Guest Blog. Deleted

Today I have a guest blogger…

My apologies.

Permitting this specific guest blogger to post here has opened an unintentional can of worms.

I do not want to be involved in his controversies.  Thus, the post, along with all related comments have been expunged as of 7/20/2009.

390

14 Responses to Guest Blog. Deleted

  1. CHAKRA 07/17/2009 at 9:57 AM #

    Hi Mark
    Please explain this observation I made today on GOOGLE.
    The stock dropped by about $12.00. to $430.00
    ATM PUT AUG 430 went up by only 0.20c.
    Why?
    I checked the DELTA value and it is -.38
    Why GOP P AUG 430 moved only 0.20c?
    This should have gone up by about $4.50, I think.
    Where am I wrong?
    As always thanks for your easy to understand explanations.
    Thanks
    NG

  2. Sigma Options 07/17/2009 at 9:57 AM #

    “Because we’re nuts.
    And the experts know it.”
    Ain’t that the truth.
    The BS that investors fall for when buying information proves it.
    The latest spiel I’ve spotted around the traps is “How to retire in a year with only $10,000”.
    Obviously people are paying this man money to find out the impossible dream.

  3. Mark Wolfinger 07/17/2009 at 10:30 AM #

    This is an ongoing problem for inexperienced option traders.
    It was intelligent of you to check the option’s delta. But did you look at the implied volatility (IV)? That is the most important factor in determining the price of an option, and you cannot successfully trade options by ignoring IV.
    Yesterday, prior to the news announcement there was reason to believe that when GOOG stock opened for trading this morning it would be trading at a price that was substantially different from yesterday’s close. Why? Because earnings news was announced after the close yesterday.
    In anticipation of that price chance, investors wanted to buy options. Why wouldn’t they? When the stock makes a big move, option owners tend to make money. Thus, ‘everyone’ want to buy options.
    That’s great. Who is going to sell those options? They do not grow on trees. That’s the market makers responsibility. Knowing the stock price is very likely to be very different this morning, should they just sell options to every buyer who comes along, at whatever price the buyer prefers to pay? No. That would be beyond stupid.
    Knowing that news is pending, they raise their volatility estimate for the stock by ‘telling’ the software that computes the value of an option (and thus, the bid and ask prices they publish) to raise the volatility estimate used to calculate an option’s value.
    That higher volatility estimate raises the price of all options. When buyers outnumber sellers – as it almost always the case – then they raise the volatility estimate again. And again. And again. Until finally (if it ever happens) the high prices attract enough sellers so that the market is balanced between buyers and sellers.
    In the real world, there are almost never enough sellers as option buyers overwhelm option sellers. That results in higher and higher prices for options.
    The sad truth is that too many people are so blinded by the possibility of a 100-point move in GOOG that they are willing to pay whatever prices is asked of them to acquire options. They don’t bother to see how high the IV is and then determine whether to pay that price. They just pay the price. Thus, options are priced high.
    The next morning, earnings have been announced. There is no more news pending. The chances that the stock is going to make another large move is small. That all leads to a severe reduction in the volatility estimate used to determine the price of options in the marketplace. In fact, many times that estimate is lower than usual.
    Couple that with all those option owners who now want to sell what they bought yesterday. Huge number of seller, few buyers. Well, that crushes IV even further and the prices are much, much lower than the inexperienced trader – who paid any price yesterday – can imagine.
    Those huge profits that option buyers were looking for are just not there. The put buyers made a few pennies and the call buyers lost huge chunks of money.
    That’s the system. “Everyone’ knows how it works. Warnings are mentioned everywhere, but rookies and gamblers continue to buy options and get what they deserve.
    Trading in ignorance, trading with hope of a windfall – these are not good ideas. These do not lead to long-term success as an option trader.
    The answer to your question is that IV dropped by a large amount. thus, prices are lower than expected.
    I truly dislike having to repeat this message every so often, [see: http://tinyurl.com/naa4o2} but the truth is those who eagerly buy options, looking to make a killing, seldom pay attention to the price they pay. they mistakenly believe that yesterday’s price was a fair price and that they would be able to sell today at another fair price.
    The prices were ‘fair’ because prices must rise when there is great demand and fall when there is a large supply.
    I hope this was only a theoretical question for you and that you did not make this trade.

