Expmonthly Vol3no5 Sep 1

7/27/2019 Expmonthly Vol3no5 Sep 1

1/17

September 2012 | Vol. 3 No.

MONTHLYT H E O P T I O N T R A D E R S J O U R N A L

THE

STRADDLE

Short Sellers &

Option Traders as

MARKET

PREDICTORSHard to Borrow

OPPORTUNITY?

Making Time

STOP The FOMC

3+3 Trade


2/17

www.expiringmonthly.com September 2012 2

ONTHLYT H E O P T I O N T R A D E R S J O U R N A L

editorial

bill LuyJad Woodad

mak Sasian

Andw Giovinazzi

design/layout

Laun Woodow

contact information

edioial cons: [email protected]

Advising and Sals

exiing monhly psidnmak Sasian: [email protected]

phon: 773.661.6620

th infoaion snd in his ulicaion dos no consid you

sonal invsn ojcivs o nancial siuaion; hfo, his

ulicaion dos no ak sonalizd condaions. this info-

aion should no consud as an o o sll o a soliciaion o

uy any scuiy. th invsn sagis o h scuiis ay no

suial fo you. W liv h infoaion ovidd is lial;

howv, exiing monhly and is aliad sonnl do no gua-

an is accuacy, ilinss, o colnss. Any and all oinionsxssd in his ulicaion a sujc o chang wihou noic. In

sc o h coanis o scuiis covd in hs aials, h

sciv son, analys, o wi cis o exiing monhly ha

h viws xssd accualy c his o h own sonal viws

aou h sujc scuiis and issuing niis and ha no a of h

sons consaion was, is, o will lad o h scic co-

ndaions (if ad) o viws conaind in his ulicaion. exiing

monhly and is alias, hi loys, dicos, consulans, and/

o hi sciv faily s ay dicly o indicly hold osi-

ions in h scuiis fncd in hs aials.

Oions ansacions involv colx ax considaions ha should

cafully viwd io o ning ino any ansacion. th isk of

loss in ading scuiis, oions, fuus, and fox can susanial.

Cusos us consid all lvan isk facos, including hi own

sonal nancial siuaion, fo ading. Oions involv isk anda no suial fo all invsos. S h oions disclosu docu-

n Chaacisics and risks of Sandadizd Oions. A coy can

downloadd a h://www.oionsclaing.co/aou/ulicaions/

chaac-isks.js.

exiing monhly dos no assu any liailiy fo any acion akn

asd on infoaion o advisns snd in his ulicaion.

No a of his aial is o oducd o disiud o ohs y

any ans wihou io win ission of exiing monhly o is af-

lias. phoocoying, including ansission y facsiil o ail scan,

is ohiid and sujc o liailiy. Coyigh 2012, exiing monhly.

contents

4 e n

Bill Luby

5 s s o t

mk p

Jared Woodard

7 tradeexample: mk t s

Mark Sebastian

10 The FOMC 3 + 3 Trade

Bill Luby

13 tradeexample: t sb 2012

FOMC 3 + 3

Bill Luby

15 w d h t B

s p V B

o?Andrew Giovinazzi
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3/17


About the

Expiring Monthly Team

Bill Luby

bill is a iva invso whos sach

and ading inss focus on volailiy,

ak snin, chnical analysis,

and etFs. His wok has n has n

quod in h Wall S Jounal,

Financial tis, baons and oh

ulicaions. A coniuo o baons

and minyanvill, bill also auhos h VIX

and mo log and an invsn

nwsl fo jus noh of San

Fancisco. H has n ading oions sinc 1998.

pio o coing a full-i invso, bill was a usinss sa-

gy consulan fo wo dcads and advisd clins acoss a

oad ang of indusis on issus such as sagy foula-

ion, sagy ilnaion, and ics. Whn no ading o

logging, h can ofn found unning, hiking, and kayaking

in Nohn Califonia.

bill has a bA fo Sanfod Univsiy and an mbA fo

Cangi-mllon Univsiy.

Jared Woodard Jad is h incial of CondoOions. Wih ov a dcad of

xinc ading oions, quiis,

and fuus, h ulishs h Condo

Oions nwsl (ion condos) and

associad log.

