The IB Options and Futures Intelligence Report
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| As of: Mon, 8 Feb 2010 03:32 PM EST |
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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. 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 Volumes and Call/Put Ratio Volumes
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.
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: Monday February 8, 2010 3:45 pm EST
Bank of America bears buy puts
Today’s tickers: BAC, PBR, F, FXI, NXY, KFT, DELL & HPQ
BAC – Bank of America Corp. – Bearish option traders purchased put options on Bank of America today with shares of the firm trading 3% lower to $14.52. The number of put options purchased at the March $14 strike price surpassed existing open interest at that strike, suggesting many investors are bracing for continued near-term share price erosion. Approximately 33,000 puts were purchased for an average premium of $0.59 apiece at the March $14 strike. Investors picking up the put options perhaps anticipate B of A’s share price could slip beneath the effective breakeven point on the trade at $13.41 ahead of March expiration. The 12% increase in the reading of options implied volatility on Bank of America to 43.74% today points to increased fluctuation in the price of the underlying shares going forward.
PBR – Petroleo Brasileiro SA ADR – The Brazilian oil company’s shares recovered slightly today, rising 0.65% to $39.03, amid higher commodity prices and a rebound in the price of crude oil. Option traders are still initiating bearish trades on the stock though, which suggests today’s modest rebound could be short-lived. One investor purchased a put spread in the January 2011 contract, establishing long-term downside protection. It appears the trader bought 5,000 in-the-money puts at the January 2011 $40 strike for a premium of $6.50 each, marked against the sale of 5,000 puts at the lower January 2011 $30 strike for an average premium of $2.13 apiece. The net cost of the transaction amounts to $4.37 per contract. The parameters of the trade indicate an effective breakeven share price of $35.63, which marks the price at which shares must trade at (or below) before downside protection kicks in for the put-spreader.
F – Ford Motor Co. – Shares of the American automaker, whose sales increased 24% year-over-year in the month of January, rallied 3.40% to $11.28 today. Notable options activity on the stock involved long-dated put options in the January 2012 contract. It looks like at least one investor purchased 20,000 puts at the January 2012 $5.0 strike for a premium of $0.58 per contract in combination with the purchase of an equivalent number of shares of the underlying stock. The ‘married-puts’ picked up by options players provide long-term downside protection should Ford’s shares collapse in the next two years. But, the trader(s) are most probably taking a long-term bullish stance on Ford by taking a long stock position and anticipating share price appreciation in the next couple of years to expiration.
FXI – iShares FTSE/Xinhua China 25 Index Fund – Shares of the FXI exchange-traded fund, which invests in twenty-five of the largest and most liquid Chinese companies, rebounded slightly today, rising 0.40% to $37.72. The value of the fund’s shares eroded significantly during the last trading week, but the modest rally today has perhaps inspired some investors to pursue bullish positions using options. Optimism appeared in the May contract where it looks like one trade sold 5,000 puts at the May $37 strike for a premium of $2.50 each in order to finance the purchase of 5,000 calls at the higher May $38 strike for $2.41 apiece. The investor pockets a net credit of $0.09 per contract on the trade, which he keeps as long as shares of the underlying stock trade above $37.00 through expiration day. Additional profits accumulate to the upside if the FXI’s share price breaks out above the $38.00-level ahead of expiration in approximately four months time.
NXY – Nexen Inc. – Shares in oil and gas exploration company, Nexen Inc. are higher by 27 cents or 1.3% at $22.30, while a large options play grabbed our attention. It looks as though a single investor sucked up 3,000 calls expiring in the March contract that would grant buying rights over 300,000 shares in the company at a fixe $25.00. If the share price doesn’t rise by at least 12.1% between now and then the investor will possibly have wasted the 39 cent premium spent today. Shares had been grinding lower last week and it appears that the fact the market isn’t following through after the price of oil reached $71.00 in an over supplied crude oil market, might have given this investor some reason to look to the near-term upside. Nexen’s share price hasn’t traded above $25.00 since November 23. Implied options volatility rose slightly to 44.5% today.
KFT – Kraft Foods, Inc. – Shares of the U.S. food producer are up 0.40% to $28.55 this morning, but early options movements on the stock perhaps point to limited near-term gains in the price of the underlying. It looks like one trader sold roughly 5,000 out-of-the-money call options at the March $30 strike for an average premium of $0.40 each. Open interest at the March $30 strike exceeds 31,000 contracts. Thus, the trader could be banking gains on a previously established long call position. Alternatively, it is possible the trader is long the stock and engaging in covered call selling. Investors exchanged more than 8,200 contracts on Kraft in the first forty-five minutes of the trading session.
DELL – Dell, Inc. – The personal computer manufacturer’s shares are trading more than 3.30% higher in early trading to stand at $13.67. Option traders exchanged more than 21,300 contacts on the stock in the first hour of the trading session. Investors are favoring call options on Dell at the start of the trading week, with more than 4 calls traded to each single put option in play today. The most heavily populated strike price thus far is the near-term February $13 strike where more than 7,400 in-the-money calls changed hands. Options implied volatility is slightly lower by about 3.30% to 38.59%.
HPQ – Hewlett-Packard Co. – It looks like the majority of the 5,200 calls exchanged at the now in-the-money February $47 strike were purchased by investors initiating bullish stances on the tech-giant. Hewlett-Packard’s shares are trading 1.25% higher in early trading to stand at $47.90. Options traders paid an average of $1.70 per contract for the calls, and thus stand ready to amass profits if shares of the underlying stock rally above the breakeven price at $48.70 ahead of expiration day.
Andrew Wilkinson |
Caitlin Duffy |
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