Friday, June 4, 2010

PowerShares DB Oil (DBO) - Bet on Oil Direction Against Changed Skew

DBO is trading 24.01. The LIVEVOL™ Pro Summary is below.

The ETF has traded over 3,500 options in the first three hours on total daily average option volume of just 209. All but 30 contracts have been puts. Close to all of the action is in the Oct puts (purchases). The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates that the puts are mostly opening (OI << trade size). The largest trades have been in the Oct 21 puts - they've traded over 2,500x.

Note the tiny OI in the entire option chain. It looks like the Jul 28 calls have 686, then Jul 26 403, then nothing even in the 300's. The 2,500 in the Oct 21 puts on zero OI is sizable for this issue.

The Skew Tab snap (click to enlarge) illustrates the oil skew.

Commodities trade differently than stocks - this type of parabolic skew isn't necessarily unusual. Having said that, a look at the skew on 12-21-2009 (click to enlarge) demonstrates a couple things:

1) The wings have gotten more expensive (there is bend on the upside and downside).
2) The monthly levels are clearly separated now with the front months much higher vol than the back. Also, in the past, the back months were higher than the front.

The option markets reflect greater perceived risk/vol in the near-term. If things return to "normal," Oct vol will go up relative to the summer months. This is a bet on that pattern.

Finally, the Charts Tab (6 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

You can see the big dip recently and the recovery. It's interesting to note how accurate IV30™ has tracked HV20™. Or, in English, how accurately priced the options have been to the realized movement in the underlying.

The trades today buy the cheaper Oct vol but on the expensive part of the curve (the downside wings). This is a bet the light sweet crude goes down in Oct (or vol jumps).

Keep in mind, oil prices are down over 14 percent from $87 a month ago. The drop probably started with concerns over European debt problems dragging down global demand for commodities. In a way, this is a bet either that moratoria on gulf drilling are short lived or, that the European crisis continues... sneaky...

This is trade analysis, not a recommendation.

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