Jad has n quod in vaious

dia ouls including th Wall

S Jounal, bloog, Financial

tis Alhavill, and th Chicago Sun-tis. H is also a con-

iuo o thSs Oions pos svic.

In 2008, h was old as a o oions no in Socks,

Fuus, and Oions magazin. H is also an associa

of h Naional Fuus Associaion and gisd incial of

Clinan Financial Gou LLC, a coodiy ading adviso.

Jad has ass dgs fo Fodha Univsiy and h

Univsiy of edinugh.

Mark Sebastian

mak is a ofssional oion ad

and oion no. H gaduad

fo Villanova Univsiy in 2001 wih

a dg in nanc. H was hid ino

an oion ad aining oga y

Gou 1 tading. H sn wo yas

in Nw Yok ading oions on h

Aican Sock exchang fo

oving ack o Chicago o ad SpX

and DJX oions Fo h nx v

yas, h add a vaiy of oion oducs succssfully, oh

on and o h CbOe oo.

In Dc 2008 h sad woking as a no a Shidan

Oion mnoing. Cunly, mak wis a daily log on all

hings oion ading a Oion911.co and woks a i

as isk anag fo a hdg fund. In mach 2010 h ca

Dico of educaion fo a nw ducaion Oionpi.co.

AndrewGiovinazzi Andw Giovinazzi sad his ca in

h nancial aks af gaduaing

fo h Univsiy of Califonia, Sana

Cuz wih a b.A. in econoics in 1989.

H joind Gou On, Ld. and quickly

ca a of h pacic Sock

exchang (and la h CbOe), wh

h add oh quiy and indx

oions ov a 15 ya san. Duing

ha iod h nv had a down ya.

A h sa i, Andw sad and an h Dsignad

piay mak mak os fo GouOn on h oo of h

CbOe. I ca on of h highs-gossing oss fo h

coany in 1992 and 1993. Whil acivly ading, Andw was

insunal in caing and anaging an oion ad ain-

ing oga fo Gou On.

H lf Gou On, Ld. o co-found Hny Caial managn

in 2001. Andw hn joind Aquin LLC (20082011) o hl

ing 3D quoing and analysis o nancial daa. H is Chif

Oions Sagis a Oion pi.


4/17


Editors

NotesBill Luby

Wha a dinc a lil cnal ank invnion aks.

Wih h cnal anks in h Unid Sas, uo zon,

China and Jaan all doing hi s o siula h gloal

conoy, liquidiy is high and volailiy is low. I is indd a

din landsca fo h nancial aks in gnal and

oions ads in aicula. Ls lun: any invsos

a now having a ga dal of diculy dining how

uch aco isk o ic ino oions. Whil i ay s

lik a conadicion of sos, so vn s o unc-

ainy and lss isk in h cun nvionn.

Fo h S diion, exiing monhly sks o cov

a oad ang of oics, fo oions as a ak dico,

o long and sho saddl ads, o h inlay wn

had o oow scuiis and ilid volailiy.

In Sho Slls and Oion tads as mak pdicos,

Jad Woodad xains a cn a y r. Jad DLisl,

bong Soo L, and Nahan mauck which as o d-

in whh sho slls o oions ads hav

infod oinions aou h ak.

th aicls in his onhs agazin addss saddls.

In making ti So, mak Sasian discusss h accu-

acy of ha and ilid volailiy inus ino oions icing

odls and alks aou h ilicaions fo a Googl long

saddl osiion. elswh, I look a a ad I call h FOmC

3 + 3 tad ha as o caializ on incasing ilid

volailiy in advanc of FOmC announcns and falling

IV af h announcns. In on aicl I discuss so

of h hisoical VIX daa in h conx of FOmC announc-

ns and in a follow-u I ansla so of his hinking

ino long and sho SpX saddl ads fo h S

FOmC ing.

Las u no las, Andw Giovinazzi has a hough-ovok-

ing look a how had o oow scuiis diso so of h

Gks in Facook oions in Whn Dos a Had o boow

Siuaion psn a Volailiy buying Oouniy?

As always, ads a ncouagd o snd fdack

o gus aicl coniuion idas o dio@

xiingonhly.co.

Hav a good xiaion cycl,

bill Luy

Contributing Editor
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5/17


Short Sellers and Option Traders as

Market PredictorsJared Woodard

theresearchliausuggss ha oh sho slling

and oions ading aciviy sv

o dic fuu ak uns.

