The Latest

• What Can We Learn From Mike Tomlin?
  Posted by Adam Warner on January 28th, 2011 at 8:06 am, Comments: 0

  

  So you’re the Steelers, you have the ball on the Jets 40 yard line, and a 5 point lead . There’s two minutes left, and the Jets have no timeouts. What do you do? You can run the ball, let the play clock run to 0, then punt, giving the Jets the ball on about their 10 yard line. They’d have about 1:10 left to travel 90 yards.

  Alternatively, you can pass. But if its incomplete, the Jets get the ball back in presumably the same spot, but now with 1:50 left?

  According the Win Prob. calculator at AdvancedNFLStats, the Jets would win 3% of the time (.03 of Win Probability, or WPA) if the Steelers ran the clock and punted. But if they throw incomplete and give them the extra 40 seconds, those odds go up to 8%. So basically the Steelers need to get the 1st down successfully about 62.5% of the time to pan out, right? You’re risking .05 of WPA to “earn” .03. Considering a generic team makes 3rd and 6 about 40% of the time, that sounds insane?

  Or does it?

  Well, it wasn’t quite that insane. Among other things, the game essentially ends if they get the 1st down. In addition, this is not an automaton running the play. If you trust the QB to only throw to a wide open receiver, and eat the ball inbounds otherwise, you essentially get a 2nd look. And finally, you catch the defense by surprise, no one’s expecting the QB to do anything but run around there.

  In a way its like playing an options vertical, earnings on, expiration day. The spread either goes to $5 or 0. If you sell it for $1, you need to win 80% of the time, e.g. Except in the football case, there’s a little game theory going on too. Roethlisberger can change the play at the line if he thinks the pass won’t be there, can take a sack, and so on. You don’t get a second look if you carry the option position at 4pm.

  And again, that lame math up above isn’t really correct. Its not just any .03 of WPA you add with success, its the last .03 of WPA you need, it ends the game. The (f***ing) DeSean Jackson touchdown vs. the Giants was more or less a .50 WPA play, but it had the exact same effect. Its just obviously easier to convert on 3rd and 6 than it is to run a punt back for a TD.

  In other words, maybe time to roll out a poker analogy!

  The Steelers had the chance to buy the pot, and took it. Sort of….that fails a little under scrutiny too (the Jets can’t actually fold, they still get to defend the play).

  I guess the point is, they’re all relatively simple math problems., but none are completely the same.  There is one connection though. In all situations, we’re winning at the time of the decision. Even in the options trade. If its a $5 vertical trading for $1, odds are in your favor (assuming expected gain is 0). But in the Steelers game, and the poker hand, it actually made more sense to add risk, not less. Option trades are all about the specifics, but perhaps the principle of “pressing” a winner is better than meets the eye.

  
  

• AMZN Tonight
  Posted by Adam Warner on January 27th, 2011 at 8:14 am, Comments: 0

  

  For those seeking options trading information, here’s a doozey.

  An idea from Goldman ahead of the release of Amazon (NASDAQ: AMZN) earnings tonight.

  “Buy Mar $180 calls for $8.50 (5% of spot, $176.70) to trade a bullish view on earnings. Given that AMZN implied volatility has typically fallen 22% on earnings for 1-mth vol over the past eight quarters, we see better breakevens with March options given much more limited downside to implied vol post the event, in our view. We estimate that investors who buy March $180 calls would need less than a 2% move to break even on the day after AMZN’s earnings, assuming implied vol for March options fell to 34%, or down 22% from the Feb vol levels of 45%. If shares are flat post earnings, we estimate only an 8% decline in March $180 calls vs. a 20% decline in Feb $180 calls if volatility falls to 35% for both, making the risk/reward of March options more attractive to us. Call buyers risk losing premium paid if shares close below $188.50 (+7%) on Feb expiration.”

  … adding, if the calls stay elevated for four hours, consult your physician.

  Please click thru to InvestorPlace for the balance of the post.

  
  

• NFLX Earnings Play: Sponsored Post
  Posted by Adam Warner on January 26th, 2011 at 7:12 am, Comments: 0

  

  I got totally hooked on Lost on Netflix recently. On Season 2 now, No Hints Please!

