Sunday, March 18, 2012

Options Analysis and Commentary from CondorOptions

Have You Tried Binary Options Yet? Condor Options Analysis and Commentary Blog

BofA interest rate strategists Ralph Axel and Ruslan Bikbov suggest that now would be a good time to buy tail risk hedges. (hat tip Joe Weisenthal) 6-month options on 10-year swap futures are as inexpensive now, they claim, as they’ve been in decades, excluding one period in 2006.

6M IV on 10Y Swap Futures, bp. Source: BofA Merrill Lynch Global Research
So far, so good. If rates are your key concern, this looks like a decent time to…

Implied volatility (IV) skew is one of the most important and interesting aspects of listed options. IV skew typically refers to the differences in the implied volatilities of options in the same expiration cycle with different strike prices. There have been many attempts in the academic literature to model the behavior of changes in skew, but the interpretation of skew information by traders is still done largely on a qualitative and ad hoc basis.
In “Quantifiable Implied Volatility Skew,”

Based on my understanding of the Fed stress test results, here’s an argument for why you should buy shares of Citigroup.
  1. Ceteris paribus, you should buy (short) shares of any bank that will have (will not have) adequate Tier 1 capital under the Fed’s stress scenario.
  2. If Citi revises its proposed capital actions after Q1 2012, it will have adequate Tier 1 capital under the Fed’s stress scenario.
  3. Citi is revising its proposed capital actions after Q1 2012.
  4. Therefore,

The halt in TVIX share issuance and the fact that, on some days, VIX-based ETF/ETN rebalancing accounts for 90% of VIX futures volume has caused some pretty wild speculation. I’ve been too busy this week to write a proper rebuttal, but here are some points that will help you steer clear of all the needless hand-wringing:
  • The rolling of contracts in VXX and similar products is in no way “entirely game-able,” for the same reason that the term

VelocityShares Daily 2X VIX Short-term ETN (TVIX), an increasingly popular volatility product, is an exchange traded note (ETN) provided by Credit Suisse that seeks to provide two times the daily return of the S&P Short Term VIX Futures Index (SPVXSTR), the same index tracked by the popular iPath S&P 500 VIX Short-Term Futures ETN (VXX). SPVXSTR maintains positions in first and second month VIX futures in a ratio weighted to provide constant exposure at a one-month horizon.

The jargon of options trading sometimes turns people off, and maybe “volatility skew” is one of the biggest hurdles. So I’m going to explain the concept in a straightforward way, and then explain why volatility skew is something you should care very much about.
Volatility skew usually refers to the difference between the implied volatilities of options at different strike prices in the same expiration cycle. For the majority of stocks and indexes, options with high strike prices have low…

The Condor Options newsletter portfolio returned 28% in the final quarter of this 2011, compared with 10% for the S&P 500. For the full year, the iron condor strategy beat the index by 4.39 percentage points, returning 2.59% compared with -1.80% for the index.
In the last quarter of the year, we made a major change to the strategy, expanding the scope of option selling trades to include a full suite of underlyings with exposure to U.S. and international stocks,…

Here’s one for all you volatility traders. You have to take a position in some combination of the following contracts (and only the following contracts), and hold it for all of 2012. The position will be closed out on the last day of December.
What’s your take? For this hypothetical, we’re limited to only those…

Humans can’t not tell stories: that’s the result of decades of research in cognitive science, psychology, neuroscience, and philosophy into our tendency to string together disparate events into coherent narratives. If you’re philosophically inclined, you know that David Hume got it right centuries ago: when we identify causation, what we are really doing is composing fictions to help us make sense of the buzzing world around us. But it would be a mistake to confuse our convenient fictions with the…

Historically, two of the most successful approaches to trading have been trend following and option selling. Trend following and momentum investing are strategies known to just about everybody, and option selling (i.e. collecting the volatility risk premium), while not quite as famous, is hardly a closely-held secret.
Usually, these two approaches are treated as strangers. Momentum/trend traders are conceptually long volatility in that they are willing to accept small, frequent losses from choppy markets in order to reap gains…

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