Monday, August 2, 2010

PowerShares Agriculture (DBA) - Order Flow Reverses the Skew

DBA is trading $26.05. The LIVEVOL™ Pro Summary is below.

The ETF has traded over 18,000 options on total daily average option volume of just 2,099. All but 1,138 contracts have been calls. The largest trade was 8,000 Oct 25/27 call spread sales, accounting for 16,000 contracts (sell 25 strike, buy 27 strike). 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 OI is greater than the trade volume. Looking back over the historical Time & Sales, I believe the trades today are re-opening on the OI (i.e. Oct 25 calls are short OI and Oct 27 are long OI).

The Skew Tab snap (click to enlarge) illustrates the vols by strike by month.

We can see the skew shape is backwards from 25 to 27; the 25 line is below the 27 line. This is from the overwhelming order flow and is very interesting as a case study. Note that the skew goes back the right way in the lowest strike.

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 immense stock jump recently from ~$23. The call spread sale @ $0.90 gives it a 1.1:0.9 max loss:max gain ratio, but at this moment parity is $1.05. I don't love this trade, but if you're a player in this type of ETF, it's a reasonable payout for a limited downside bet on a ripping upswinging price. I don't like the backward vol scalp though.

This is trade analysis, not a recommendation.

Legal Stuff:


  1. Ophir.

    Ford had a similar trade today. Bear Call Spread. Sept. 2010 expires.

    1. Sell 150000 for 1.40 (Call 13)
    2. Buy 150000 for 0.75 (Call 12)

    Max Profit 9.75*10^6
    Max Loss 5.25*10^6

  2. Yeah, I saw that. I think it was just closing Sep 12 to roll into Sep 13; not really a call spread sale per se.

  3. Well, we'll keep an eye on the OI.

  4. Did the OI not update today? Shows 56k, but how could that be when 159,000 contracts trade?

  5. That was from yesterday. OI updates the next day, it isn't a real time data set. So it's very common to see trade size > OI; in fact, that's how you can tell a trade is opening.

    OCC seems to have failed (again) to provide OI to the market, but that's for today, not yesterday.