  Anyway, NFLX earnings due up tonight. This from Options Trading Signals.

  One of the hardest things for me to remember is not to believe everything I see. I am a sucker for the latest “can’t lose” strategy supported by the experts. This morning I ran across a trade that looked too good to be true. I think it is, but I think it is instructive to walk through the potential hidden land mine. The event is the Wednesday afternoon release of NFLX earnings but there is a hidden trap for option traders using one commonly used earnings play structure.

  The construction of the play is that of a “double calendar” spread. The underlying profit engine is an attempt to exploit the routinely seen spike in implied volatility (IV) of the options series most closely following earnings release. In this case, NFLX has weekly options which expire 48 hours after the scheduled announcement.

  Please click thru for the balance of the post.

  
  

• Fading VIX Breakouts
  Posted by Adam Warner on January 25th, 2011 at 10:27 am, Comments: 0

  

  So I saw this tweet:

  “VIX briefly traded above MM 0/8ths= 18.75, A breakout is bearish for the market … ”

  Not sure what exactly that “MM 0/8ths” means, but I would agree that’s a breakout level by other criteria. Namely it puts the CBOE Volatility Index (VIX) more than 10% above its 10 day statistical moving average (SMA).

  Here’s my quibble though. A VIX breakout is not bearish for the market, its bullish. At least in the short term.

  ….please click thru to InvestorPlace for the balance of the post.

  
  

• Is 80 Volatility Ever Cheap?
  Posted by Adam Warner on January 23rd, 2011 at 11:03 pm, Comments: 0

  

  Maybe cheap is the wrong word for 80 volatility. I mean it implies the underlying needs to move about 5% on a typical day. Or expect a big gap sometime soon.

  But 80 volatility in line? It can happen. Check out MCP in the graph here. Options with 30 days to expiration (basically Febs) trade at about 80 volatility. The 20 day HV in the stock is 105. That’s a pretty large discount. What’s more, the stock has moved at an 80 volatility clip or greater since early December, so the current readings are not out of whack.

  Now before you go nuts buying 80 vol. straddles, keep in mind this all compares past action to predictions for the future, always a risky proposition.  And there’s some evidence the party is winding down. Here’s 10 day HV.

  

  As you can see, its now 60. So barring another spike, that blue line up above will soon dip to the yellow line.

  But guess what, even if you think MCP will move at a 60 volatility pace, options at 80 vol. here are still a better buy than index options. SPY options trade a volatility double to the both 10 day and 20 day realized volatility in SPY itself (15 vs, 7.5).

  My point? Options prices are relative. 80 volatility can be reasonable, 15 volatility can be fat, depending on the specifics. And that’s not to say MCP is a gamma buy, and SPY is a gamma sell either. Again, past can instruct about the future, but not really predict it. Just always keep an open mind, and don’t judge fat and cheap by comparing implied volatilities in a vacuum.

  
  

• Are Giants Fans Rooting For Jets?
  Posted by Adam Warner on January 23rd, 2011 at 7:28 am, Comments: 0

  

  The Times Fifth Down blog asked the above question.

  My answer is a couched “sort of”. Or better, yes on Jets in general, no on this particular group.

  Its not like Yankees-Mets, there’s really not much Giant-Jet rivalry. They play once every 4 years. They both finish between 8-8 and 11-5 pretty much every year so there’s not all that much difference in the overall success of either team. Well, with one glaring exception; the Giants have parlayed their occasional really good years into Super Bowls, not so much for the Jets. The Coughlin-Eli Giants have won a total of 4 playoff games, all in the same season. Over that same time frame, the Jets have at least 5 playoff wins. As someone mathematically inclined, I would say that’s more randomness than some grand character trait. Someone has to get hot and/or catch some balls off their helmet for 3-4 games at the end of each year, it just hasn’t been the Jets. Yet.

