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IB Market Brief
| As of: Fri, 10 Sep 2010 03:58 PM EDT |
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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. All tables, except the Fut Arb table, are posted hourly on each trading day from 11:45 to 15:45 ET (with a 15-minute market data delay) under normal circumstances. Tables are also posted at 16:15 ET to capture the market close. The Fut Arb table is updated every 15 minutes (with a 15-minute market delay), 12:00 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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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: Friday September 10, 2010 at 2:40 pm
Hartford Financial Services Group call options in high demand
Today’s tickers: HIG, EW, GENZ, AWK, STEC, DELL, HTZ, DBRN & OVTI
HIG - Hartford Financial Services Group, Inc. – Call options on the insurance and financial services firm are flying off the shelves today with shares trading higher by as much as 2.95% to tie down an intraday high of $22.99. As of 2:20 pm ET, more than 14.1 calls have changed hands on HIG for each single put option in action on the stock thus far in the session. The sharp increase in demand for calls bumped up the insurer’s overall reading of options implied volatility 26.4% to today’s high of 56.57%. While some investors populating HIG are selling calls, the majority of calls traded were purchased by traders positioning for continue appreciation in the price of the underlying shares. Near-term optimists picked up roughly 7,500 calls at the September $23 strike for an average premium of $0.50 each. Call buyers at this strike make money if HIG’s shares rally above the average breakeven price of $23.50 by expiration day next Friday. Other bulls purchased some 4,600 calls at the September $24 strike for premium of $0.23 each. Another 2,800 calls were scooped up at the higher September $25 strike at an average premium of $0.16 a-pop. More than 10,800 calls changed hands at the September $26 strike versus previously existing open interest of just 3,300 lots. The vast majority of those calls, some 7,000 contracts, traded to the middle of the market at a premium of $0.12 apiece. Bullish sentiment on the insurance company spread to the October $24 strike where some 2,000 calls were coveted at an average premium of $0.76 each. Investors holding these contracts stand ready to accumulate profits if HIG’s shares jump 7.7% over today’s high of $22.99 to exceed the average breakeven price of $24.76 by October expiration. An additional 2,000 calls were picked up at the October $25 strike for premium of $0.70 a-pop. Traders long the calls make money if shares surge 11.8% to trade above $25.70 ahead of expiration day next month. Options traders exchanged more than 66,700 contracts on Hartford Financial Services Group by 2:30 pm ET.
EW - Edwards Life Sciences Corp. – The provider of products and technologies created to treat advanced cardiovascular disease popped up on our ‘hot by options volume’ market scanner after one options player initiated a sizeable bearish transaction in the November contract. Shares of the medical supplies company are currently down 0.80% to arrive at $59.29 as of 1:55 pm ET. The investor established a ratio put spread, buying 5,000 puts at the November $57.5 strike at a premium of $2.95 each, and selling 10,000 puts at the lower November $47.5 strike for premium of $0.75 per contract. The net cost of the pessimistic play amounts to $1.45 each. Thus, the responsible party is poised to profit should Edwards Life Sciences’ shares decline 5.5% from the current price of $59.29 to slip beneath the effective breakeven price of $56.05 by expiration day in November. Maximum potential profits of $8.55 per contract pad the put-spreader’s wallet as long as the price of the underlying stock plummets 19.9% to settle at $47.50 at expiration. The sharp increase in demand for put options on EW lifted the stock’s overall reading of options implied volatility 7% to 40.64% by 2:00 pm ET.
