apiece. The investor pockets a gross premium of $5.08 per contract, which he keeps if shares trade within the range of the strike prices described through expiration next year. The short position in both calls and puts leaves the trader vulnerable to potentially devastating losses should CVS’s shares swing beyond the upper breakeven price of $40.08, or trade below the lower breakeven price of $24.92, by expiration day.

KGC – Kinross Gold Corp. – Canadian gold mining company, Kinross Gold Corp., attracted bullish option traders this morning as its share price jumped up 4.25% to $17.36. Plain-vanilla call buying activity is apparent at the March $17 strike where more than 5,000 in-the-money call options were picked up for an average premium of $1.25 apiece. Bullish players long the calls are positioned to accrue profits if Kinross shares increase approximately 5.10% over the current price to surpass the breakeven point at $18.25 by March expiration.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Caitlin Duffy
Equity Options Analyst

The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Trichet departs Sydney in a hurry

Tuesday February 9, 2010

On Tuesday the euro was on the rise after it was revealed that ECB President Trichet was going to leave a central bank meeting in Sydney. His premature departure created a significant amount of speculation that a Thursday EU summit in Brussels had been called to present a bailout for Greece and other struggling Eurozone nations. The significant number of latecomers to the euro-bashers ball was in part forced to move rapidly to the sidelines and so illustrated the vulnerable state the market finds itself in. The euro added a cent in a very short time frame as a result of today’s story, which turns out to be true in content but lacking in rationale.

02-09-2010 12:40 PM EST	Current Price	Put Open Int	Weekly Change in Put Open Int	Call Open Int	Weekly Change in Call Open Int	Put/Call Open Int Ratio	30-day Historical Vol (%)	Implied Volatility (%)
Euro	1.3756	20,803	6,062	14,219	1,713	1.5	9.4	11.9
Yen	89.5450	5,626	299	2,875	-8	2.0	12.6	13.0
Pound	1.5728	12,090	79	3,095	33	3.9	10.5	12.3
Canada	0.9346	2,639	51	10,394	46	0.3	10.5	11.9
Aussie	0.8789	4,801	410	23,759	1,186	0.2	13.9	14.2
Swiss	1.0624	2,340	110	2,321	146	1.0	10.5	11.6

Euro – According to a statement given at the Reserve Bank of Australia to explain Mr. Trichet’s movements, the early departure is purely on account of logistics. In other words, it’s an awful long way back to Brussels. Elsewhere traders discovered that the EU summit is routine and not emergency and that it was indeed scheduled one month ago.

But, there is an important lesson being played out here. A record number of euro shorts have built up in the futures market over the last week according to CFTC data. The euro has quite understandably become the whipping boy and a vulnerable target where speculators can easily make money. However, announcing the presence of an ice-cream truck handing out free ice creams in the school yard over the elementary school public address system would probably teach the same lesson. Too many speculators are betting on the same outcome and the reality of free ice cream comes at the cost of fighting through the scrimmage in order to qualify.

The euro is sitting at the day’s high at around $1.3750 as the school yard shifts to New York. Against the yen the euro has regained ¥1.50 to stand at ¥123.40, while it’s also sitting at its highest point in two weeks against the British pound at 88.10 pence.

British pound – As the pace of shorts against the pound has also reached an extreme according to the same CFTC data, the pound is now benefitting from the same over crowded situation. The unit has just sprung to life against the dollar and has risen to $1.5625. Since Friday morning the pound has failed to close above $1.5650 on the hourly chart and yesterday traded as low as $1.5535.

The pound continues to suffer from anxiety over the probability that the summer election will leave neither political party in charge. Data today showed a worsening of the trade deficit to £7.3 billion making it the widest export shortfall in about one year. Last month’s shortfall stood at £6.8 billion. The numbers show a surprising lack of demand for British exports at a time when the pound has been ultra-competitive.

Elsewhere the British Retail Consortium confirmed that January’s retail sales decline of 0.7% compared to the same month a year ago was the worst performance for sellers in at least 15 years. Meanwhile a RICS survey showed that the balance of surveyors reporting higher house prices rose to a near-three year high.

Aussie dollar – The Aussie dollar has found its sea legs this morning after being tossed overboard last week. It’s currently trading at 87.47 U.S. cents having been capped at 87 cents since last Thursday.

Japanese yen – The slightly firmer tone to market sentiment on Tuesday is allowing a subsidence in the demand to the Japanese yen, which has pared recent gains against the dollar to stand at ¥89.67. Finance minister Kan told reporters after a regular cabinet meeting that the recent weakness in domestic stock indices was brought on by international concerns and did not mark fresh weakness for the Japanese economy.