Sho slls ay indusy

insids o oh infod ak

aicians who a osiion-

ing hslvs asd on info-

aion ha has no y n

discound y h ak. th

addiion of lisd oions o h

ak fo an ass has gnally

n found o ovid addiional,

non-dundan infoaion aou

fuu uns ov and aov

h infoaion conaind in h

quiy od ow. A cn sudy

valuas which y of ading aciv-

iysho slling o oions adingis

o diciv and whh h wo

a colnay.

In Who a o infod, sho

slls o oion ads? r. Jad

DLisl, bong Soo L, and Nahan

mauck a o con whh

infoaion fo oions aks

acually is non-dundan and o

din which gou of ads is

o infod. On of h challngs

fo any coaison of sho sll-

s and oions ads is ha h

is likly signican ovla wn

h aicians in hos wo gous.

Addiionally, h inoducion of liquid

lisd oions acs h aoun and

h cincy of sho slling: so

sho slls uy us o wi calls

insad, whil so sachs hav

found ha oions duc sho slling

coss. Disnangling h wo gous

in od o analyz hi sciv

cs is no asy, and h conclusions

in h io liau viwd y h

auhos vay widly.

to s fo a laionshi, h

auhos hyohsiz ha:

if option traders act independently

of or before short sellers, this

would indicate informed traders

engaging in the options market and

supports the theory of non-redun-

dancy. On the other hand, if option

traders simply follow the lead of

short sellers, then the short sell-

ers are the more informed tradersacting in the equities market, and

this suggests the options market

is not adding any completeness

to the equities market and rejects

non-redundancy.

th hodology of h s is

coosd of a gssion of oion

on ins agains sock sho

ins o chck fo coln-

aiy and a i sis gs-

sion odl agains quiy uns

o xain which y of aciviy

is o infoaiv. th auhos

us onhly sho ins aios

on U.S. socks fo 1996 o

2009 and onhly aggga

oion on ins on h sa

undlyings.

thi conclusions un conay

o uch of h xising lia-

u. Fis, hy nd ha onhly

oion on ins dos no

conain infoaion aou fuu

quiy uns and ha oions

aks gnally follow sho ad-

s. So sho slls a laivly o

infod; howv, hy also nd ha

sinc sho slls ac o innsly

o as ngaiv foanc, sho

slls a also no scially infod

W can hink of wo ways o n

h analysis of his sudy. by agg-

gaing all oion on ins and

y doing so a a onhly hoizon, h

auhos includ a lo of ncssaily

uninfod aciviy ha ay oscu

h lvan hoizon of infod ad-

ing. Fis, hy could consid wok-

ing wih daa a a wkly o daily

ifaincluding sho aios,

on ins, and ass unso

din whh h snc of

infod ading is dcal in h

sho . Scond, hy could y o

l oion on ins o focus on

anoal lvls as a onial indica-

o of infod ading, .g. gssing
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2139600http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2139600http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2139600http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2139600


6/17


quiy uns agains on on in-

s whn i is a vaious cnag

hsholds aov o low noal.

Oh cn sudis of oion on

ins (Khl and puhan (2012) and

Fodo, Kig and Doan (2011)ni-

h a cid in his a) hav u-

sud oh of hs ous, and hav

found conoically signican uns

fo sagis ading on h infoa-

ion fo oion on ins. W

will follow u on so of hs o

daild sudis in a fuu no. EM

r

DLisl, Jad, L, bong-Soo and mauck,

Nahan, Who are More Informed, Short

Sellers or Option Traders? (Augus 31,

2012). Availal a SSrN: h://ssn.co/

asac=2139600

Fodo, Andy, Kig, Kvin and Doan,

Jas S., Do Option Open-Interest

Changes Foreshadow Future Equity

Returns? (July 12, 2011). Financial maks

and pofolio managn, Vol. 25, No.