GENZ - Genzyme Corp. – A three-legged bearish options combination play on biotechnology company, Genzyme Corp., caught our eye today. It looks like one strategist is bracing for Genzyme’s shares to decline ahead of expiration in January 2011 perhaps because Sanofi-Aventis, the French drugmaker looking to purchase the biotech firm, said it is not at this time raising the $69.00 a share or $18.5 billion offer as some rumors suggested earlier this week. Genzyme’s shares slipped 0.55% in morning trading, but recovered this afternoon to stand 0.15% higher on the day at $70.74 as of 1:45 pm ET. The investor responsible for the three-legged transaction sold approximately 5,000 calls at the January 2011 $72.5 strike for premium of $2.70 each, purchased the same number of puts at the January 2011 $67.5 strike at a premium of $3.35 apiece, and shed 10,000 puts at the January 2011 $60 strike for premium of $1.40 a-pop. The trader pockets $2.15 in premium per contract on the transaction, and keeps the full amount as long as shares fail to rally above $72.50 by expiration day in January. Additional profits amass should GENZ shares decline 4.6% from the current price of $70.74 to trade beneath the effective breakeven point to the downside at $67.50 by expiration. Maximum potential profits of $9.65 per contract, which includes premium pocketed today, are available to the investor if the biotechnology firm’s shares plunge 15.2% to settle at $60.00 at expiration next year.
AWK - American Water Works Co., Inc. – Shares of the provider of water and wastewater services to residential, commercial and industrial customers in the U.S. and Canada inched up 0.30% today to a high of $22.63. The firm appeared on our ‘hot by options volume’ market scanner during the second half of the session after one strategist initiated a bullish play in the December contract. It looks like the investor sold 3,000 puts at the December $22.5 strike to pocket premium of $1.00 apiece. The trader keeps the full premium received on the sale as long as American Water Works’ shares exceed $22.50 through expiration day in the final month of the year. Put selling, in this case, indicates the investor is happy to have shares of the underlying stock put to him at an effective price of $21.50 each in the event that puts land in-the-money at expiration.
STEC - STEC, Inc. – Call options on the global provider of enterprise-class Flash solid-state drives are in high demand today amid rumors personal-computer maker, Dell, may be interesting in making a bid for the company. STEC’s shares increased as much as 5.1% earlier to attain an intraday high of $12.18 before cooling slightly in afternoon trading to stand 2.00% higher on the day at $11.82 as of 1:10 pm ET. Investors hoping to see STEC extend gains ahead of September expiration picked up approximately 3,000 calls at the September $12 strike for an average premium of $0.35 each. Call buyers at this strike make money if shares rally 4.5% over the current price of $11.82 to surpass the average breakeven point to the upside at $12.35 by expiration day next Friday. Bullishness spread to the September $13 strike where traders purchased some 1,500 calls at an average premium of $0.18 a-pop. Investors long the calls are prepared to profit should STEC’s shares jump 11.5% to trade above the average breakeven price of $13.18 by September expiration. The overall reading of options implied volatility on the SSD maker stands 15.6% higher as of 1:15 pm ET to arrive at 62.42%.
DELL - Dell, Inc. – Shares of the world’s third-largest personal computer maker fell as much as 3.5% this morning to touch an intraday low of $11.69 after analysts at Morgan Stanley, citing global PC weakness due to tablet competition, cut their rating on Dell to ‘underweight’ from ‘equal-weight.’ One bearish options trader is positioning for shares to head lower ahead of October expiration, but does not appear to expect the stock to collapse any time soon. The investor initiated a ratio put spread, buying 4,100 now in-the-money puts at the October $12 strike at a premium of $0.55 each, and selling 8,200 puts at the lower October $11 strike for a premium of $0.21 apiece. Net premium paid to establish the ratio spread amounts to $0.13 per contract. Thus, the bearish player is poised to profit should Dell’s shares slip beneath the effective breakeven price of $11.87 by expiration day next month. Maximum potential profits of $0.87 per contract are available should shares shed another 8.00% to settle at $11.00 at expiration. In order to attain maximum profits on the position, shares of the underlying stock must fall through the current 52-week low of $11.34, set on August 24, 2010.
