Top Twenty 30-day (V30) Implied Volatilities
Implied volatility is the options market's prediction is the
options market's prediction of how volatile a given underlying
will be in the future. Implied volatility 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 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 percent 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.
As of: Friday November 6, 2009 2:30 pm EST
Staples firm – Proctor & Gamble options suggest further upside
Today’s tickers: PG, CTXS, LINTA, HIG, CVS, UUP, VIX, AONE, SWKS, CLX, BCSI & NVDA
PG - The Proctor & Gamble Co. – Bullish action on Proctor & Gamble today suggests one investor expects shares to continue to rally ahead of expiration in November. Shares are currently trading 1% higher to $61.13. The trader purchased 10,000 calls at the now in-the-money November 60 strike for 1.39 each, and simultaneously sold 10,000 calls at the higher November 62.5 strike for 26 cents apiece. The net cost of buying the call spread amounts to 1.13 per contract and yields maximum potential profits of 1.37 each if shares rally up to $62.50 by expiration. Shares need only rally another 2.2% from the current price to reach the $62.50-level.
CTXS - Citrix Systems, Inc. – Software developer, Citrix Systems, attracted bullish option traders to the November contract today amid a 1% increase in shares to $38.80. Investors displayed optimistic sentiment on the stock by selling approximately 10,600 puts at the November 35 strike for 10 cents premium apiece. Put-sellers retain the full dime-per-contract as long as shares remain above $35.00 through expiration this month. Shares of CTXS have traded above $36.00 since September 4, 2009.
LINTA - Liberty Media Corp. – Shares of the broadcasting and entertainment company rallied 1% during the trading session to $12.14. Plain-vanilla call buying action on the stock today suggests some investors expect shares to rise significantly by expiration in January 2010. Traders purchased about 11,800 calls at the January 15 strike for an average premium of 25 cents apiece. Call-buyers will accumulate profits if shares surge at least 26% from the current price to surpass the breakeven point at $15.25 by expiration.
HIG - Hartford Financial Services Group, Inc. – Medium-term investors placed bearish bets on the insurance and financial services firm today. Shares are currently trading less than 0.25% higher to $24.16 after suffering significant erosion throughout the week. One pessimistic trader initiated a bearish risk reversal in the January 2010 contract. The investor sold 4,500 calls at the January 27 strike for an average premium of 78 cents apiece to partially finance the purchase of the same number of put options at the lower January 21 strike for 1.68 each. The net cost of the transaction is reduced to a more palatable 90 cents per contract, but does leave the investor exposed in the event of a rally of more than 11.7% by expiration in January. The HIG-bear may profit by expiration if shares decline 17% from the current price to breach the breakeven point at $20.10.
CVS - CVS Caremark Corp. – Shares of the retail pharmacy chain recovered slightly today after taking a severe beating yesterday. The stock is currently trading 2.5% higher to $29.58. One investor established a bullish stance on CVS in the December contract. It appears the trader put on a bullish risk reversal by selling 5,500 puts at the December 30 strike for an average premium of 1.70 apiece, thus more than offsetting the cost of purchasing the same number of calls at the same strike for 1.11 each. The investor pockets a net credit of 59 cents per contract. Additional profits may accumulate by expiration next month if shares rebound above $30.00.
UUP - PowerShares DB U.S. Dollar Index Fund – Call options continue to be bought again today in this ETF tracking the performance of the U.S. dollar index. We’re coming around to the view that rather than expecting a bullish perspective on the behavior of the dollar, some savvy options traders paid attention to the filing on Tuesday by the fund’s managers who noted that they may have to create more shares in order to meet growing demand. Heavy option activity followed, which may have created further liquidity issues at the fund and caused a short squeeze on Thursday when shares were halted pending this announcement. What is noteworthy is the fact that the UUP veered off in a direction all of its own, surging two percent at a time when the dollar index was practically unchanged. So we’re not quite sure what the buyers of November and December 23 strike calls are doing on the other side of this trade. It’s possible they have a ready made hedging or arbitrage position to offset as many calls as they can. Open interest in the November calls today grew to 310,000 from 40,000 on Monday, while the 20 cent premium today has seen a further 30,000 contracts change hands. The dollar did get a short-lived boost after the rate of unemployment broke the double-digit barrier earlier in the morning. Non-farm payrolls fell by 190,000 in October lifting unemployment to 10.2% - the highest in 26 years. Dollar buying as a safe haven quickly abated as investors came round to realizing that the economic gloom continues to clear.