  4. Mark Wolfinger 07/17/2009 at 10:39 AM #

    The public investor really is ignorant – from the point of view that they believe the garbage sold to them by brokers, financial advisors, planners, insurance agents – in short any salesman who earns fees/commissions by making the sale.
    They tell the investor anything to make the sale.
    The truth is not the issue. Benefiting the investor is only a side issue. The game is commissions and those salesmen benefit because the public is nuts by believing what is told to them.
    To me the difference is between these:
    a) You can believe me because I’m earning a fat fee for advising you
    b) You can believe me because I have little, or nothing, to gain by advising you
    There is NOTHING wrong with making money – when there is a true fiduciary responsibility that is taken seriously. Wall Street does not take it seriously. Profits for the salesmen come first.

  5. CHAKRA 07/17/2009 at 11:34 AM #

    Hi Mark
    Thnaks for an excellent explanation as usual.
    No I did not do the trade. I am still trying to learn all
    the pros and cons from experts like you.
    May I ask you again, where can I get this IV info?
    TD Waterhouse OPTION CHAIN does not give this info.
    Fiannly have you written any article on the use of IV for option trade?
    I will read your articles as suggested more carefully.
    Thnaks
    NG

  6. Sigma Options 07/17/2009 at 11:34 AM #

    Mark,
    Unfortunately true. What do you think of the postulation that investors that fall for it, deserve it?
    My observation is that the sort of person who falls for the “Be a millionaire by 3:30PM tomorrow by buying WOTM call options” type of spiel, doesn’t want to know the real truth. They still believe in the holy grail.
    There certainly is no shortage of punters willing to give large sums of money to these clowns.
    I find it bewildering.

  7. Mark Wolfinger 07/17/2009 at 12:01 PM #

    IV information should be available from every broker. But, it’s not. Call (or send email) TD and ask them if the data is available and where you can find it.
    There is NO REASON for it to be on the option chain. It has to be accompanied by live option prices.
    But current IV is not going to do you any good. With what are you going to compare it. You also need historical option data.
    Two places to get that are ivolatility.com (don’t pay – they have some stuff for free. My favorite is The Option Strategist (http://tinyurl.com/nargch). the column labeled: ‘curiv’ is the current IV.
    I have one magazine article on this: http://www.sfomag.com/article.aspx?ID=620
    The truth is that the message is the same: Understand how much you are paying for an option and then ecide it it’s worth the price. No one can make that decision for you.

  8. Mark Wolfinger 07/17/2009 at 12:11 PM #

    Sigma,
    Well, investors who fall for the hype ‘get rich quickly’ certainly deserve a huge portion of the blame.
    It’s not that bewildering to me. People are innocent, trusting and thus, con artists skin them alive in any business. Very sad.
    What I loathe is the professionals who give BAD advice to the masses. When you read a financial journalist and he/she quotes some expert, the average reader believes every work. Sometimes those experts lie in an effort to attract customers. At other times they spew garbage, believing they are being helpful.
    Too many salesmen (brokers, financial planners, financial advisors, insurance salesmen) are out to earn a commission and it does not matter to them how much the client is harmed. I don’t think they intentionally do harm – but many just don’t know any better and it’s too much effort for them to learn. The customer suffers. That’s what I hate.
    Thus, I’m in favor of hands on options trading for anyone willing to make the effort. I stress safety, risk modification, and education. To me, that allows people to take care of themselves.