3, . 265-280, 2011. Availal a SSrN:

h://ssn.co/asac=1918778

Khl, Ksin and puhan, tajana-Xnia,

The Information Content of Option Demand

(Augus 31, 2012). Swiss Financ Insiu

rsach pa. Availal a SSrN: h://

ssn.co/asac=2005763

Short Sellers and Option Traders as Market Predictors (continued)
http://ssrn.com/abstract=2139600http://ssrn.com/abstract=2139600http://ssrn.com/abstract=1918778http://ssrn.com/abstract=2005763http://ssrn.com/abstract=2005763http://www.condoroptions.com/http://ssrn.com/abstract=2005763http://ssrn.com/abstract=2005763http://ssrn.com/abstract=1918778http://ssrn.com/abstract=2139600http://ssrn.com/abstract=2139600


7/17


Making Time

StopMark Sebastian

itisinterestingha any insiuional invsos hav a d undsanding how highilid volailiy in an oion can ak h ony in an oion ha has n sold, u fw uly

undsand how o ak ony ads iu fo h long sid. today, w a going o walk

hough a classic xal of how a saddl acually aks ony fo h long sid.

Whn askd how o ak ony ading a saddl in low volailiy, os ads will say

ih fo gaa scaling o fo ilid volailiy going u. In uh h answ is ih o

oh. Whil in his xal w a no going o walk hough gaa scaling, i would hav

wokd vy wll in his xal. W a going o walk hough IV going u, u in h adiional

way os ad look a IV going u. th oions w a going o look a a, unil h vy nd,

no going o incas in valu. In fac, unil hy nd hy will no ak any ony a all.

Ls walk hough:

On Augus 16h a ad noics ha GOOG 30 day IV is a an all i low. On could also us

VXGOG, u in his cas w a looking a LivVolpo analyics.

Figure 1

LivVolpro

th ad should no ha vy i h IV gs his low i quickly incass. th ad

innds o ad ha an, looking fo an vsion.

Now fo oving on a quick no on an vsion. man vsion can icky, as IV

can always go low o high in h idia, if i is xcud a xs, i is a ha h

ad will g caugh adly y volailiy. tha said, i is ioan o awa ha an v-

sion is no a 1 o 2 day conc, i is no vn a 1 o 2 ya conc, i is a lifi of h sock

conc. th VIX gos hough 45 ya iods of ing wll aov and wll low h an.

tads us awa of cyclicaliy in IV o s xcaions of an IV ound.

Looking a GOOG h a sval ways o lay IV, if on has a dicional oinion, on can

uy o sll a u of call. In his cas w a going o look a a saddl. W xcu a saddl on

Aug 16h.

t r a d e e x a m p l e


8/17


Figure 2

OtionVu7

W wan ads o noic h Gks ing u ou y his icing odl, noic ha h high

ha ha is ing oducd y h icing odl. r, a odl is only as good as h inus,

volailiy ing on of h. If w hav a slowly ising IV, ha ha nu is going o vy

wong. Which is xacly wha hans?

Figure 3

OtionVu7

this is akn a full wk la, whn accoding o ou odl a ons w should hav n down

clos o h housand dollas. Y, h osiion is ssnially a. Wha hand?

Making Time Stop (continued)


9/17


Ilid volailiy acually incasd. Whil w an u ony on h osiion, w a no down

ony on h GOOG saddl. th slow incas in IV sos ha fo acually occuing. Whn

woking wih insiuions, I usually dsci his occuncs f gaa. Whil no acually f,

h ad dos hav o uy h saddl, caus h ad dosn los ha ov h holding

iod, h ad has gon a f look a sock ovn. Whil in his cas h GOOG osiion

dos no ak ony, wha if GOOG had ad a 30 o 40 dolla ov ov h wk. th ad

would hav had xosu o h ov, wihou having o ay h ha fo is.

In his cas, whil h ad dos no ak ony, h ad is also no choking on iu.

this allows h ad o say in h ad fo a long iod of i han h o sh iniially likly

lannd fo. If a ad has o isk anagd h ad should al o si in a long iu

ad fo only so long fo h o sh is focd o sll ou.

Figure 4

OtionVu7

Ou ailiy o wai nds u aying o. by ing al o in h ad hough Lao Day wihou

colly lding o dah fo ha h ad is al o lay h f gaa. by h wk

af Lao Day GOOG has gun o ov quickly again, and y xiaion h undlying has co-

lly akn o. A ad would hav ndd u douling h saddl caus of h ads ailiy

o say in h ad. EM

Making Time Stop (continued)


10/17


The FOMC

3 + 3 TradeBill Luby

eighttimesvy ya, hFdal On mak Coi

(FOmC) s o discuss h onay

olicy of h Unid Sas and aks

vaious olicy changs, as aoia,

in od o fulll h Fds dual an-

da o ncouag oh ic sailiy

and axiu loyn.

