Monday, November 1, 2010

Direxion Small Cap Bear 3x (TZA) - Market Now Prices More Downside Risk

TZA (Small Cap Bearish) is trading $22.69, up 0.3% (up?) with IV30™ up 2.6%. The LIVEVOL™ Pro Summary is below.


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The ETF has traded over 7,100 options on total daily average option volume of just 1,215. Calls have traded more than 2:1 to puts. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the action is spread all around in Nov. Note that Nov vol is up more than 3 points and Dec is up 1.9 points.

The Skew Tab snap (below) illustrates the vols by strike by month.

This is pretty cool b/c up means bearish so the skew looks backward though in reality it is how it should be. We can see a rather abrupt upward skew. I have included the Skew Tab from 9-1-2010, i.e. two months ago (below).

We can see that a couple months ago the skew was less pronounced and in fact the back was more expensive than the front across all strikes. Hmm...

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the on the bottom portion that the IV30™ has just now popped above both long-term and short-term realized vols. That combined with the skew chart now as compared with two months ago reflects the option market's general pricing of greater downside risk (upside in this bearish ETF).

Possible Trades to Analyze
This opportunity is all about comfort with the broader market. If you feel like the downside in the market (upside in this ETF) is in fact "in play", then this is nothing more than an, "Oh, I see..." But, if you think the market's downside isn't more risky, then selling that skew reveals a potential opportunity.

1. Sell the Nov 28/29 1x2 call spread @ $0.25 credit. This is safe until TZ goes past $30.25, then it's naked upside. This trade also wins if "nothing happens" or if the market has an abrupt down day but the ETF doesn't really get too close to the 29 level. This trade really is more like a "get out of the way" trade. The lower strikes yield a larger credit but are definitely more risky.

2. Naked sales of the skew are also in play, though more risky.

3. A 1x2 put spread (maybe 18/19) for a credit is sort of a play the other way. I'm not in love with selling that part of the skew for obvious reasons.

This is trade analysis, not a recommendation.

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  1. Ophir, there is a 10 points skew in the 26 strikes. How about 26 Dec/Nov calendar?

  2. I noticed that little kink which opened up that spread. I like calendars, but I do feel like the vol is a touch elevated and buying the back is long vega even though it's winning to theta. It's a slightly different trade, but seems like it's worth a look.

  3. Well, that 10 points skew dissapeared, it's only 4 points now. That trade could make ~25% in 10 minutes.

  4. that's why I love options; price discovery actually allows for trading windows without and super fast algo.

  5. I believe your TZA avg daily option volume figure is incorrect- OCC shows more like 18,000 contracts/day

  6. Whoa, you're right. Good catch. We're looking into it, thanks.