Different thinking pays of

Profitaker · Oct 10, 2005

Quote from nonprophet:

To check out the option market can at least be an additional factor. Like in the SEBL example, if hypothetically I would have considered a bearish position and find someone willing to risk 50k on OTM calls 1 week before expiration, I might postpone a week. No matter how you slice it, the calls are NOT a bearish position.

Correct, the guy that bought them is bullish, But the guy that sold them is bearish. Open interest is neither bullish nor bearish... they are just open Calls. The same is true on the Put side.

Sorry, but I really don't see why you interpret it any other way.

Please explain...

markg_ny · Oct 10, 2005

This is interesting: [from http://finance.yahoo.com/q/h?s=XLNX]
[Press Release Source: Xilinx, Inc. Xilinx Revises September Quarter Sales Guidance Monday October 10, 8:50 am ET
SAN JOSE, Calif., Oct. 10 /PRNewswire-FirstCall/ -- Xilinx, Inc. (Nasdaq: XLNX - News) today updated September quarter fiscal 2006 sales guidance.]

Xilinx tumbles on sales warning by $4.35.

Now, if I was planning to buy xlnx on Thursday (10/06/2005) I would be worried by:
05Oct Strike 27.5 puts that were:
SYMBOL,DATE, BID,ASK,VOLUME,OPEN INTEREST
XLNX,10/06/2005,27.22,-0.68,0.85,0.90,15223,6099

Over 15,000 puts!!!!!!!!!!!! for one contract type as compare to total of 3152 calls for all months and all strike prices for this day.

Today it is:
SYMBOL,DATE,BID,ASK,VOLUME,OPEN INTEREST
XLNX,10/10/2005,22.77,-4.35,4.60,4.90,220,20949

Open interest increased by close to 15,000 and price from:
0.85-0.90 to 4.60-4.90.

It could be just a hedge two days before unexpected news, it was not a spread because total put volume for all months and strikes was 17007.

Before some of you start calling your friend MM in the options game (Dell-Boy) calling me full of shit, or spam artist (hope SethArb you read my reply earlier), just go to option clearing corp. or schaeffersresearch site and check by yourself the volume and open interest changes and values.

Hope this was interesting for other readers (was for me).
Just another incentive to study volatility skew and greeks.

nonprophet · Oct 11, 2005

Quote from Profitaker:

Correct, the guy that bought them is bullish, But the guy that sold them is bearish. Open interest is neither bullish nor bearish... they are just open Calls. The same is true on the Put side.

Sorry, but I really don't see why you interpret it any other way.

Please explain...

The lady who initiated the trade is who matters. Sometimes. Like when she wanted her position so bad that things get out of whack.

One way to make an educated guess about her intentions is to compare todayâs openint and implvol with yesterdayâs. Add call or put gives 8 scenarios, for example:

Calls
Openint dn
IV up

means she covered her short call positions --> sheâs a BULL !!

BULL--ONY of course. Even when right about individual positions, it averages down to garbage. But the more out-of-the-ordinary the move, the LESS UN-reliable the signal (note how careful I am, pls donât spamshit me

).

Example:

- yesterday total frontmonth put OI was 336
- today 1535 openings in one put series, all NEW because new OI is 1868
- value about 38k (based on closing bid)
- daily (bid)IV:

35.4
26.4
23.4 <-- today
24.5

Clear IV dip --> PUT-BULL (SHORT puts).

I donât know or care if itâs an adjustment or part of some larger play: it seems NOT to be a bet on a freefall, thatâs all that matters. I guess-with-an-edge, at best....I hope....

Btw I donât necessarily think of her as a scrupulous ins*der. Could be a gambler. Whoever, I prefer not to position myself AGAINST the big lady. And should other signs point in the same direction I may, MAY consider some bullish move (not by shorting the same puts of course, they are too cheap now.)

Yes itâs crude. But is it any less reliable than drawing imaginary trendlines on a price chart.... ?

Iâm on markgâs side but would never (seldom) trade ONLY on option activity. It just provides an additional viewpoint, thatâs all.

nonprophet · Oct 11, 2005

One note:
I DO of course check all strikes and expirations for any obvious spread positions.

Profitaker · Oct 11, 2005

Quote from nonprophet:

Yes itâs crude. But is it any less reliable than drawing imaginary trendlines on a price chart.... ?

Agreed with you there.

One point regarding changing IV - Put's and Calls of the same strike trade at the same IV and all things being equal the IV smile will hold too. So... the change in IV may not actually have been caused by the trade you think caused it.

I know you know that, but maybe others don't.

nonprophet · Oct 12, 2005

Quote from Profitaker:

I know you know that, but maybe others don't.

Well, Iâm not so sure about myself.

Do you mean that quotes will (auto-)adjust in all strikes and expirations to prevent arbitrage possibilities? If so, yes in general it makes no sense to pick an arbitrary option series, check for change in IV and draw any conclusions about buy/sell/long/short/etc. But in a less liquid market where apparently there has been unusual excess supply or demand in ONE series only, it becomes possible to cautiously draw some conclusions about that specific one, Iâd say.

If this is not at all what you mean, then please explain. Iâm sure there are things about this I donât know but would like to know. Thanks.

Let me just add: I mean excess supply/demand in one series compared to total option activity, like in the CRA example which plots TOTAL frontmonth volume, but the spike happens to be concentrated in one strike only. Also, the IV is measured only in that strike, it is not some composite IV index.

Profitaker · Oct 13, 2005

Quote from nonprophet:
Do you mean that quotes will (auto-)adjust in all strikes and expirations to prevent arbitrage possibilities?

Yes, exactly so.

Quote from nonprophet:
If so, yes in general it makes no sense to pick an arbitrary option series, check for change in IV and draw any conclusions about buy/sell/long/short/etc. But in a less liquid market where apparently there has been unusual excess supply or demand in ONE series only, it becomes possible to cautiously draw some conclusions about that specific one, Iâd say.

I would agree with that in an illiquid market, with âcautiouslyâ being the operative word.

So just to re-cap...

1) An option trade is never long or short, it's just "open" - every buyer is matched with a seller.
2) Determining who initiated the option trade is difficult to impossible, depending on the market.
3) And even if you knew who initiated the trade, how do you know if it was speculation or a genuine hedge ?
4) And even if you knew who initiated the trade AND you knew it was speculation, what makes you think the speculator is right ?
5) With so many variables and uncertainties, why bother monitoring option trades ? Could your time not be better used elsewhere ?

nonprophet · Oct 14, 2005

Quote from Profitaker:

5) With so many variables and uncertainties, why bother monitoring option trades ? Could your time not be better used elsewhere ?

Your re-cap sounds good! Perhaps at least being able to pinpoint the specific uncertainties is not so bad. Especially in most techie stuff (un)certainties can be determined only through backtesting. The BASIS for most of that stuff is just some vague intuition (an exception for things based on serious statistics and probability theory, but then you soon end up in academic work and indeed, option pricing theory).

In that sense I find monitoring option trades more down-to-earth despite indeed, many levels of uncertainty.

Different thinking pays of

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