Trade Alert: SKF

Take a look at the daily chart of the SKF. First we see that the price is resting on the long-term support in the $90 zone. Next looking at the stochastic we find it below 20 with the fast line turning up. I would like to see a little more force in the momentum change accompanied by a change in direction of the share price before entering this trade.

We are a long 100 shares of the ETF and now would be a great time to add to that position. However I noticed something Minanville that may make calls attractive. In the article HV stands for historical volatility which is just an average of the standard deviation over the specific time period and implied volatility is a variable in the mathematical models used to derive the option price.

Don't get too spooked by the mathematical models smoke and mirrors, we saw how good the mathematical black-box models and quantum funds were last year. But option prices for a particular strike price expiration date combination are based on three things, the price of the underlying ETF, the time to expiration, and the volatility. So if there is a big price spike in one day it will reflect the in the premium price via the volatility, but if there is a period of relatively calm price action the volatility variable will decrease and be reflected in the premium price as well. For instance in the 10 day chart of the SKF you can see that the price has fallen about $60 that's highly volatile and will kick to premium price up.

Here's an example of something that could happen. Suppose you bought the April 90 call on Tuesday immediately after that on Monday cliff dive. Whatever price you pay for the call the volatility variable is going to be very high, but four or five days of little price movement will set that variable back down and you can have a case where say the SKF is trading at 95 five days later say in your call is actually decreased slightly in value. I learned it the hard way not to buy options immediately after volatile price spikes.

SKF: May You Trade in Interesting Times

These are interesting times we trade

in. Here's SKF volatility: Up top, we have 10-day realized volatility (HV) in the stock itself; down below we see 30-day implied volatility of the SKF options (in yellow) and 30-day HV.

Options are at a pretty sizable discount to realized volatility right now, to say the least. 10-day HV -- the here and now of stockvolatility -- is 250, and that's a calculation based on either close-to-close moves, and/or intra day ranges. It knows not of moves within a range, like yesterday's extreme violence. Now, like that guy said at the table in 21, the past is history; tomorrow's a mystery. So you can't say just because options have been relatively cheap in the last stretch that they'll remain so. We might soon settle.

But it does suggest that options have already priced in that decline in volatility. We had this last fall, and options just remained underpriced relative to stock volatility, since stock volatility soared. Of course, there was one big difference: The market was getting plowed.
Now, we act pretty well. And I would note this is an unusual pattern for this time in the expiration cycle. You're more likely to see jigs like this when the gamma is highest - i.e., in front of expiration.

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The biggest reason to short the financials cannot be seen on the chart but the damage was done last week when the Fed announced that it was going to blatantly debase the dollar and decrease your spending power. The reason I am short the financials is because all the banks are insolvent at the end of Ponzi finance. I'm comfortable holding a short position when I know I have the time to be right. But when it comes to buying options you can't just be right you have to be right, right now. Tomorrow is Friday I don't want to buy calls on a Friday, but on Monday another week has passed and I've noticed around noon or so options seem to get a little cheap.

Either way with options, more SKF shares, or shorting the by IYF we will add to our short position on the financials.