Aqumin Volatility Newsletter 04/13/2011 - $SCO $AMR

I am changing up the format a bit for the Aqumin Blog. This newsletter format picks up more of the activity I see using AlphaVision. My focus will be on interesting ETF’s and Equities based on market activity that normally would not make the cut of most active Option Classes but have noteworthy action. Having additional color (pardon the pun) in some of these names should help investors looking to use options for hedging or initiating a position. Essentially, I want to identify groups that are out of favor (or very in) to see if there is any interesting option pricing with the underlying moves. From 15 years of floor trading I noticed securities don’t run in one direction forever and AlphaVision is great at bringing names into focus that are normally off of the radar.

ETF Focus

I used the simple Opening View in AlphaVision on April 12^th. This gives me a sense of what the underlying ETF’s are doing at any given point in time. In the screenshot below you notice a few green spiky buildings in the corner of the Commodity Fund SubSector. The SCO, the ProShares UltraShort DJ-UBS Crude Oil ETF, was up nearly 6% as oil prices sank.

Now let’s look at the options on the SCO in the Option Landscape. The big spiky options are expiring in April so I will leave them out for this discussion. Mostly you see stubby white buildings in the May expiration cycle. The Mid Point implied volatility (60.78%) is tracking about 11% over the 30 Day Historical Volatility. To me this means there is really no active selling of options in these levered, inverse Commodity ETF’s (DNO and GLL are showing similar patterns) and you have to pay up a little to own options in these names right now. Even with the little pop, the call sellers are not there yet.

Equity Focus

The big gainer yesterday was the Airlines. With names like UAL, AMR, LCC, DAL and ZNH rallying on the hope of lower oil prices. Most of these names are down 25%-40% since the beginning of the year as the market fears the crude oil price hikes are going to erode profitability. The landscape below shows them far and away rallying and the force of the pop looks like a bounce off of the bottom for these names. The dark green buildings are showing big moves next to the #2 Performing SubSector, Cosmetics/Personal Care.

If you are looking at an opportunistic entry point for the Airlines, let’s take a look at the options.

For the name I have selected, AMR, you notice the Option Landscape is greener than the ETF Option Landscape above. This means the option implied volatility (59.49%) is priced at a higher premium to the 30 Day Historical Volatility. With the Airlines in a total funk the underlying movement slows down making the options more expensive on a relative basis. For investors looking at the 3 month decline in the Airlines stock prices as an opportunity, the more expensive puts look like a better play for the long side and lower equity entry points. Most of the big Airlines report in the middle of the May Expiration cycle.

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