"Options market pricing in a X% move on the stock"

[a529612]

When an options guru says the market is pricing in a X% move on the underlying stock, does he mean the long straddle premium, say $2 on a $20 stock = 10% move or he's talking about volatility?

Also, is it really possible to predict the next move on a stock just by looking at the options market?

 

[cvds16]

he's probably talking about stradles and at the same time volatility. And no it's not possible to predict a stock's next move by looking at the options.

 

[a529612]

So all that put/call ratio is just BS?

 

[cvds16]

yup

 

[MTE]

Quote from cvds16:

yup

Every contract has a buyer and a seller so how can anyone determine anything by looking at the put/call ratio!? You can't say that people are buying calls cause at the same time other people are selling calls to those buyers and etc. Unless, of course, you can see the order flow with all the details. In that case, that's a totally different story!

By the way, you don't have to be a guru to see what size move the market is pricing in, just look at the ATM straddle or use the IV that straddle is trading at and then estimate the move to expiry based on that volatility: vol*sqrt(days to expiry/365). Use 365 days if using calendar days to expiry or use 252 if using trading days to expiry.

 

[thegazelle]

I disagree with the post above. I KNOW that is entirely reasonable to predict a move in the stock by option activity.

Note that the info below does not work 100% of the time. If it was, I obviously wouldn't be posting here and would be off in the bahamas..

It all started when I was browsing the CBOE website one time.. I stumbled upon their "CBOE TV" program. Its hosted by Dr. J . Its taped a couple of times a day. I started watching it because I was extremely interested in options, and couldn't get enough.

Dr. J has a program called the "heatseaker" program that identifys calls being purchased/sold. He also has another one for puts being purchased/sold called "distant thunder" .

I think these programs are overhyped, however they have shown promising results, though not always accurate any means.

The program identifies whether or not the calls/puts were exchanged at the current bid price or the current ask price.

For example, I can't remember what segment it was on, but it was noted that 10,000 ebay 30 calls were purchased on the ask. Purchased on the ask means action taken by a buyer. 10K of calls @ 1.3 a piece means 1.3 million was paid for the calls.

If I was putting up 1.3 million I sure as hell wouldn't do it unless I was 100% sure... Obviously it doesn't always indicate somone is speculating. Perhaps a hedge fund was short 1 million shares and wanted to hedge themselves in front of earnings (I don't think was the case this time around, just an example)

There have also been times where he notes that all of the option exchanges were "swept" at the same time. I.e. say all exchanges had ebay feb $30 calle @ 1.30 ask. Every single available call was purchased at that instant.

There have also been other specific ones calls, such as the buyout offer of HET.

I tried the blog service that Dr. J has. I found it had too many recommendations. I mean yes, if you shoot a shotgun you are going to hit something. So if you have 1 out of every 5 calls being profitable, you can see where this becomes a problem. The blog service is $500/month.

While I only tried out the blog service for a month, I still watch CBOE TV as it is interesting to watch unusual option activity unfold. Dr. J also has another website @ optionmonster.com . It has a daily webcast as well, but is usually just a rehash of the same stuff posted on CBOE TV.

BTW, CBOE TV is taped in the OEX pit @ CBOE.

 

[spindr0]

Quote from thegazelle:

The program identifies whether or not the calls/puts were exchanged at the current bid price or the current ask price.

For example, I can't remember what segment it was on, but it was noted that 10,000 ebay 30 calls were purchased on the ask. Purchased on the ask means action taken by a buyer. 10K of calls @ 1.3 a piece means 1.3 million was paid for the calls.

If I was putting up 1.3 million I sure as hell wouldn't do it unless I was 100% sure... Obviously it doesn't always indicate somone is speculating. Perhaps a hedge fund was short 1 million shares and wanted to hedge themselves in front of earnings (I don't think was the case this time around, just an example)

How do you differentiate the speculative buyer of 10K calls at the ask from the hedge fund buying 10K calls at the ask to protect 1 million short shares ??

 

[risky63]

check out this page....tomm it will change.
http://bigcharts.marketwatch.com/quickchart/options.asp?symb=ebay&sid=117345&time=1

shows the options activity before the news after hours.
you decide if theres any valuable info there.