In foal s, h dual an-

da das fo a 1977 andn o

h Fdal rsv Ac of 1913 and

scis:

The Board of Governors of the

Federal Reserve System and the

Federal Open Market Committee

shall maintain long run growth of

the monetary and credit aggre-

gates commensurate with the

economys long run potential

to increase production, so as to

promote eectively the goals of

maximum employment, stable

prices and moderate long-term

interest rates.

In acical s, his has hisoi-

cally an ha h Fd has focusd

is aciviis on anaging h fdal

funds a, which is an uncollaal-

izd ovnigh inank lnding a.

Sily sad, low as ak o

ony availal o fund nw conoic

aciviy whil high as sic h

aoun of ony availal fo nanc-

ing uoss.

Givn h onially lag co-

noic iac of Fd olicy changs

o h fd funds a, h igh annual

FOmC ings a highly aniciad

y h nancial a-

ks. Dnding uon

ak condiions and

invso xcaions,

h oucos of hs ings hav

h onial o daaically ov h

aks.

th highnd aniciaion asso-

ciad wih FOmC ings yically

ushs ilid volailiy high in

advanc of h ing and o

ofn han no, is sonsil fo a

susanial do in ilid volailiy

idialy following h FOmC olicy

san. this chang in ilid

volailiy xcaions is asonaly

dical and ss u so ading

oouniis, including on sagy

I call h FOmC 3 + 3 tad, which I

oulin low in gnal s and dis-

cuss in h conx of h os cn

FOmC ing in th S 2012

FOmC 3 + 3 tad.

Strategy and Rationale

to u h FOmC 3 + 3 ad in hisoi-

cal conx, I xaind h las 182

FOmC ings and lookd a h

ovns in h CbOe Volailiy

Indx (VIX) in h n days lading u

and following h olicy announc-

n, wih daa going ack o 1990.

In Figu 1 low, I hav noal-

izd h daa and s h avag

clos on h da of h FOmC olicy

san o 100. No ha h daa

show a an of a ising VIX lading

u o h FOmC announcn, fol-

Figure 1 Normalized VIX, +/- Ten Days from FOMC Meetings, 1990Present


11/17


lowd y a sha dclin in h VIX

af h announcn and a sus-

qun incas in h VIX ha gins

sval days af h announcn.

In oh wods, invsos hav a n-

dncy o xc a ig suis and

disaoind, hn uon cion,

gin o consid h agniud of

h uncainy and isks in h iod

lading u o h nx FOmC ing,

yically aou six wks hnc.

In h gahic, I hav usd a gn

aow and a gn ox o highligh h

an 2.5% incas in h VIX fo

fou days io o h FOmC ing o

on day io o h ing. Siilaly,

I hav usd a d aow and d ox

o highligh h an 3.0% dcas

in h VIX fo on day io o h

ing o wo days af h -

ing. each aow and ox coo sans

h days; h 3 + 3 lal fs o

h days of incasing volailiy -

ing and h days of dcasing

volailiy os-ing.

Of cous i is always dangous

o dal wih avags. Whn I hink

of avags I ofn chuckl a h

hough of h aocyhal saisician

who downd cossing a sa ha

was, on avag, six inchs d. In

h cas of h VIX daa, h cn-

ag of winning ads (i.., a ising

VIX) fo day -4 o day -1 is only 52%.

Fo day -1 o day +2, h hisoical

daa a o favoal, wih 69%

winning ads. On can coin h

wo ads and g a 60% win a,

wih a an coind un of 5.4%.

Wih igh ings ya, his y

of xcd un ovids a fil

nvionn fo caing succssful

oions ading sagis.

Structuring the FOMC

3 + 3 Trade

Invsos ay choos h hisoical

FOmC-lad VIX daa as a ju-

ing o oin fo addiional sach o

ay conclud ha h daa snd

aov a sucin o iln an

oions ading sagy o ak advan-

ag of ha an.

I ad h FOmC ings on a

gula asis and gnally f o

k hings sil, oning u a long

SpX o SpY saddl osiion a h

clos fou days io o h FOmC ol-

icy san and closing ha osiion

on day io o h announcn.

