Good News on Stock Options & AMT
If you received and exercised stock options, and had to pay taxes on the phantom income, I have got some good news for you:
Buried in the $700b TARP Bailout is this AMT tax amendment:
"Their tax nightmare was created by a provision of the Internal Revenue Code called the Alternative Minimum Tax, or AMT. These tech workers had been granted what's called an incentive stock option. Under the AMT, these are taxed at the time employees exercise the right to buy them, based on the difference between the grant price and the exercise price. During the dot-com era, when stock prices soared to dizzying heights, employees could have a stock option that was granted at less than a dollar but that he or she exercised at more than $100 a share."
Look For Expiry Driven Volatility Today
Cry Havoc! And slip the dogs of war". . .
quadruple option expiration today -- expect big swings. Note that this comes in the same months as the no shorting rule expired.
"The U.S. stock market's wildest swings since 1929 may get even bigger as almost 80 million options expire today.
Owners of the contracts on stocks, indexes and exchange- traded funds have until today's close to take advantage of the rights granted by the calls and puts they own. Investors are preparing for the possibility that market makers will boost volatility by buying and selling stock to hedge the risk of the option trades they have facilitated, according to Scott Nations, president of Fortress Trading Inc...
About a quarter of the approximately 337 million existing options expire today, according to Chicago-based Options Clearing Corp., which settles all trading of exchange-listed contracts and is the world's largest derivatives clearinghouse."
It may be wild today!
Stock Gyrations May Roil Trading as 80 Million Options Expire
Bloomberg, Oct. 17 2008
Intrade Election Update, 9/20/08
A few interesting charts from Intrade
Since we last ran the "Palin dropped from ticket" trade, Intrade has added a "Biden dropped from ticket" contract. With internet rumors of a swap of Biden for Hillary circulating, here's what this looks like:
Here is Intrades presidential outcome odds, with the lead swapping back and forth.
Source: all charts/graphics via Intrade
I'll update this weekly, or when time permits.
Try not to let the lizard portion of your brains get the better of you in comments . . .
Betting on Bear's Bust
Today's most talked about article is likely to be this breathless Bloomberg piece on the demise of Bear Stearns:
"On March 11, the day the Federal Reserve attempted to shore up confidence in the credit markets with a $200 billion lending program that for the first time monetized Wall Street's devalued collateral, somebody else decided Bear Stearns Cos. was going to collapse.
In a gambit with such low odds of success that traders question its legitimacy, someone wagered $1.7 million that Bear Stearns shares would suffer an unprecedented decline within days. Options specialists are convinced that the buyer, or buyers, made a concerted effort to drive the fifth-biggest U.S. securities firm out of business and, in the process, reap a profit of more than $270 million.
Whoever placed the bet used so-called put options that gave purchasers the right to sell 5.7 million Bear Stearns shares for $30 each and 165,000 shares for $25 apiece just nine days later, data compiled by Bloomberg show. That was less than half the $62.97 closing price in New York Stock Exchange composite trading on March 11. The buyers were confident the stock would crash."
The article goes on to quote a few option traders who thought the bet was extremely unusual and unlikely without inside information.
While there is lots of anecdotal evidence, I remain less than convinced. A bet of under $2 million is relatively small for any decent sized fund (A trader friend at a major macro fund laughed at the Bloomie piece, calling $2m "A pimple on an elephant's ass").
It was pretty clear at the time that Bear was in deep trouble. And as we noted on the evening of March 10 (Rumor of the Day: Bear Goes Belly Up), paying $4 for a $60 put was expensive.
Here is what was being written at the time at Marketbeat:
Options activity is heavily tilted toward bearish bets, with aggressive players buying put options on March options contracts at the $50 and $40 strike prices – which would be an enormous move in the shares, currently trading at about $62.50 a share. Officials at Bear Stearns were unavailable for comment.
However, “it’s very expensive to buy a put” at a $60 strike price, notes Sveinn Palsson, options analyst at Credit Suisse. “You’re paying $4 for a $60 stock, and there’s not much more than a week left in the maturity, so people are just trying to get that cheaper in sort of a worst-case-scenario thing.”
