The Credit Crisis Financial Stocks Short Journal
- Thread starter Daal
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From what I can see, it's really just the theta that you've paid. You have benefited from the roll, but that's, unfortunately, fully offset by the erosion of time value that your option had at the time of purchase. Vol in these hadn't done much of anything, which is a little strange to me, but is a theme in all rates mkts recently. Especially, the very front ends (whites and 2yr notes/schatz), where the mkt-makers have been marking vols down very heavily of late. I can give you more detail, but I don't think there's anything more complicated than theta, in your particular case.
No, time value works the same way for all options, regardless of what type of asset it is. What you're referring to is rolldown, aka slide (sometimes, not too accurately, IMHO, described as carry).
Generally, I like to think of it this way. I start by assuming nothing whatsoever moves in the mkt on a particular day. My option position will still show some PNL at the end of that day. That PNL can be roughly decomposed into a few independent elements (this decomposition is different, but sort of adds to the standard PNL explain done with the greeks):
1) Theta, i.e. the fundamental time decay all options exhibit
2) Curve rolldown, i.e. PNL due to your position moving 1 day along the rates term structure
3) Vol rolldown, which is the same as above, except it's from movement along the term structure of implied vol
4) Slide along the smile, which is probably not too important, but refers to the PNL that results from the moneyness of your option changing with the passage of time
There might be others (model-dependent), but they're likely to be of much less importance.
At any rate, in the case of your Mar11 calls, you have benefitted from the curve rolldown, but you paid theta. Essentially, being long Mar11 calls is a carry trade with limited downside. Unfortunately, the limited downside bit you have to pay for.
All other things being equal, this option should increase in value as it moves closer to expiration. You call this curve rolldown, which is fine. In any case, this part of the value should vastly overwhelm any time value.
Now if I owned a Mar 11 99 put, the theta would be a much larger component of the value.
I remember Tony Saliba's interview in Market Wizards. He was talking about some call options he owned. He said that the locals would knock down the price of these options every day just to try and drive him out of the position. Instead, knowing they were getting even more undervalued, he just kept buying and made a mint once the price of the underlying made it impossible for the locals to keep banging them down.
I have to believe something similar is happening here. These are thinly traded and probably not important enough for anybody to arbitrage. I'll just have to wait for the underlying to get so out of whack w/the value of the option that the price can no longer be kept down!
Would have loved the opportunity to sell some of these in the low 30s this week, though.
Now if I owned a Mar 11 99 put, the theta would be a much larger component of the value.
I remember Tony Saliba's interview in Market Wizards. He was talking about some call options he owned. He said that the locals would knock down the price of these options every day just to try and drive him out of the position. Instead, knowing they were getting even more undervalued, he just kept buying and made a mint once the price of the underlying made it impossible for the locals to keep banging them down.
I have to believe something similar is happening here. These are thinly traded and probably not important enough for anybody to arbitrage. I'll just have to wait for the underlying to get so out of whack w/the value of the option that the price can no longer be kept down!
Would have loved the opportunity to sell some of these in the low 30s this week, though.
You're wrong, my friend. You don't need to take my word for it. You can check all the aspects of your PNL yourself very easily by using a simple option calculator that is trivial to create in Excel. If you want to, I can send you a spreadsheet.Quote from ralph00:
All other things being equal, this option should increase in value as it moves closer to expiration. You call this curve rolldown, which is fine. In any case, this part of the value should vastly overwhelm any time value.
Now if I owned a Mar 11 99 put, the theta would be a much larger component of the value.
I remember Tony Saliba's interview in Market Wizards. He was talking about some call options he owned. He said that the locals would knock down the price of these options every day just to try and drive him out of the position. Instead, knowing they were getting even more undervalued, he just kept buying and made a mint once the price of the underlying made it impossible for the locals to keep banging them down.
I have to believe something similar is happening here. These are thinly traded and probably not important enough for anybody to arbitrage. I'll just have to wait for the underlying to get so out of whack w/the value of the option that the price can no longer be kept down!
Would have loved the opportunity to sell some of these in the low 30s this week, though.
This is, in fact, exactly what I did when I looked at your Mar11 calls. You're also not correct regarding the call/put issue. No matter how you slice it, the option you own is 30bps OTM, so it has no intrinsic value, only time value.
As to the games played by the mkt-makers, you're right, this does happen and I have been on the wrong side of these shenanigans often, most recently in the past week (in white Euribors and schatz). However, you have to realize that this type of manipulation is done for options where there's a very large open interest, i.e. where the mkt-makers are very short.
At any rate, if you don't believe me, you should post your query in the Options forum and see what the other members of the community say.