A ha oin, I yically ansiion o a

sho SpX o SpY saddl and hold ha

osiion unil h clos wo days fol-

lowing h announcn.

On of challngs of his y

of dnd duaion ad is whh

invsos should auoaically xi h

ad in h days af i is ond

o whh on can oiiz xis o

lii losss o nhanc os. I ouch

on so isk anagn aoachs

o his ad low in th S

2012 FOmC 3 + 3 tad.

Of cous h is a onial hid

lg o his ad, no discussd aov,

which calls fo a six day holding iod

fo day +3 o day +9 and, on av-

ag, has sn a hisoical un of

aoxialy 3.0%.

Conclusion

th FOmC 3 + 3 tad sagy ou-

lind aov is a scic insanc of

a oad y of oouniy ha is

ofn snd aound a schduld

vn fo which invsos anicia a

onial incas in volailiy. Oh

xals includ vyhing fo h

nonfa ayoll and GDp os o

ky uo zon ings, lcions, c

th fac ha hs a schduld in

advanc and civ a ga dal of

anion in h dia lading u o

h vn ak i asi fo invsos

o co ovly oional aou

h onial oucos and aach

o signicanc o h ailiy of h

ouco o ov h aks han is

The FOMC 3 + 3 Trade (continued)

th gnal incils ofising

ilid volailiy xcaionslading u o an vn and dcliningilid volailiy following havn a ioan o k in ind fo

all oions ads.


12/17


waand y h hisoical daa. On

can asily xnd h sa lin of

hinking o cooa anings os

fo so of h os oula socks,

such as Al, Facook o whav

sock hans o cau h iagi-

naion of h ail invso duing

h qua.

In a lad vin, h is noh-

ing agic aou h h day hold-

ing iod ih. Duing h las v

yas, fo insanc, a v ya holding

iod fo h sho saddl oion of

h FOmC 3 + 3 tad has signicanly

oufod all oh holding iods.

Invsos should also k in ind

ha vy FOmC ing is di-

n (xcaions and suis on-

ial a always in ux) and h FOmC

shi changs vy ya. by

h sa okn, ach Fd Chaian

loys a din aoach o ans-

ancy and wih sc o sing

xcaions in advanc aou olicy

changs. In so cass h signaling

is ov and in oh cass i is o

sul.

Whh o no on looks a ading

oions aound FOmC ings, invs-

os should k in ind ha ach

volailiy vn has is own uniqu s

of oouniis. So can o

asily highlighd wih h us of his-

oical daa, u h gnal incils

of ising ilid volailiy xcaions

lading u o an vn and dclining

ilid volailiy following ha vn

a ioan o k in ind fo all

oions ads. EM

f r

th S 2012 FOmC 3 + 3 tad

Expiring Monthly, S 2012

The FOMC 3 + 3 Trade (continued)
http://vixandmore.blogspot.com/


13/17


The September 2012

FOMC 3 + 3Bill Luby

theresponsetoh cnad suvy indicad a song in-

s in wha I call y oof-of-conc

ads, which a ssnially ad

idas ha a o xloaoy han

fully fod and sk addiional info-

aion fo hy can dloyd

wih a asonal xcaion ha

hy igh oal ov an

xndd iod. Wih ha in ind, i

is y innion going fowad o y o

link o oof-of-conc ads o

vaious sach and analysis aicls

ha I ulish in h sa issu.

today I ak y s s in ha

dicion y using his sac o

ansla h gnal hinking -

snd in th FOmC 3 + 3 tad o h

S 13h FOmC olicy sa-

n and susqun ss conf-

nc y bn bnank.

Background and Rationale

th aional fo his ad is sil.

I ho o us a long saddl o cai-

aliz on incasing ilid volail-

iy xcaions fo fou days io

o h FOmC announcn o on

day io o h announcn. I hn

wish o un aound and us a sho

saddl o n fo an anici-

ad dclin in ilid volail-

iy fo h day fo h FOmC

announcn o wo days fol-

lowing h announcn. p

daa snd in th FOmC

3 + 3 tad aov, I ho o

al o cau h an 2.5%

gain (52% win a) wih h is-

ing volailiy lg ov h cous

of h days and hn add anoh

3.0% gain (69% win a) wih h fall-

ing volailiy lg.