 

[thegazelle]

Quote from spindr0:

How do you differentiate the speculative buyer of 10K calls at the ask from the hedge fund buying 10K calls at the ask to protect 1 million short shares ??

I have no idea, however take these scenarios. Lets assume the stock is going to move $3.40 either way after earnings (The estimated cost of buying a $30 Feb straddle on 1/22 @ 1 PM )

Option A

10K of calls traded at 1:00 PM - 1:03 PM EST. I'm assuming this is what he was referring to. Stock price at this time was 29.15 . The calls cost 1.30 , but if you were the fund that was short, you'd still have to go up to $30 to "stop the bleeding" with your calls. Add that .85 to the 1.30 , and you've got $2.10, and the cost of holding into earnings and using options at best would cost you $1.30 per share, and at worst cost you $2.10 per share.

Possible results :
Stock pops $3.40 , you lose $2.10 per share
Stock drops $3.40, you make $2.70 per share ($4 profit - 1.30)

Risk to reward ratio : .77



Option B

Other option would be to cover the shares ahead of earnings. Say hypothetically that the buying pressure of 1 million shares causes an increase of $1, so you lose $1 per share (this assumes all shares are covered at an average of $30.15 per share). You've still spent less than the $1.30 cost of the call. (Let the record show I've never done enough volume to move a stock, so I don't know how high the stock would go if you purchased 1 million shares)

Stock pops after earnings : Lose $1
Stock drops after earnings : Lose $1
(outcome is the same b/c you've covered before earnings)

Risk to reward : Not really one in this case, no reward.

Option C :

Outright speculation based on insider info or some other sort of information.

Stock pops $3.40 : Make $2.10 per share ($29.15 (stock price) + $3.40 (gain from pop) - $1.30 (cost of option) = $1.25. I'm only counting intrinsic value, time value might add $.20 per share perhaps, for a total of $1.45

Stock drops $3.40 : Lose $1.30

Risk to reward : .89


Any insight or ideas others could provide would be much welcomed.

 

[MTE]

Quote from thegazelle:

I disagree with the post above. I KNOW that is entirely reasonable to predict a move in the stock by option activity.

Note that the info below does not work 100% of the time. If it was, I obviously wouldn't be posting here and would be off in the bahamas..

It all started when I was browsing the CBOE website one time.. I stumbled upon their "CBOE TV" program. Its hosted by Dr. J . Its taped a couple of times a day. I started watching it because I was extremely interested in options, and couldn't get enough.

Dr. J has a program called the "heatseaker" program that identifys calls being purchased/sold. He also has another one for puts being purchased/sold called "distant thunder" .

I think these programs are overhyped, however they have shown promising results, though not always accurate any means.

The program identifies whether or not the calls/puts were exchanged at the current bid price or the current ask price.

For example, I can't remember what segment it was on, but it was noted that 10,000 ebay 30 calls were purchased on the ask. Purchased on the ask means action taken by a buyer. 10K of calls @ 1.3 a piece means 1.3 million was paid for the calls.

If I was putting up 1.3 million I sure as hell wouldn't do it unless I was 100% sure... Obviously it doesn't always indicate somone is speculating. Perhaps a hedge fund was short 1 million shares and wanted to hedge themselves in front of earnings (I don't think was the case this time around, just an example)

There have also been times where he notes that all of the option exchanges were "swept" at the same time. I.e. say all exchanges had ebay feb $30 calle @ 1.30 ask. Every single available call was purchased at that instant.

There have also been other specific ones calls, such as the buyout offer of HET.

I tried the blog service that Dr. J has. I found it had too many recommendations. I mean yes, if you shoot a shotgun you are going to hit something. So if you have 1 out of every 5 calls being profitable, you can see where this becomes a problem. The blog service is $500/month.

While I only tried out the blog service for a month, I still watch CBOE TV as it is interesting to watch unusual option activity unfold. Dr. J also has another website @ optionmonster.com . It has a daily webcast as well, but is usually just a rehash of the same stuff posted on CBOE TV.

BTW, CBOE TV is taped in the OEX pit @ CBOE.

As I said in my post, if you see the order flow then that's a different story because then you can see whether the intiator was bidding or offering. This is NOT the same as looking at the total put/call volume and then trying to make sense out of it.