From GS. I don't whether to take comfort in or be frightfully worried by these remarks ...
http://pragcap.com/goldman-sachs-5-trend
GOLDMAN SACHS: 5 TRENDS THAT WILL RESULT IN A WEAK RECOVERY
The latest from Goldmanâs Chief Economist, Jan Hatzius, is not exactly a ringing endorsement of the stock market. Hatzius says the recovery is likely to continue to be very slow and that unemployment is likely to spike higher in the near-term accompanied by little to no inflation. Hatzius claims that the second half recovery in 2009 was entirely driven by the stimulus and inventory restocking. In other words, it is nothing to get excited about as neither are sustainable trends. What concerns Hatzius most going forward are 5 continuing negative trends:
1. Continued saving by households
2. Weak labor income
3. Fiscal drag from states and local governments
4. Vacant homes and unused industrial capacity resulting in low private sector investment
5. Limited credit availability
Although the labor markets are showing signs of improvement in recent weeks Hatzius sees a continuing âjobless recoveryâ and persistent weakness into 2011. He is calling for a climb in the unemployment rate from the current level of 9.7% to 10.5%. He continues to believe inflation will remain well below trend and that the Fed is on hold for the remainder of 2010 AND 2011.
http://pragcap.com/goldman-sachs-5-trend
GOLDMAN SACHS: 5 TRENDS THAT WILL RESULT IN A WEAK RECOVERY
The latest from Goldmanâs Chief Economist, Jan Hatzius, is not exactly a ringing endorsement of the stock market. Hatzius says the recovery is likely to continue to be very slow and that unemployment is likely to spike higher in the near-term accompanied by little to no inflation. Hatzius claims that the second half recovery in 2009 was entirely driven by the stimulus and inventory restocking. In other words, it is nothing to get excited about as neither are sustainable trends. What concerns Hatzius most going forward are 5 continuing negative trends:
1. Continued saving by households
2. Weak labor income
3. Fiscal drag from states and local governments
4. Vacant homes and unused industrial capacity resulting in low private sector investment
5. Limited credit availability
Although the labor markets are showing signs of improvement in recent weeks Hatzius sees a continuing âjobless recoveryâ and persistent weakness into 2011. He is calling for a climb in the unemployment rate from the current level of 9.7% to 10.5%. He continues to believe inflation will remain well below trend and that the Fed is on hold for the remainder of 2010 AND 2011.
I disagree with Baum and the people that are scorning the idea that a higher inflation target is silly
http://www.bloomberg.com/apps/news?pid=20601039&sid=auwdZNXYb9nM
She objects because "it would sacrifice hard-won central bank credibility -- for what? Breathing room in case of another hundred-year flood?"
She is wrong on that, the US had a two deflation scares in the last 10 years, this is due the inflation battle having been won and CPI inflation being taken down from double digits in the 70's to 2% around 2000. With a 2% target almost every recession or financial crisis will bring deflation scares again, and I know of no empirical evidence that shows that a 3% target is inferior to 2%, it does not follow that the more is even better, at some point the risks of inflation expectations spiring out of control will start to dominate but to think that 2% is the better almost as if by magic(with no significant evidence) is not right
http://www.bloomberg.com/apps/news?pid=20601039&sid=auwdZNXYb9nM
She objects because "it would sacrifice hard-won central bank credibility -- for what? Breathing room in case of another hundred-year flood?"
She is wrong on that, the US had a two deflation scares in the last 10 years, this is due the inflation battle having been won and CPI inflation being taken down from double digits in the 70's to 2% around 2000. With a 2% target almost every recession or financial crisis will bring deflation scares again, and I know of no empirical evidence that shows that a 3% target is inferior to 2%, it does not follow that the more is even better, at some point the risks of inflation expectations spiring out of control will start to dominate but to think that 2% is the better almost as if by magic(with no significant evidence) is not right
The US had a major deflationary period in from 1873 to 1896. Business went on as usual - there were economic expansions and contractions. During the decade of the 1880's, the PPI (or whatever they called it then) fell by 10%. The CPI fell by 4%. Nominal wages ... they GREW by 23%. It was the greatest period of productivity growth, technology growth, and REAL wealth creation in our country's history.
The 1880's (the Gilded Age) even had their own financial crisis - the panic of 1884. There was no Fed around to print money or bail anybody out. The overnight rate jumped to something like 1000% or more, a bunch of firms went out of business, some folks lost everything ... a couple of months later, the economy returned to normal and the Gilded Age continued.
Deflation is widely misunderstood. In a period of rapid technology and productivity growth (think the invention of the internet), deflation is what should happen. The Fed, by mistakenly shooting for some positive change in the CPI, allows way too high growth of money, which helps cause bubbles. This whole policy of shooting for some positive change in the CPI is idiotic and could only have developed in the halls of our government or universities.
Bernanke should have studied the Gilded Age rather than the Great Depression. My children's futures would be brighter for it.
The 1880's (the Gilded Age) even had their own financial crisis - the panic of 1884. There was no Fed around to print money or bail anybody out. The overnight rate jumped to something like 1000% or more, a bunch of firms went out of business, some folks lost everything ... a couple of months later, the economy returned to normal and the Gilded Age continued.
Deflation is widely misunderstood. In a period of rapid technology and productivity growth (think the invention of the internet), deflation is what should happen. The Fed, by mistakenly shooting for some positive change in the CPI, allows way too high growth of money, which helps cause bubbles. This whole policy of shooting for some positive change in the CPI is idiotic and could only have developed in the halls of our government or universities.
Bernanke should have studied the Gilded Age rather than the Great Depression. My children's futures would be brighter for it.