Andrzej,
Good questions. To a professional options trader,
volatility is almost more important than being
right on the direction of the underlying. Let me
give you some examples. When the Bre-X - Barrick
story started to unfold in December, the December
20 straddle went from about $5.00 bid to $9.00
bid in a few days. Now, obviously with the stock
at about $20.00, this was tremendously overpriced,
but it took steel nerves to sell either side, and
too much capital to sell the straddle. On the other
hand, Barrick volatility has collapsed from 42%
to about 31% even though Barrick will probably
have a bigger long-term move if it is successful
(or if it fails) in the Bre-X joint venture.
It just comes down to supply and demand. If people
keep selling a certain line (puts or calls), it will
drag down the vol on all other series eventually.
Barrick has declimed from about $41.00 to $35.50,
and clients are still selling puts naked. Personally,
I wonder what they're doing. At the same time, 'wise-
guys' (they think) have been selling naked calls on
ABX. As a contrarian, this makes me thimk a big move
is coming in ABX. If I could tell you which way, I
could retire in six months.
Mike Naiditch, the DPM on Bre-X on the CBOE, has been
providing invaluable insight into trading on the
'Yankee Stadium' of options. Read what he says carefully.
For example, a big purchase of puts may be accompanied
by a large stock buy, turning what looks like a bear
bet into a synthetic call purchase.
If any of you are still with me after this lengthy post,
let me ask a favour (again). The TSE is in the midst
of revamping the rules for options trading. Their
object is to go from an 'open out-cry' auction market
to a screen-based system. In the process, they intend
to abolish client priority and skew the trading rules
to favour the 'upstairs' member firms. This will have
the effect of driving independent traders and eventually
specialists from the market, which will result in a
dealer market for options similar to NASDAQ. I implore
all concerned options investors to e-mail Ms. Susan
Crocker <scrocker@tse.com>, Vice President of the TSE,
asking what the Exchange is up to and how they think
what they are doing furthers the interests of the in-
vesting public. What they are proposing, in my opinion,
will lead to the total demise of derivative markets in
Canada. You should be concerned. Please take two minutes
to put their feet to the fire.
Thanks,
Porter Davis |