Canadian dollar – The Canadian dollar is also breaking higher and moving away from recent lows that saw it as low as 92.74 U.S. cents. Currently the dollar is trading at 92.68 cents.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Relief rally in equities fails to budge bond yields

Tuesday February 9, 2010

You can almost hear an audible sigh of relief echoing around risk managers’ desks and that tone is reflected by a positive market sentiment on hopes for a solution to the fiscal problems facing the government of Greece. Given the far more favorable tone to both equity and commodity prices on Tuesday, it seems that something is out of whack since bond prices have failed to decline. Yields have remained relatively unmoved, adding just a couple of basis points. That begs the question as to whether investors are expecting little more than a relief rally. Why sell bonds for more than a couple of sessions at most? Short term interest rate futures around the globe are just about flat to higher arguing in the face of the rally in risk appetite.

As of: Tue, 9 Feb 2010 12:32 PM EST

Eurodollar futures – With a 1.1% opening gain for the stock market reversing Monday’s unexpected losses, one might be forgiven for expecting a big down day for notes and Eurodollar futures. However, that’s far from the truth and the December expiration implied yield remains below 1% indicating the likelihood of tighter monetary policy this year remains extremely limited. As such markets are coming round to accepting slower growth and a departure from easier quantitative policies, not necessarily because fixed income investors have crunched the permutations, but because they are accepting that economic growth will remain slow on the other side of recession.

Treasury notes reached a knee-jerk low on higher pre-market equities at 118-10, but have since come back to an astounding two tick intraday loss where the 10-year yield stands at 3.60%. In addition the market today faces the auction of $40 billion in three-year notes, also offering the potential to see yields back up. Yet it simply isn’t happening.

European short futures – There is an easier tone to the cash market as some of the recent stresses and strains are relived today by better prospects for peripheral Eurozone nations. Short end euribor contracts are higher by a couple of basis points. I noted last week some flattening of the curve as cash market pressures forced selling of nearby contracts lower. That pressure has unwound somewhat today on the story that ECB President Trichet quit a central bankers’ coven in Sydney in order to arrive at a hastily convened EU meeting in Brussels to discuss Eurozone’s most busted economies. As it turns out the market’s detective work is a little flawed and the meeting has been on the agenda for a month already. Still, the market continues to live by the caveat that where there’s smoke, there’s fire. Hopes for some kind of package, aid or resolution for Greek public finances has lifted confidence in plundered debt prices across the belt of Europe’s endangered periphery.

The recent escalation of selling that drove the price of Greek two-year notes into the ground has abated. Record costs to buy insurance against the default of Portuguese and Spanish government debt have stopped rising. The yield on the 10-year Greek bond eased eight basis points today to 6.68% while the spread over comparable bund yields narrowed to 354 basis points, having exceeded 400 last week.

British interest rate futures – British debt prices continued to underperform peer benchmarks. The March gilt futures contract is lower by 16 ticks at 115.30 where the yield has risen to 3.97%. Trade data revealed concerns over growth as the deficit grew again in December and showed that a weaker currency was not leading to a flood of orders for British goods and services. Short sterling is virtually flat while the FTSE100 has risen by 0.4%.

Australian rate futures – A warning by the RBA governor Glenn Stevens that falsely depressing interest rates ran the risk of creating asset bubbles had interest rate markets on the back foot on Tuesday. Interest rate bulls had recently feasted on 90-day bill contracts after the RBA kept rates unchanged earlier in the month. Now, a reversal in stock market losses in China and words of wisdom from Mr. Stevens leaves traders with a little indigestion. Bill prices slipped about four basis points on Tuesday while a further flattening in the yield was apparent with the 10 year bond losing three basis points in yield at 5.37%.

Canada’s 90-day BA’s – Yields of the 10-year Canadian government bond added a single basis point in light of a rally for gold, crude oil and other national treasures that helped also lift the value of the local dollar. Bills are slightly higher in price with yields one or two basis points lower.

Japan – The Nikkei fell to a two-month closing low although an optimistic Finance Minister Kan deflected blame saying that it was not a weakening Japanese economy driving down stocks. Rather the problems were those of foreigners especially those faced by European governments.

Bond markets responded to weakness in stocks and tales of woe from abroad by rallying after a highly successful auction of ¥600 billion in 30-year government bonds. Almost four buyers turned up to purchase each bond at auction, which is the best turnout since June last year. Bond traders seem to be warming to a message that bonds represent an appealing alternative to other available asset classes given the fact that equity markets keep running repeatedly into the same old brick wall.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com