Oil Put Demand, That Is
by ilene - September 22nd, 2009 2:07 pm
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Cancel that Prius, just like commodity technicians Fall Out Boy once sang, "Oil, We’re Going Down".
OK, it was Sugar. But Oil is definitely going lower. Seriously.
Why you ask? Because the puts are overpriced, says Bloomberg.
The gap between prices of options betting on a decline and those that would profit from a rise in oil widened to a record 10 percentage points, according to five years of data compiled by Banc of America Securities-Merrill Lynch. Crude stockpiles in the U.S. are 14 percent larger than a year ago and OPEC is pumping 600,000 barrels a day more than the world needs, according to the International Energy Agency.
…..Options granting the right to sell, or put, oil in December below current prices have a so-called implied volatility of 54.3 percent, compared with 43.3 percent for the equivalent options to buy, or call, data from the New York Mercantile Exchange show.
The premium for December and other put options shows “the market is worried,” said Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA in London. “If puts are pricing higher than calls, we are looking at a situation where the market is more averse to the downside and is looking for more compensation” for the option, he said.
Demand for puts may be caused by speculators betting on lower prices or by producers hedging against a decline in the value of their oil, Tchilinguirian said.
Well technically they don’t say the options will be right, it’s just presented as consistent with everything else in the article that points to an oil decline. But since we’re an options site (sort of) let’s stick with this.
As my friends Jared and Don would surely agree, Bloomberg gets a bit "so-called" happy. News-flash: It’s not "so-called" implied volatility you refer to, it IS implied volatility.
But more important than semantics, it’s unclear what options we compare here. Are we talking puts and calls of the same strike, in which case the disparity of put volatility to call volatility is about cost of carry, and not sentiment.
(I mean so-called cost of carry and so-called sentiment).
Are "equivalent options…
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Educational Videos
by phil - August 28th, 2009 5:52 pm
The following is a collection of podcasts and videos from the Options Clearing Corporation and selected others.
The cover a lot of ground and new ones are occasionally added to their site. They are not as good as the coursework from MarketTamer, who are Option Sage’s excellent group but these are free (as opposed to $99 a month with Sage’s PSW special) so take a peek at the subjects that interest you:
First up is a very good introduction to options basics from Adam Lass, a very good overview. His next episode is the basics of call options – hopefully he’ll do more. Then we have the podcasts from OCC:
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Solving the Options Problem, Part 1
by ilene - June 8th, 2009 8:02 pm
[Free subscription to PSW, click here - it's easy - Ilene]
Constructing equivalent option positions,…
Solving the Options Problem, Part 1 
Courtesy of Minyanville, by Mark Wolfinger
One of the interesting features about options is that there’s a relationship between calls, puts, and the underlying stock. And because of that relationship, some option positions are equivalent -- that means identical profit/loss profiles — to others.
Why is that important? You’ll discover that some option combinations -- called spreads -- are easier, or less costly to trade than others. Even with today’s low commissions, why spend more than you must?
The basic equation that describes an underlying and its options is: Owning one call option and selling one put option (with the same strike price and expiration date) is equivalent to owning 100 shares of stock. Thus,
S = C - P; where S = stock; C = call; P = put
If you want a simple proof that the above equation is true, consider a position that’s long one call and short one put. When expiration arrives, if the call option is in the money, you exercise the call and own 100 shares. If the put option is in the money, you’re assigned an exercise notice and buy 100 shares of stock. In either case, you own stock.
Note: If the stock is at the money when expiration arrives, you’re in a quandary. You don’t know if the put owner is going to exercise the put. Therefore, you don’t know whether to exercise the call. If you want to maintain the long stock position, the simplest way out is to buy the put -- paying $0.05 or less — and exercise the call.
Example of Equivalent Positions
There’s one equivalent position that you, the options rookie, should know, because these are strategies you’re likely to adopt.
Take a look at a covered-call position (long stock and short one call), or S - C.
From the equation above, S - C = -P. In other words, if you own stock and sell one call option (this is covered-call writing), then your position is equivalent to being short one put option with the same strike and expiration. That position is naked short the put. Amazingly, some brokers don’t allow all clients to sell naked puts, but they allow all to write covered calls. The world isn’t always efficient (you already…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW.