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American Capital Agency Corp. Message Board

  • slegermark slegermark Jan 4, 2013 1:40 PM Flag

    Options pricing question. I just saw a disturbing flip in premiums that might signal a reverse.

    I have been tracking the basic materials play in KRO and bought a strangle in december. Then it pleasently began to rise well into profitability with steady upward charts on strong volume. Then as volume weakened I saw the signature HFT undulations in the chart. Now as it was last night, at-the-money premiums for feb were at a buck. Today during an hft undulation, the premiums flipped down .50 for the calls and up .50 for at the money puts.

    So, it went from 20/20 c/p 1.00/1.00
    to
    20/20 c/p 0.50/1.50

    and this is during a rise in price. The market did the opposite of what one would think.

    I think they are planning something big here. Encourageing the selling of puts and the buying of calls only to trap them in a tank. This stock has a history of unusual moves like this.

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    • First, KRO isn't "basic materials", it's a specialty chemical company, and a minor player against 800-lb gorillas like DuPont.

      Second, you can't detect the "signature HFT undulations" by watching price action in only one stock over a couple of hours. You need multiple stocks doing something distinctive and unmistakably correlated, or one stock drawing smiley faces on the jumbotron for pretty much the entire day. Otherwise you're mistaking a shift in the wind for the arrival of ghost ships.

      Third, volumes on those options are low enough that all it takes is one trader with anxiety and a thin book to skew them by a multiple of the spread.

      Fourth, an HFT isn't going to get much from doing a lot of work manipulating the stock price and making a few contracts sucker themselves across the options desk. The connection is too loose on low-volume stocks, and not all that tight on the big tickers.

      What's more likely, if an HFT was involved, is that they set themselves up a reasonable bearish options position, pressed their joy-buzzer against the stock book until it triggered a trade bot to panic-dump and tank the stock, then covered their options at a then-reasonable price and walked away. The stock book would recover, being more liquid and only artificially out of equilibrium, but the options would have to wait for someone to care, being thinly traded and clueless as to the cause. The only question with this theory is why, if the HFT could take advantage of the change in option price to cover their bear position, would they not then just turn around to a bullish position. They would take out the slack and start the recovery, and make twice the money.

      So in my version of the theory you'd be a fool not to take advantage of the sudden imbalance. Although I'm assuming that this is the imbalance. Maybe the old price was the imbalance and the options know that there's real info that will tank the stock for good, soon. It's not a dividend thing; the next one should be in March, and is only 15 cents.

      • 1 Reply to yourbestfriendintheworld
      • 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.

 
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