Options pricing question. I just saw a disturbing flip in premiums that might signal a reverse.
Yes it is in the basic sector [The Basic Materials economic sector consists of companies engaged in the extraction and primary refinement of chemicals, metals, nonmetallic and construction] dealing in tiO and i have been trading it for a year now. It is 82% insider held but still manages to trade 700k shares per day, ten times what mtge traded a year ago.
. They managed to tank this thing last spring when it showed blow out fundamentals using your hypothetic scene in paragraph 5. Resulted in relentless carnage when by all rights it should have risen like its collegues who had great sales.
I think after a 33% run in december, they tested the waters with a couple depressive attempts these lasst two days. As can be seen in the charts. They do this with MCP, also basic materials, all the fn time, which showed a mirror image to the kro chart today, so far.
You are not familiar with the dome signature in daily charts. It is a variation on the sinewave,[ but occurs in isolation] that paired cocacola with something else this year, you commented on it yourself back then in summer. Those signatures did not exist in the pattern during the main run on kro until two days ago. Nor did they appear in daily charts before the days of hft... back in the 90's when I was last active.
I think The flip in options pricing is a trap set. Cheap calls and expensive puts is the clue out of the blue, uncharacteristic. If you were eyeing this equity on a nice run in the last two weeks but the call premiums just a little pricey, then suddenly the price halves itself and you think, "I am jumping on that!' Boom the same thing as last spring happens and it tanks until its pe is 3. I am thinking I should take my now halved profit and leave before they make their move. Although, if it is a trap, they would have to lure in enough option acivity before it is sprung.
I do not know what this means, but the May atm 20calls have open interest of 500 and today's volume is 1000. The call premiums have gone down while the stock price has gone up. AND the put premiums have gone up when they should be going down on a rally. That might be enough volume to make it worthwhile. 100k times a five point drop, plus you get to keep premiums.
Short interest is also last reported at 30% of float.
There is more than my paranoia running here.
The thing I saw was in three stocks in the Dow, all three in lock-step for several hours. It wasn't merely a dome, or a single sinusoidal cycle, it was several cycles locked to each other and to the clock. Scariest damn thing I've ever seen on the markets. And totally impossible to gauge unless it's correlated among multiple stocks or very persistent in one stock, because any stock can undergo a single sinusoidal cycle with nobody's help. The psychological and economic forces have always been there for isolated spontaneous cycling, but the resolution wasn't, and it's probably the change from eighths to pennies that revealed it to you.
I think the real reason it's hard for an HFT to set an options trap is that the HFT can't control the book while waiting for someone to come by to fall into the trap. You and I can set our own orders inside his prices and take the HFT's margins away. It's somewhat easier for the HFT to take an apparently vanilla position, get itself poised to cover that position, then hit the stock with its cattle prod and make the covering price a lot more favorable to it. The HFT sees the payoff coming and is right there to eat it, where you and I are left to analyze it after the fact. Only in this case it left a scar, which you're interpreting as the trap, and I'm thinking is more of an arbitrage opportunity.
The fact that it hasn't relaxed yet makes me think there's news somewhere that's merely made the downside risk bigger, and neither of us knows what it is.
It is indeed an arbitrage opportunity. If this pricing imbalance extends into tomorrow, the trade would be:
- Short the stock
- Sell the strike 20 puts
- Buy the strike 20 calls
(All positions in equivalent share amounts, all options same month).
At (or before) expiration, you exercise your calls or get assigned on the puts -- either way, close the stock at 20. You keep the initial credit plus the share price amount above 20.
This should lock in more than a dollar profit for the longest expiration, almost a dollar for the nearest, essentially risk free. And this is at posted bid/ask for the options -- which could probably be improved, since the spreads are fairly wide. In addition to the put bid minus call ask, the arbitrage profit would include the amount by which the stock is above 20 (about 23 cents).
Who cares what the origin of the imbalance is. It seems like a trading opportunity (assuming there is no hidden special huge dividend about to be announced).
"The fact that it hasn't relaxed yet makes me think there's news somewhere that's merely made the downside risk bigger, and neither of us knows what it is."
Downside risk would mean you are writing puts with enhanced premium because you think the probability of the price going down is higher than the price going up. And conversly you are selling calls cheaply to encourage the buying of calls because you see low probability of the price going up.
The fact that this has occured when the price hit 20, means that the option originators expect the price to not rise much beyond 20. Would that be a logical statement?
I just checked the ask/bid on the May 20 calls/puts 1.40/2.60 somebody jumped on it because volume on both is about 1000 vs 500 open interest. One dividend in between for .15