Author Topic: Question for all you using pits and calls  (Read 918 times)

BTDretire

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Question for all you using pits and calls
« on: December 10, 2019, 06:24:07 PM »
I just read this article about a large hedge going on with Dec 2020 puts on the S&P.
 I don't have a great understanding of this, but I do wonder if playing the other side
between now and then, might payoff since it is so skewed at the moment.

https://www.cnbc.com/2019/12/09/investors-are-terrified-of-something-a-year-from-now-and-theyre-placing-bets-to-hedge-themselves.html

Where would I look for info about the hedges going on.

bacchi

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Re: Question for all you using pits and calls
« Reply #1 on: December 10, 2019, 07:22:43 PM »
https://markets.cboe.com/us/options/market_statistics/daily/ ?

I believe that open volume interest on a specific contract has to be bought. If it takes less than 1 hour (and it probably should -- it's a fairly simple db search), it's free.

https://www.cboe.com/data/customized-data-reports/


Edit: And if it is free, pls post what they send.

Systems101

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Re: Question for all you using pits and calls
« Reply #2 on: December 10, 2019, 09:48:01 PM »
I believe that open volume interest on a specific contract has to be bought

Nah, go grab it from finance.yahoo.com.  Look up ^SPX and look at the options contracts.

However, in this case, the article is not about open interest.

First, an analogy.  If I made the statement "The car is accelerating rapidly in the direction of the car in front, therefore it will hit the car in front of it", can you pick out the problems?  You lack both position (could be a mile away from the other car), velocity (it could be a car starting from zero at a stop sign at an intersection, and about to turn to avoid the car stuck in traffic in front of it), and relative velocity (the car in front could be moving 10X the velocity and thus the accident would be either impossible or so far in the future as to be avoidable)

In this case, the article is not about a large bet anyone has made. It's not "the market is moving downward" or even "someone has bet the market is moving downward".  It's not even "the options market is making it relatively more expensive than normal to make the bet that the stock market will move downward", but actually "the options market is making it relatively more expensive than normal to make the bet that the stock market will move downward relative to the normal cost to bet the stock market will move upward".   It's implied volatility skew - so it's reflecting what the component of cost representing volatility would be IF you tried to do a large hedge vs the component of the cost representing volatility would be IF you did a large upward speculation.

Without additional context, it feels just as useless to me as the acceleration of one car in the example above.  The "IFs" are important because it doesn't necessarily mean many people are trading at these prices.

What's crazy is the difference of the skew from normal (shown in the graph) is tiny (8% now is historical but it's basically been 6.5-7.5% since 2016... so... how abnormal is this really?).  Can someone show this is more than noise? (this is a genuine question, not rhetorical).  Also, the article talks nothing about which is different from normal - is the implied volatility on puts abnormally high?  Or calls abnormally low?

Also, is the total amount being hedged higher or lower than normal? (is it extra buyers or less sellers?).  There is significant open interest, but I don't know what "normal" is (and there's a bunch of open interest in December 2021 as well... so... understanding "normal" is important). If it's less sellers than normal, can we really classify that as "terrified" or is that "prudent in the face of the tail risk from election uncertainty"? (Note: options don't price in tail risk well)

"Playing the other side" here is a crummy individual trade if you sell puts.  You make a small amount of money, at the risk of losing a large amount.  It works well when averaged over hundreds of transactions (make a little every time, sometimes lose a lot is actually rather profitable, much like selling insurance), but doing it as a one-time event is a single "make a little, lose a lot" decision, which I would avoid.  There may be some crazy strangle or something that can expose the skew better, but that part is beyond my knowledge base.  For me, this is not something I'd know how to capture (if it's even big enough to do that)

ChpBstrd

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Re: Question for all you using pits and calls
« Reply #3 on: December 11, 2019, 08:00:39 PM »
What they're saying is puts are relatively expensive compared to calls. The trend-opposing trade (the one with limited risk) would be to buy a call.

Interestingly, you could do so while shifting your portfolio in a defensive direction. E.g. trade your S&P 500 ETF shares for S&P 500 calls with a 12 month duration and invest the remaining 90% of your cash in TIP or something similarly low risk. This would essentially put a floor on your possible losses, while maintaining much of the upside potential and compensating for lost dividends.

That said - these kind of SKEW moves have little predictive value.
http://tastytradenetwork.squarespace.com/tt/blog/2019/6/11/does-the-skew-index-have-predictive-value

I've also noticed the treasury yield curve is slightly inverted for the 6 month and 1 year durations (6 mo yields 1.58% while 1y yields 1.55%). The implication is the same as stated in the CNBC article. Participants are hedging the risk Trump somehow won't announce a China trade deal to juice the market right before the election - an outcome that is already priced in. They're also concerned that a leftist like Sanders or Warren could win the Democratic nomination. Sometime between 6 months and 1 year from now, we'll know the answer to both, and possibly know a high-probability election outcome.

That's also the timeframe when, historically, yield curve inversion would start showing up as a recession or correction, so puts are attractive for multiple reasons. 


jim555

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Re: Question for all you using pits and calls
« Reply #4 on: December 11, 2019, 10:37:18 PM »
https://markets.cboe.com/us/options/market_statistics/daily/ ?