March options expire at the end of next week, so these are short-term bets, but heavy activity is being witnessed in April options as well. Volatility has spiked dramatically in the options as the bearish bets have multiplied; more than 31,000 March put options have traded today, compared with about 16,000 call options. Meanwhile, spreads on the company’s credit default swaps have widened dramatically, to between 700 and 800 basis points, compared with about 450 points Friday. -David Gaffen
It will be interesting to see what this "investigation" uncovers, but regardless, the Bloomberg piece smacks of some historical revisionism . . .
Bringing Down Bear Began as $1.7 Million of Unsuspected Options
Bloomberg, August 11 2008
Bearish Bets on Bear Stearns
Marketbeat March 10, 2008, 12:16 pm
Impact of Eliminating Uptick Rule
Volatility Index (VIX)
1 Year daily reading
Chart via Yahoo
I haven't done a study on the actual correlation between the dropping of the uptick rule in July 2007 and what its impact has been on volatility. My assumption is that it would lead to an increase in the VIX readings, and that is what you see on the chart above.
While there is correlation, I do not if there is any causation for sure. Some smart academic should do a study on this.
Meanwhile, I can tell you anecdotally that many of the short firms we deal with are far more willing to cover positions quickly. Last Friday's rally is a perfect example. There is less of a worry of being able to get an uptick to reshort a position.
Perversely, the initial effect seems to be increased upside volatilty!
Bespoke Group has some words about the Uptick Rule and Its Pilot Period that are worth reviewing.
A comment asked for a longer term VIX chart:
Options and Monday's Lows
Example: Consider option gamma and this week's option expiration on Friday.
Very often, as we get closer to expiration, the underlying relationship between equities and their options can exacerbate market moves in both directions. Given the recent move off of the peak highs, and where many option traders made their purchases, the potential to dramatically impact downside action exists.
That's especially troublesome if Monday’s lows on stocks are violated.
I am oversimplifying, but if Monday's lows are breached, the ‘gamma’ effect of options may come into play. Gamma = Change in Delta/Change in Underlying Asset. As out of the money options go ‘into the money,’ it could force traders to rebalance their hedges, which in turns further aggravates the move to the downside.
As we get closer to Friday's expiry, there is little premium left on expiring options. That can create a more intense gamma effect. (Options traders: Please correct my phrasing; I was never a trader on an option desk, and I may be misusing terms of art) .
This is merely a short term trading observation. Just an FYI . . .
Backdating Options Scorecard
Here's a nice free feature courtesy of the online WSJ.com: They posted an updated look at more than 120 companies that have come under scrutiny for past stock-option grants.
Note: This list contains companies that have disclosed government probes, misdated options, restatements and/or executive departures. Some companies that have undertaken or disclosed internal probes but no further news may not be included.
June QQQQ 38 Calls
NOTE: This option trade was originally posted at Real Money on 6/14/2006 2:12 PM EDT; The two follow up discussions to let traders know where to exit. This was posted here chronologically (on June 17th) not as investing advice, but rather as an example of a trading call.
Interesting Q Option Trade
6/14/2006 2:12 PM EDT
For speculators only: The June 38 QQQQs, which expire Friday, are now trading at a nickel by a dime.
If the Qs see a 1 point rise between now and week's end, they should go out at about 50 cents or so.
If not, they expire worthless. Only buy what you are willing to see go to zero...
Position: Long Q calls.
2. Partial First Sell
QQQQ 38 Calls Trade
6/15/2006 11:34 AM EDT
Yesterday's option trade -- buy the Q 38 calls for a dime -- has seen a nice pop along with the market.
If you want to hold some for expiry tomorrow, that's fine -- but I am a seller of half the position at 35 cents.
Bulls, bears and pigs ...
Position: Long QQQQ calls, QQQQ.
3. Final Exit
Out of the Q calls
6/15/2006 3:46 PM EDT
I just let the other half of the Q calls go at 75 cents; Perhaps there is some more upside, but that's about as much patience as I can muster.
Thanks for the emails on this; your kind words are always appreciated.
Cody, I haven't forgotten about you and will ge tback to you after the bell.
Position: still long QQQQs
Note: This was an absurdly successful option trade, and is extremely atypical; 90% of all optiions purchased expire worthless. It was consistent with our call tradable bottom call, and showed how agressive traders can juice a market position.
I wouldn't expect to see this kind of an option trade again for a long long time. The Nasdaq down 8 consecutive days is a rarity, and then the out of the money calls were also so cheap, I thought it was a good risk reward trade.
This is not typical, so don't hold your breath waiting for a repeat anytime soon.