Amtrust Financial (AFSI) - Following Order Flow

I found AFSI using the scanner in Livevol Pro; specifically the high option volume scan; and now I am watching. You can see the image of the scan below.


The company is showing over 4,000% higher option volume than average. The company page, in the order flow section, also reveals the same unusual heavy activity comparing average option volume to today's option volume (see image below).


I immediately turned to the options tab where the vast majority of the order flow jumped off the screen. The Jun 12.5 Calls traded over 5,000 times, with zero OI implying that these option trades are all opening orders (new positions). Looking even further into the trades (using the sidebar trade list on the Options tab) I could see that these were predominantly purchases of the calls. You can see the green font indicating lifting of offers on the Options tab or the Time & Sales tab.



I did notice that the OI on the March and Dec 12.5 Calls went up on or around 10/6/09 as people seemed to make opening order sales (i.e. opening short orders). I saw this by investigatig the Time & Sales tab after peeking at the Level II quotes for those two strikes (Level II shows the OI charts; if you hold your mouse button down you can see the details). The image for the Dec 12.5 calls and the increase in OI are presented below. (there is a similar looking chart for the March 12.5 calls).


Even though there were what looked like opening order short positions on front 12.5 calls, the size of the opening order purchases in the Jun 12.5 calls is overhelming. I am not sure what is going on yet, but now, I am watching.

Amazon.com Inc. (AMZN) - Here Comes the Vol?

Taking a look at the 2 year IV30^TM chart for AMZN we can easily see how it tends to spike near earnings and then drop off. See the image below from the Livevol Charts Tab (click the image to enlarge).

This behavior is not that uncommon. Earnings represents a known news event that could affect the stock price more than average; that single day therefore should have a substantially higher expected volatility. This phenomenon is referred to as "earnings vol" by most professional traders.

What's more interesting about AMZN is how low it's volatility has gone recently. The images below are available by holding the left mouse button down on the vol chart in the Charts Tab.


The 2 year low in IV30^TM for AMZN has been 36 (on 5/16/2008). As of 9/18/2009 the IV30^TM hit 37. Since hitting that virtual support in vol (I drew in a yellow line illustrating the vol support in the image below), AMZN IV30^TM has begun to diverge from that low. See the image below (again, you can click the image to enlarge it; the red line is IV30^TM, the blue HV30^TM).


With AMZN earnings coming on or around 10/22/2009 and its tendency to demonstrate strong earnings vol, together with the fact that it has reached and bounced off of a 2 year volatility low, maybe this is just the beginning of a run up in AMZN volatility. It makes me wonder if maybe, "Here comes the vol"?

Caterpillar (CAT) - Doing your homework might pay dividends

-- written by "Lane"; Professional NYSE ARCA Options Market Maker

A quick glance at CAT’s dividend history shows a long steady history of quarterly dividends paid in January, April, July and October. More digging shows that over the past four years the stock has gone ex-dividend prior to the option expiration date every quarter. Furthermore, since January 2000, CAT has paid 39 quarterly dividends. Of those 39 dividend distributions, only four times has the ex-dividend date for the distribution been after the expiration date. That is some compelling evidence that CAT will go ex-dividend prior to October expiration. Feeling pretty confident that the ex-dividend date for October’s dividend is before October expiration? Even Bloomberg would tell you this is the case (image below is copyrighted by Bloomberg, and all that legal stuff).


What odds would you give me to take the other side?

After some significant research cross referencing the dividend stream on the Caterpillar website, here is what I have found. Dating all the way back to 1996, in October the dividend is consistently declared on the second Wednesday of the month. The shortest time period between the declaration date and the ex-dividend was not less than six calendar days after the declaration date.

What does that mean for the anticipated October dividend? The second Wednesday of October is October 14, I then add, at a minimum six calendar days to that and I am at an ex-dividend date not before the October 20, which falls after October expiration, October 16. Livevol is projecting the ex-date after Oct expo:


For comparison I looked for another expiration month which had dates similar to October 2009. I found April 2004. The second Wednesday of the month was the April 14, the dividend was declared on that day with an ex-dividend date of April 22 which fell after April expiration. My odds might be getting a little better.
How I am trading it.

I decided to isolate my trade as much as possible to a binary wager. There is or is not a dividend prior to October expiration. To do this, I chose to put on a reversal in October. Without getting terribly academic, if the market is pricing in a dividend amount greater than I am forecasting, then compared to my values, the market’s put values would be relatively expensive and its call values relatively inexpensive. This would lead me to buy calls, sell puts and sell stock (to remove the delta risk). These three trades are the three legs of a reversal.

Risk reward ratio
If the stock goes ex-dividend prior to October expiration and the dividend is $.42 then I would need to receive about $.42 in order to breakeven (before transaction costs) on a reversal, being short the stock I would be responsible for paying that dividend. If, however, the stock goes ex-dividend after expiration of my October position, any premium, above my transaction costs, I received to do the reversal would be profit.

When I started putting this trade on a little over a week ago, I was receiving about $.25 to reverse in October. Based on the closing marks in CAT from Friday October 2, 2009 the midpoint of the October reversal/conversion market was about -$.15. In terms of risk/reward for reversing, the risk is now approximately $.27 (.42 dividend -.15 received) to make $.15. The October reversal is laying roughly 2/1 on the trade right now. Is there greater than a 67% chance that the dividend is after October expiration? If so, then there is still edge in reversing for $.15, but the cost of being wrong is going higher.

CIT Group (CIT) - Mess with the Bull-Get the Horns

In the last post I showed the gambling man (or woman) selling $2,000,000 in premium in dime options over two days and sitting pretty as of Monday close. Oh my, how the tide has turned.

Yesterday CIT dropped 40% and the Nov 1 puts were active again... to the tune of a quarter million contracts on OI of 200,000 (see image from Options Tab below).


The Company Tab (image below) shows us that people were buying premium in options (Net Premium is positive) and getting short deltas in options (Net Deltas is negative).


With volume 50,000 higher than OI, opening positions were almost certainly being taken. Yet when looking at the OI today (image below from Level II on Options Tab) we can see that it actually decreased about 40,000 (from ~200k to ~160k). So 40k contracts closed net, AND there were opening orders on the line.

Net, net I see a massive closing from the original 200,000 short puts @ 0.10. Checking the Time & Sales Tab you can see a huge number of put purchases on that line for 0.35. Taking some liberties and asuming this is the same trader closing the dime sale, you are looking at a 0.25 loss on 200,000 options --> $5 mil. Now that's a lot of jack, no matter how much cheese you come to the table with.

The lesson... Selling dime options uncovered to open is a risky game. Mess with the bull, you get the horns.