I believe that open volume interest on a specific contract has to be bought. If it takes less than 1 hour (and it probably should -- it's a fairly simple db search), it's free.

https://www.cboe.com/data/customized-data-reports/


Edit: And if it is free, pls post what they send.
Open Interest is the number of outstanding contracts, it has nothing to do with being bought or sold within an hour.

jim555

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Re: Question for all you using pits and calls
« Reply #5 on: December 11, 2019, 10:43:25 PM »
Someone is buying a lot of puts, the article assumes this a hedging.  But there is no way to know if it is a hedge or an outright position.

ChpBstrd

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Re: Question for all you using pits and calls
« Reply #6 on: December 12, 2019, 07:09:33 AM »
Someone is buying a lot of puts, the article assumes this a hedging.  But there is no way to know if it is a hedge or an outright position.

And someone else is selling a lot of puts.

BDWW

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Re: Question for all you using pits and calls
« Reply #7 on: December 12, 2019, 11:54:18 AM »
Someone is buying a lot of puts, the article assumes this a hedging.  But there is no way to know if it is a hedge or an outright position.

And someone else is selling a lot of puts.

Don't options by definition have to be a zero sum game? i.e. if someone is buying an equal number  of people contracts have to be selling? So how would it have predictive power? Perhaps if the selling/buying is concentrated by a few players and many more are on the opposite side?
« Last Edit: December 12, 2019, 11:56:45 AM by BDWW »

bacchi

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Re: Question for all you using pits and calls
« Reply #8 on: December 12, 2019, 12:01:55 PM »
https://markets.cboe.com/us/options/market_statistics/daily/ ?

I believe that open volume interest on a specific contract has to be bought. If it takes less than 1 hour (and it probably should -- it's a fairly simple db search), it's free.

https://www.cboe.com/data/customized-data-reports/


Edit: And if it is free, pls post what they send.
Open Interest is the number of outstanding contracts, it has nothing to do with being bought or sold within an hour.

If the CBOE research takes less than an hour, it's free.

jim555

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Re: Question for all you using pits and calls
« Reply #9 on: December 12, 2019, 02:08:08 PM »
Someone is buying a lot of puts, the article assumes this a hedging.  But there is no way to know if it is a hedge or an outright position.

And someone else is selling a lot of puts.

Don't options by definition have to be a zero sum game? i.e. if someone is buying an equal number  of people contracts have to be selling? So how would it have predictive power? Perhaps if the selling/buying is concentrated by a few players and many more are on the opposite side?
Every option contract has a writer and a buyer.  Just as each stock sale has a buyer and seller.  When you buy a contract you are either buying from a previous buyer or a new writer who is opening a new position.  The writer is obligated to deliver shares (for calls) at a set price at your demand.  The writer can own shares (covered) or must go out into the market and buy (naked) them to deliver to you (for calls).  It is hard to tell if the transactions are hedges for existing positions.

jim555

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Re: Question for all you using pits and calls
« Reply #10 on: December 12, 2019, 02:09:15 PM »
https://markets.cboe.com/us/options/market_statistics/daily/ ?

I believe that open volume interest on a specific contract has to be bought. If it takes less than 1 hour (and it probably should -- it's a fairly simple db search), it's free.

https://www.cboe.com/data/customized-data-reports/


Edit: And if it is free, pls post what they send.
Open Interest is the number of outstanding contracts, it has nothing to do with being bought or sold within an hour.

If the CBOE research takes less than an hour, it's free.
What kind of research are you asking for?  Doesn't make much sense to me.

bacchi

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Re: Question for all you using pits and calls
« Reply #11 on: December 12, 2019, 02:18:18 PM »
https://markets.cboe.com/us/options/market_statistics/daily/ ?

I believe that open volume interest on a specific contract has to be bought. If it takes less than 1 hour (and it probably should -- it's a fairly simple db search), it's free.

https://www.cboe.com/data/customized-data-reports/


Edit: And if it is free, pls post what they send.
Open Interest is the number of outstanding contracts, it has nothing to do with being bought or sold within an hour.

If the CBOE research takes less than an hour, it's free.
What kind of research are you asking for?  Doesn't make much sense to me.

I could've been more clear in my first post but no matter. It made sense to Systems101, who indicated the data could be found on Yahoo! Finance.

jim555

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Re: Question for all you using pits and calls
« Reply #12 on: December 12, 2019, 02:24:41 PM »
https://markets.cboe.com/us/options/market_statistics/daily/ ?

I believe that open volume interest on a specific contract has to be bought. If it takes less than 1 hour (and it probably should -- it's a fairly simple db search), it's free.

https://www.cboe.com/data/customized-data-reports/


Edit: And if it is free, pls post what they send.
Open Interest is the number of outstanding contracts, it has nothing to do with being bought or sold within an hour.

If the CBOE research takes less than an hour, it's free.
What kind of research are you asking for?  Doesn't make much sense to me.

I could've been more clear in my first post but no matter. It made sense to Systems101, who indicated the data could be found on Yahoo! Finance.
I'm guessing the trade history for a given contract.