VIX - CBOE Vix index – Equities traded either side of unchanged after nerves were soothed in the wake of the unemployment reading. Yet now that the Dow industrials average has reclaimed 10,000 and the earnings reports at eight-out-of-10 S&P 500 index constituents have beaten estimates, fear has once again slipped. This time last week saw heavy demand for the protection that option premium offers investors but a week later the vix index has slipped back to 24.73. There was contrarian call option buying to be found though. Investors bought 5,000 calls maturing in January at the 27.5 strike and twice as many calls at the 35 strike for what’s shaping up to be a rich 1.35 premium. Elsewhere there appears to be significant put selling at the December 22.5 strike where almost 28,000 lots have traded at 50 cents. Either someone has a strong desire to sit on an attractive 50 cent bid, making room for arbitrage selling or someone is abandoning a long position as the whole volatility trade goes sour.
AONE - A123 Systems Inc. – Heavy-duty lithium battery manufacturer took a Thursday thumbs-down from CNBC’s Jim Cramer, who in his infinite wisdom proclaimed that the easy money has been made on the stock. As a result today shares are down 3.5% to $17.00. Only two months ago did the company see its stock jump draw a crowd when the IPO saw its capitalization rally by 50% right out of the gate. Option sellers turned up to short call options expiring in December with a 22.5 strike price. By writing calls at the strike for a 45 cent premium, these investors guarantee delivery of stock in the event that the share price recovers by 32% from its current price. It doesn’t appear as though this activity suggests covered call strategies given the pace with which the stock is in decline today.
SWKS - Skyworks Solutions, Inc. – Shares of the semiconductor maker surged 8.5% today to $11.91 after the firm set a profit target above analysts’ expectations and stated revenue will likely grow in the current quarter. SWKS posted fourth-quarter earnings of 24 cents per share, beating street estimates by 2 pennies, on revenue of $228 million. Bullish options action took place in the January 2010 contract where one investor initiated a call spread. The trader purchased 5,000 calls at the now in-the-money January 10 strike for a premium of 2.00 apiece, spread against the sale of 5,000 calls at the higher January 12.5 strike for 60 cents each. The net cost of the transaction amounts to 1.40 per contract. The trader may pocket maximum potential profits of 1.10 per contract if shares rally up to $12.50 by expiration in January, but the decision to buy in-the-money call options suggest a desire to take ownership at expiration. Option implied volatility contracted 30% following earnings to arrive at the current intraday low of 49%.
CLX - The Clorox Company – Option implied volatility on the maker of household and consumer products jumped 8.31% to 21.69% amid increased demand for call options on the stock and a 0.5% rally in shares to $59.83. The firm reported a 23% increase in first-quarter net income on Monday and raised its full-year profit outlook. The supplier of bleach said profits were lifted by increased sales of disinfectant wipes to stave off the H1N1 flu virus. Investors exchanged more than 2,500 calls at the December 65 strike within the first 45 minutes of the trading session.
BCSI - Blue Coat Systems, Inc. – Early morning put activity pushed the supplier of proxy appliances onto our ‘hot by options volume’ market scanner. Shares are slightly off by 1% to $25.02. BCSI announced plans yesterday to cut approximately 10% of its staff as part of a new restructuring plan. Blue Coat also revealed it will acquire S7 Software Solutions – a software R&D firm based in Bangalore, India – for approximately $5.25 million. Implied volatility edged up from 54% to the current reading of 57%.
NVDA - NVIDIA Corp. – Third-quarter earnings of 19 cents per share for the semiconductor company beat street estimates by about 9 cents and sent shares up more than 6% to $13.04. Option implied volatility contracted 22.22% to 41.78% following earnings. Investor exchanged more than 8 call options to each put contract in play on the stock. Upwards of 27,300 option contracts changed hands on NVDA by 10:30 am (EDT).
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.
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