  I am not old enough to remember Super Bowl III. I do remember the Richard Todd Era and “What a Day for Duhe” and Mark Gastineau’s sort of phantom roughing the passer against the Browns, and Doug Brien’s missed FG’s and other assorted Jets heartbreaks. The best team they had imho was that 1998 one that just ran into a better Broncos team. I honestly do feel for Jets fans (other than Fireman Ed) and would like to see them finally win one.

  This actual team is so f***ing annoying though, they make it a bit tough.The mid 90′s Cowboys acted like this too, but at least they actually won something first. If the Jets win the Super Bowl, I guess we can credit their overall toolishness for leading the way.

  And hey, as a Giants fan, it sure beats having the Eagles win it and seeing that DeSean Jackson punt return on a never-ending loop.

  
  

• The Case for VXX?
  Posted by Adam Warner on January 21st, 2011 at 9:12 am, Comments: 0

  Well its a weak one, but I try to make it in this post on InvestorPlace

  
  

• VXX Trade Idea
  Posted by Adam Warner on January 20th, 2011 at 9:20 am, Comments: 0

  

  MKM Partners mentioned the other day they are looking for a VIX rally. Well, here’s how they suggest playing it.

  In our January 18 note, we recommended preparing for a volatility event that could drive the CBOE SPX Volatility Index (VIX, 17.31) to 30 by initiating exposure via February 21/30 call spreads. Recognizing that some clients are relatively new to trading volatility, we follow up here with a structure using the iPath S&P 500 VIX Short-Term Futures ETN (VXX, $32.18) and recommend purchasing the ETN against the sale of a March 38/44 call spread.

  …..Having already recommended long volatility exposure via VIX options, we also want to show a slightly more conservative trade using the VXX ETN. VXX suffers from negative roll yield, which explains its 90% decline since inception in February 2009. Because of this, we have only suggested using the product for discrete periods of time, and typically when its implied volatility is elevated so that options can be sold against owning the underlying. Here, a trade we like is buying VXX and selling a March 38/44 call spread at $0.70. Sale  of the 38 strike calls covers the long VXX, so the shares would be sold at that level for an 18% gain. In the event that spot VIX spikes above the 30 level we anticipate and VXX follows suit, the 44 calls provide further upside exposure. And finally, the $0.70 in premium that is pocketed represents 2.2% of the underlying and can partially offset VXX’s decay while the position is held.

  OK full disclosure: I bought VXX and VXZ the last couple days as general hedges. Yes I know, I’ve written 4000 posts about why you shouldn’t own these. And you shouldn’t for an extended length of time. At least VXX. The factors that knock it down a little each day remain in place.

  My thought is you have to look at owning these as you would owning a simple put. Like a put, they appreciate if they catch the direction right. Also like a put, they decay. With a put, its time evaporating. With VXX, its the drag of rolling into into a higher priced future. Most of my longs are via put and put spread shorts, so it fits me from time to time to go long VXX and VXZ.

  As to his thought of shorting a call spread against it….not a bad idea. Actually never a bad idea to short VXX call spreads, thought doesn’t particularly fit me now.

  
  

• OK To VIX-Chart?
  Posted by Adam Warner on January 19th, 2011 at 7:05 am, Comments: 0

  We get letters … some of them not only civil, but downright excellent. Like this.

  “Adam – It seems to me that many of the old school options traders look at the CBOE Volatility Index (VIX) as solely a statistic and therefore not worth doing technical analysis on. Many get really worked up when a chart guy sets a target and especially if anything other than a trend line is used. Yet many chart guys claim they use technical analysis on the VIX successfully. Additionally, I know that every major Wall Street firm is now trading Volatility as an asset class both on a proprietary basis and with (High Frequency). It creates a dilemma.”

  To which I responded:

  “I would say though there’s no simple answer. I mean you CAN chart it, just have to account that it’s not a stock, it’s a statistic. Like Netflix (NASDAQ: NFLX) can go from 50 to 100 to whatever and stay there, but VIX won’t. It lingered high longer in 2008 than ever, but still ultimately mean reverts. VIX also can’t go to 0. So to some extent there are short-term trends you can chart, but over time it will find its way back the high teens/low 20′s.”

  Please click thru to InvestorPlace for the balance of the post.