Setup and Entry

this ad can xcud using

wkly oions, u wih h S

xiaion jus on wk af h

FOmC announcn, I lcd o us

SpX oions fo h sandad onh

S xiaion cycl, which

ndd on S 22nd.

th hisoical daa suggs an oi-

u ny fou days io o h FOmC

announcn, so wih h FOmC

announcn du on S

13h, I ond h long saddl a h

clos on Fiday, S 7h. th

SpX closd a 1437.92 on ha day and

wih h indx alos a h idoin

of wo siks, I lcd o go wih h

1435, givn ha h was a ga

dal of volu a ha sik going

ino h clos. Long on u and on

call cos a oal of 14.30. (S Figu 1

low fo full daa chonology.)

Position Management

th aas of h his oof-

of-conc ad calld fo assiv

onioing and an xi h days af

h on, followd y an idia

ny ino a SpX Atm sho saddl.

Of cous, a of h aional fo a

oof-of-conc ad is o isk a li-

id aoun of caial wih h xc-

aion ha h a ofn unsn isks

ha aa only af h osiion has

n iniiad.

Wha hand o h long

saddl was ha h VIX did indd

incas, u h SpX aind in a

vy igh ang, so h uick in vola-

iliy was no nough o os h i

dcay and h long saddl los 1.30

ov h cous of h h days.

Whn i ca i o n h

sho saddl osiion, h SpX was

vn clos o 1435, so I k h

sa S 1435 sik, slling

h saddl fo 13.00 a h clos.

As i uns ou, socks sikd high

on h Qe3 announcn and h

VIX fll shaly. th nd of ising

sock ics and a falling VIX sisd

houghou h h day holding

iod fo h sho saddl and in a

nushll, h sho osiion go killd. I

vnually sld wih a loss of 12.70

on h scond lg and a cuulaiv

t r a d e e x a m p l e

Figure 1 Table of Values for September 2012 FOMC 3 + 3 Trade


14/17


loss of 14.00 fo oh lgs. As Figu 1

aov shows, h VIX dclind shaly,

as had n aniciad, u h lag

ov in h SpX ngad any gains

ha igh hav n alizd du o a

dclining VIX.

Epilogue and Takeaways

As i uns ou, h 11.1% dclin in

h VIX on h FOmC announcn

day was h sixh lags dclin

ov h cous of 182 osvaions.

Fo hos hinking jus aou h VIX

a of h quaion, on would hav

xcd a oal ouco, u h

o colx laionshi wn

h VIX and h SpX aound ajo vol-

ailiy vns ad h foulaic ad

unoal.

th ouco of his aicula

ad aiss any o qusion han

i answs. Fo sas, how valid

is i o us VIX hisoical daa o s

xcaions fo SpX saddl ading

sagy oucos? Fuh, a VIX

hisoical daa suid o dvl-

oing sagis fo VIX fuus ads

o ads involving VIX xchang-

add oducs han SpX ads?

In s of isk anagn, wha

so of sof oiizaion should

xlod? Scically, wha so of

ways a h o lii losss y xi-

ing aly insad of holding losing osi-

ions fo h full days? Addiionally,

how igh succss o failu in h

long volailiy lg ovid infoaion

aou h dsiailiy of iniiaing h

sho lg o assing on ha ad? Las

u no las, how can on incooa

infoaion aou xcd FOmC ou-

cos ino sus wih high ah-

aical xcaions?

th qusions aov should ly

hough sas. tads ha a ig

loss a nv fun, u unlik ads

ha ak vn o sul in sall of-

is and losss, hs ys of ads

should ovid a ga dal of fodd

fo addiional sach and analysis. In

h conx of a oof-of-conc ad

I hav o consid his ad a succss.

Whil i los a lag aoun of ony

in cnag s, h oof-of-con-

c conx iniizd h aoun

ading caial xosd o losss and

axiizd infoaion valu in s

of qusions aisd and onial ls-

sons land. EM

f r

th FOmC 3 + 3 tadExpiring Monthly,

S 2012

The September 2012 FOMC 3 + 3 (continued)

How valid isi o us VIX hisoical daao s xcaions fo SpX saddlading sagy oucos?


