The Weekly Options Report: Here Comes The Pain
Traditional options expiration is upon us, and as such today we will continue our discussion on options expiration strategies, which we briefly touched upon in last week’s report. But before we dive in, let’s talk RIMM. With shares of RIMM trading at $17.58 last week we suggested traders consider purchasing the Dec 17.5-16 1×2 put spread to take advantage of elevated volatility and position for shares to either fall slightly from current levels or move higher through December. We initiated the trade, collecting $0.46 at inception. Using yesterday’s closing prices, the 1×2 put spread could be closed at $0.23, locking in 50% of the initial credit. With time decay (theta) working in our favor, no specific catalyst scheduled for next week, and recent Street upgrades, I’d suggest letting this one ride for now.
Weekly Options Catalyst Catcher:
Hewlett-Packard (HPQ) earnings highlight a rather uneventful and typically slow Thanksgiving holiday week. HPQ is scheduled to report 4Q financial results on Monday after the close. Shares of HPQ have averaged a +/-5.6% move over its last 8 earnings announcements, with a massive 20% move observed last quarter as highlighted in the chart below:
HPQ Historical Earnings Volatility
Weekly Options Research Corner
“Pin Risk” is a term commonly used around the trading activity of certain highly liquid, optionable stocks on options expiration Friday. More specifically, Pin risk is typically defined as “the risk that the underlying asset of a traditional option will close near the strike price at expiration. In these situations, the option seller does not know and cannot predict whether or not the option holder will exercise the option. The seller must then decide whether or not to cover the position by taking an equal but opposite position in the underlying asset. If the seller covers the position and the option is not exercised, he/she may be forced to hold securities that will result in a loss. Likewise, if the seller does not cover the position and the option is exercised, he/she must rush to fulfill the contract, which may also result in a loss.”
Why is this important? To avoid the risk of pinning, institutions, which are usually short options, trade stock around their options positions, which tends to move stocks towards strike prices with heavy open interest at expiration. This phenomenon presents a nice opportunity for directional traders to place high probability trades on stocks moving towards the strike of maximum pain. Traders on binary options platforms have increasingly been using “pin risk” strategies to place positive expected value trades during the last couple hours of expiration.
Here comes the pain: Heading into an expiration Friday I like to head over to our friends at Option Pain to quickly determine potential pin strikes of highly traded, optionable stocks on my watch list. According to the Option Pain website: “In the option market, wealth transfer between option buyers and sellers is a zero-sum game. On option expiration days, the underlying stock price often moves toward a point that brings maximum loss to option buyers. This specific price, calculated based on all outstanding options in the market, is called Option Pain. Option Pain is a proxy for the stock price manipulation target by the option selling group.”
As of market close on Thursday, the maximum pain pin strike for Apple (AAPL) is $390, a roughly 3% increase from current levels (see chart below):
Chart of the Week (courtesy of TradeMonster)
In this week’s chart we highlight options with 30-day implied volatility levels trading below 30-day historical realized volatility ranked from the largest difference to the smallest. We use this chart, and ones similar, to help assess the richness/cheapness of implied volatility. Do note we have not altered the chart to filter for names that have known catalysts occurring in the next 30 days.
Similar Posts:
- Google 3Q Earnings Volatility Analysis & HPQ Weekly Options Activity
- The Weekly Options Report: Living Life Above The RIMM
- The Weekly Options Report: Markets Are Looking gRIMM?
Mr. Saunders serves as Mesa’s Vice President of Marketing, bringing with him a wealth of experience in strategic marketing and operations. In this role, Mr. Saunders is responsible for overseeing all marketing activities, utilizing a blend of traditional and digital strategies to enhance brand presence and profitability, managing a multi-million dollar marketing budget across various media platforms, and leading the continued implementation of CRM systems to streamline customer engagement and drive business growth.