HTZ - Hertz Global Holdings, Inc. – Bullish options traders are loading up on Hertz Global call options this morning to position for a substantial medium-term rally in the price of the underlying shares. The second-largest U.S. car rental company’s shares rallied 3.05% in the first half of the trading session to secure an intraday high of $10.11. Share price appreciation today follows reports Thursday that a request by investors in Dollar Thrifty Automotive Group, Inc., Hertz’s $1 billion proposed takeover target, to stop a September 16 shareholder vote regarding the sale of the company to Hertz was rejected by a Delaware judge. Dollar Thrifty shareholders sought an injunction in order to reconsider a competing bid from Avis Budget Group, Inc. Bullish options players, perhaps emboldened by the judge’s decision, flocked to Hertz in morning trading to prepare for shares to head higher in the remainder of 2010. Investors purchased at least 12,200 calls at the December $12.5 strike for an average premium of $0.57 each. Call buyers stand ready to make money should HTZ shares surge 29.3% in the next several months to exceed the average breakeven price of $13.07 by December expiration. Hertz’s shares last traded above $13.07 back on May 13, 2010.
DBRN - Dress Barn, Inc. – Bulls are trying call options on for size at Dress Barn today to position for shares of the operator of women’s apparel specialty stores to rally ahead of September expiration. Investors are likely taking bullish stance on DBRN ahead of the firm’s fourth-quarter earnings report scheduled for release after the closing bell on September 15, 2010. Dress Barn’s shares are currently up 0.30% to stand at $22.71 as of 12:30 pm ET. It looks like traders picked up approximately 1,500 in-the-money calls at the September $22.5 strike for an average premium of $0.90 apiece. Call buyers profit if the retailer’s shares rally 3.00% over the current price of $22.71 to exceed the effective breakeven price of $23.40 ahead of expiration next Friday. Options implied volatility on the stock is up 5.6% at 41.65% in early afternoon trading.
OVTI - OmniVision Technologies, Inc. – Shares in semiconductor image sensor devices manufacturer, OmniVision Technologies, fell as much as 7.2% in the first half of the trading day to reach an intraday low of $18.42, the lowest traded price since June 11. It looks like one options investor was prepared for the plunge in price and took profits off the table by rolling a previously established long put stance to a lower strike price in the October contract. The put player likely accumulated a total of 3,000 long puts at the October $24 strike for an average premium of $2.58 each starting on August 30, 2010, when OVTI shares were trading at a volume-weighted average price of $22.47. The subsequent erosion in the price of the underlying stock inflated premium on the deep-in-the-money puts. Thus, the investor was able to sell all 3,000 puts at that strike today at a richer premium of $4.70 a-pop. Net profits on the closing sale amount to an average of $2.12 per contract. Next, the trader braced for continued bearish movement in the price of OVTI shares by picking up a fresh batch of 3,000 in-the-money puts at the lower October $20 strike at a premium of $1.90 apiece. Profits on the new position start to accumulate for the investor if the semiconductor maker’s shares fall another 1.7% from today’s low of $18.42 to trade below the average breakeven price of $18.10 by October expiration day.
Andrew Wilkinson |
Caitlin Duffy |
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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.
Risk appetite fails to gain traction
Friday September 10, 2010
Risk appetite has the ability but apparently little desire to self-improve at the end of the week. The huge sucking sound of Chinese imports in to its nation’s ports helped relax fears over an impending slowdown in the pace of global recovery. A stimulus package from Tokyo also helped soothe investors’ nerves while the safe haven appeal of Swiss franc and Japanese yen came off the boil. But markets are showing some restraint in going hell-for-leather again today, as if something unsavory is bubbling away in the background.
| 09-10-2010 04:07 PM EDT | 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 |
1.2696 | 27,521 | 433 | 18,815 | 1,723 | 1.5 | 10.4 | 10.5 |
 Yen |
84.1725 | 10,876 | 235 | 2,948 | 239 | 3.7 | 10.7 | 11.8 |
 Pound |
1.5353 | 9,444 | 67 | 3,690 | 27 | 2.6 | 9.3 | 9.7 |
 Canada |
0.9656 | 10,507 | 132 | 10,566 | -125 | 1.0 | 10.8 | 10.9 |
 Aussie |
0.9264 | 9,847 | 162 | 21,696 | 67 | 0.5 | 12.8 | 11.8 |
 Swiss |
1.0194 | 3,711 | 8 | 6,360 | 479 | 0.6 | 12.0 | 10.6 |
