Peter,
I notice that this board has been moribund for about a month, in part due to your modesty about your prescient AMD/INTC trade.
I would like to generate some discussion around the related subject of options volatility and trading, so I'll take a shot which I hope will serve to reopen discussion, not with a concrete paired-trade suggestion, but with an anecdote...
I recently opened an account which lets me trade options for $1 per contract commission with a $1 minimum. Needless to say, this enables me to pursue strategies that I previously couldn't even consider. So I perused the options chains for some existing positions and happened to notice that Rambus November 22.5 call was priced at 0.25/0.30, which I thought was extraordinary for a stock selling for about 19 with an option life of exactly 4 days. Eager to capture the bait, I promptly offered to sell 5 contracts at 25 cents or better. I got 26 cents. I felt like I had just declared a special dividend to myself.
Lo and behold, that pricing anomaly was signaling that something was happening. And it was. A day later, the stock is trading above 22.5. It seems that a judge has issued an order that some see as quite favorable in RMBS' case against Hynix.http://investor.rambus.com/downloads/2004-11-15%20Claim%20Construction%20Order%20(posted).pdf
It is axiomatic that share markets are rather sluggish in comparison to option markets in responding to unusual events. I understand that the first thing that the SEC does when it begins an insider-trading investigation is to look at signs of unusual activity in the options market, for this is where such bets are normally placed.
It's not that I have much sellers remorse, as I only sell covered calls at prices that I predetermine I am satisfied with. But I have to wonder -- why aren't we all spending more time monitoring the options markets to look for such anomolies? With 20/20 hindsight I can say that instead of grabbing for the easy bait (that special $125 dividend after commission, in this case), it would have been far better if I had acted on the unusual option signal by buying more shares.
I think I have come across a site or column somewhere that tracked "unusual option activity". Cannot put my finger on it at the moment.
Here's a potential analog. Imagine a smallish biotech that is long on IP and short on cash and faces an expensive process to determine whether their ideas are as good as they hope they are. There is a date certain, or at least a date probable at which the company is supposed to report results of the clinical trial that should be outcome determinative for FDA approval. It's one of these rare binary events that will literally make or break the company. So the stock vacillates say at $10 while the 2 month 5 puts and 15 calls are both priced at 3. Expected results to be announced say Jan 1.
The question is what is the best tack for a speculator?
(1) Buy stock, because the downside risk is limited but the upside is an unfolding series of virtuous cycles.
(2) Sell stock, because the market hates uncertainty.
(3) Sell puts and calls, because the market almost always eventually regresses to the mean.
(4) Buy puts and calls, since the market usually discounts short-term volatility.
(4) Or a combination of the above, e.g., 1 and 3?
I used to think the answer was 4, but I am beginning to shift toward 1. My reasoning is as follows:
The company is rather desperate for cash and controls the flow of information. Therefore all data will be presented in a light most favorable to the company. So leading up to the expected Jan 1 release, there should be a tendency for positive spin which will have the effect of a rising stock price going into the release. By the release date, the smart money should theoretically have departed, since the bull case will partially already be discounted.
Sam |
