Every three months (March, June, September, December to be exact), financial derivative instruments which have expiration dates, reach their “sell by” date. Yep, just like the container of milk in your fridge, some stock market instruments have “sell by” dates. Well ok, not exactly like the milk. The milk sell by date is a day its gotta be out of the store, and there’s still a bit of life after that date. These options expirations are not as forgiving. Today, is a very special day, hence the quadruple. Its quadruple because, not only do stock index futures, stock index options, and regular plain old stock options expire, single stock futures also expire today. What in the hell is this guy talking about?? Well some traders, actually many or most traders, use these derivative products to either enhance their returns or hedge themselves. The way they do this is by purchasing the right to buy a stock or an index at some point in the future. The price you pay for this is typically much less than the actual underlying instrument, so it’s kind of like a lotto ticket. For a cheap price, you can make a bet that at some predefined day in the future you will have the right to purchase the underlying instrument for a predetermined price. For example: I believe that stock XYZ, currently trading at $20, will be trading much higher in two months, so I buy a call option. I purchase the option to call the stock (buy it) from someone in two months for $25. So I would buy an August $25 Call. As theres some time involved, you pay a time premium for getting the locked in $25 price 2 month into the future. So some owner of the stock, who doesn’t believe the stock will trade above $25 in that time frame, sells you a right to his shares. And for him taking the risk of you forcing the sale on him, he charges you a premium. Let’s say the premium is $1. So you paid a buck, for the right to buy this stock at any time in the next 2 months for $25. What you really need is for the stock to trade at 26.01 to make the trade profitable. Being that you paid a buck, if you call the stock, you pay another $25, so you’re in for $26 total. If it trade $26.01, congrats, you’re the lucky winner of one penny. Bet a dollar, make a penny in 2 months, 1% return, do that 6 times in a year and your ringing up a 6% annualized return. Compared to today’s bank rates, you’d be a star investment advisor, if you could continue to do just that with any certainty. But not so fast… Lets get back to the witching stuff. Today, Quadruple Witching, is the day when all those options come due.
Call Me
So buy a call option, pay a buck, wait 2 months, and I’m a star advisor. Hmmm, sounds too easy JT, what’s the catch?? Well, you’re right, it just isn’t that simple. Many people never get the right to call the stock, as it doesn’t reach the strike price. As in the earlier example, you bought an August 25 call for 1 buck, but the stock never reaches your price. What happens? Well, that’s what today is all about. You still have the right to call the stock at $25, but it’s only $24, plus you paid a premium for the time value of $1. And today’s the expiration date. What to do? Well you wouldn’t pay $25 for something trading at $24’ would you? Doubt it. So the option expires, worthless. You’re not the next John Tudor Jones, but you had some fun, didn’t you?
So, why the volatility on this day? What happens is, many people sell the option to call the stock from them, but they don’t own the stock. It’s called writing NAKED CALLS.
That’s your Expiration 101 for today. If it’s too confusing, good, that means you won’t buy options or futures, or any derivative products for that matter. They are leveraged gambling products, and the regular man should stay far away from this stuff. If you want a nice easy play, buy some SPY or DIA on expiration week Monday, and be ready to sell it some time before Friday. You should see some sort of gain, nice and simple. Today, the market should be up, and if not, watch out Monday.
HOT SHORTS
You know yesterday the shorts woke up and laid some wood on some overvalued names, there was a pronounced increase in NYSE names. After weeks of NYSE names dominating the Locate Universe, yesterday the percentage of NYX to NASDA was substantially bigger than the norm, although some of the top requests came from the NASDAQ.
Here are the ones to keep an eye on today…..
DRYS FSLR UAUA NFLX LVLT
QUADRUPLE WITCHING BONUS BANK
C—CITI continues to dominate the tape, with parity traders fighting for rebate trades, but the fundamentals on this bank still suck,
Happy Friday, when witches come to Wall St, I try to steer clear, so today I will be relaxing and watching the market action on my cabana TV while floating in my pool. Then, I’m taking my show on the road, to join my boys from Maple Partners for their annual Celebration at Monmouth Park, to play the ponies. Pool and ponies, Ah the dog days of summer. Have a great weekend.
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6 comments:
Looks like I'm going to be getting the Abner Louima treatment with the Quadruple Witch's broomstick in about 6 hours on my DXD calls.
Damned overvalued market.
Ed, you're too loyal a reader, you gotta atleast wait till i can get a pic of some babe up to make you forget about your bad calls.
Well, today's spinner makes me want to go write some naked calls.
She's so fine, I'd slide buck naked down a razor blade into a pool of rubbing alcohol just to hear her fart over a walkie-talkie.
MAPLE!
The razor into rubbin alcohol (ouch) is a little much. Bue Eddie thanks for following the short report.
JOHN tudor jones ehh? yup, looks like youll be writing this blog for a while dude. LOL
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