15/17


When Does a Hard To Borrow

Situation Present a Volatility Buying

Opportunity?Andrew Giovinazzi

inalotofways,h hado oow is on of h las und-

sood chanical acions in h a-

k lac. W snd a fai aoun of

i a Oion pi disscing had o

oow siuaions o s if h a

any oouniis in h focd acions

ha could han o h shosll-

s. I wo a fw onhs ack on h

chanics of h had o oow fo

Expiring Monthly(mach 2012). this

i I wan o dig o ino a coi-

naion of facos y uing ogh

chanics, ak volailiy and h

anings cycl siulanously o s if

ha will oduc a adal vn.

th sock ha cos o ind is

Facook (Fb). As I wi his, h

na is aking a coack fo

h high ns o aound $23. Fo

his aicl, I will focus on h acion

fo, duing and af h inaugual

Fb anings o. Fis hing I do is

g acquaind wih h volailiy his-

oy (ali sho) of Fb. th on nic

hing aou h na is ha i ca

ou of h IpO ho. Los of aly volu

hld salishd so lial vola-

iliy nus.

Looking a h d lin low, Fb

oducd a low 30-day ilid volail-

iy of aound 42% jus af h an-

ings cycl. r, whn using

a volailiy of consan duaion, h

nu is ying o k a viw of

volailiy 30 days ahad. th oions

volailiis jus fo h 30-day and

af h 30-day ak can din.

In gnal, os oion classs a

in conango, so h fon onh and

wklys ad cha laiv o h

ack onhs. Fb is no din.

th volailiy cha igh af Fb

anings shows a ig do in 30-day

ilid volailiy (Figu 1). tha in

and of islf is no al suis, sinc

ilid volailiy nds o collas

af anings. Howv, Fb was going

hough sohing ls a h i.

On of h aly lockus fo Fb was

coing, and h sock was suing

fo a os IpO ldown. th shos

sad iling in. How can you ll? th

slid low shows h aks on h

clos on July 19h, 2012. th Fb S

29 coinaion closd a a .20 cdi.

Figure 1

LivVolpro

Figure 2
http://www.expiringmonthly.com/the-misunderstood-hard-to-borrow.htmlhttp://www.expiringmonthly.com/the-misunderstood-hard-to-borrow.html


16/17


Fo h sil synhic coo cal-

culaion (Figu 2):

tak h call id (2.45), suac

h u o (2.65), and add h

suling di o cdi (-.20) o h

sik (29). tha lavs a 28.75 long

coo ic, which is .25 low h

ic fo h coon.

th ida is o us h id/ask h

sa way a liquidiy ovid would,

so us h ics hy would ad on.

Going ino anings, Fb was

alady had o oow. In gnal, a

had o oow will oos h ilid

volailiy of h class, sinc h ossi-

iliy of coving adds an xa lay of

uncainy (us g ici oo).

righ af h anings, no how

h ilid volailiy dod clos o

h lows of h ya, vn hough h

aks w showing coninud s-

su fo sho slling (Figu 1). th

Fb S 23 coo was ading fo a .45

cdi ( duc h uchas

ic y h cdi), which us h

synhic sock aound $23.55. evn

wih h sock doing y a lag

aoun, h volailiy ca in vy

had and h oow a sayd aou

wh i was fo anings.

by Augus 2nd (Figu 4), hings

sad o chang a i. th ilid

volailiy sad o ak u vy

had. Ilid volailiis hi h high

60s y aly Augus, ousid of h

anings cycl. No ha h oow

a dod aound a .01 fo h

Figu 3. Which is no ha signican

in ony s, u i sad a a-

n of coninud dclin in h a

h shos w chagd o k on

h osiion.

th an ha was os is-

siv duing his i was h 30 day

volailiy, caus i aind und

h 10 day alizd volailiy du-

ing h whol squz. Noally, h

ilid volailiy shoos way aov h

alizd volailiy, caus h oow

as div u h u valus. Fb nv

go ha ad, u his is h s hin

of h ading ida I had fo his i

iod.

by h nd of Augus look a how

h oow icu sad o chang

(Figu 5). As Fb add na h

lows sinc h IpO ond, h a h

ony coo go down o $.05. th

When Does a Hard To Borrow Situation Present a Volatility Buying Opportunity? (continued)

Figure 4

Figure 3


17/17

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