  9. TR 07/17/2009 at 6:41 PM #

    Mark
    I have read about this “high IV prior to earnings” issue many times on this blog. And in reading the details about the google put options from CHAKRA I can’t help but wonder: 1) Is the day before an earnings announcement a good day to sell strangles? or …for a safer play… 2) to buy iron condors?
    I would love to hear your thoughts on the risk/reward of the 2 ideas above.
    Rgds
    TR

  10. Mark Wolfinger 07/17/2009 at 8:59 PM #

    TR,
    It’s neither good nor bad, but the odds favor the seller. I used to be a seller of premium before earnings news. I no longer play individual stocks.
    The premium is very high and therefore it’s a pleasure to sell. Most of the time the options are priced to high, so even when the stock moves against you there can be a nice profit. That’s why the odds favor the seller. Buyers, on average, get too aggressive and pay too much. Today’s GOOG Aug 430 put is such an example. Down $12 and sellers got out for essentially even.
    But if you recall, after one nice earnings surprise, GOOG rose by $95. It’s true that 100% of the move did not occur at the opening, but imagine what it would feel like to sell a call and find that it’s 60 points ITM. That’s the risk; that’s the downside.
    The premium is high. But there’s an above average chance the stock will gap when earnings are released. You must expect to lose money part of the time when you sell. And the loss can be substantial. But you already knew that.
    Which brings us to the 2nd question. Yes – I much prefer iron condors, or perhaps selling only the call spread or only the put spread. When news is pending is not the time to be selling naked options. I no longer sell naked options anyway, but if you do – that’s not the time to be a hero.

  11. CHAKRA 07/18/2009 at 11:58 AM #

    Hi Mark
    As per your suggestion I checked IV for GOOG today (17 July 09).
    For ATM PUT GOP P AUG 430
    the IV=25.97% and DELTA for PUT=-.477.
    Since I feel that GOOG may still go down from here,
    is this IV=25.97% high or what?
    How can I determine that OPTION price is TOO HIGH or not?
    As you said, day before EARNINGS announcement option price
    is expensive.
    The question is, if GOOG goes down say another 20 or 30 points,
    is it reasonable to assume that ATM-PUT shuld go up by
    about $9 or $14 (all are rough estiamte)?
    As usual I thank you for your frank and easy to understand
    explanation.
    Thanks
    NG

  12. Mark Wolfinger 07/18/2009 at 2:32 PM #

    I appreciate your continued interest and want to be helpful, but these are the things you must do yourself.
    Going to the site I recommended above,(optionstrategist.com) – this is what I see for GOOG:
    GOOG 30 25 32 090717 25.69 600/ 12%ile 430.25
    The volatility level of 25.69 is in the 12th percentile. That means that the current IV is higher than only 12% of the past readings, covering the last 600 trading days. Thus, historically it is on the low side.
    That’s all I can tell you. IV for GOOG has been lower only about one day out of eight. I have no clue about the future. It can easily head lower, but has not done so too often in the past.
    It’s not that simple: There are always considerations. Consider this: Often, an option has an earnings announcement built in. Maybe not for weeks, but if there is news coming sometime before expiration, the option ‘knows it.’ These Aug options are going to expire BEFORE any known news release. Thus, it can be anticipated that GOOG will be less volatile than normal through expiration (because normal includes a news announcement) and the option price will depend on the IV. IV is not something tangible. Maybe what’s what people don’t get. It’s not tangible. It’s merely the estimate of future volatility as measured by the prices of the options in the marketplace.
    The best way to know if this is an option worth buying or selling is to track IV every day and be aware of the recent (say 20 or 30-day) trend. Too much work for me, and I don’t want to trade these options on individual stocks. But if you do, you can consider this as part of the homework. And I would not be surprised if this data is available somewhere. I just don’t know where.
    But, if you are looking to trade spreads (perhaps iron condors), then who cares about the Aug 30 put? Not you. You only want to see the trend of GOOG IV in general. And you can keep track of the optionstrategist’s weekly data for that.
    You must decide: trade iron condors regardless of IV (I vote no) or wait until IV is high. That may not occur for years. Not an easy decision. But, there are alternative strategies.

  13. Donald W 07/19/2009 at 11:56 AM #

    Hello Mark,
    Thank you for suggesting TradeKing in an email to me the other day. Unfortunately, after signing up for an account and receiving approval. I was unable to sign-in again because of IP addresses issues that AT&T and other air card uses is block by there security. Any other suggestions.
    Also if I may? Here is a great freeware program call OptionsOracle for options…it has a great strategy wizard built-in and is getting more and more bells and whistles by the months: http://www.samoasky.com/ …You can even set it up for live quotes.

  14. Mark Wolfinger 07/19/2009 at 1:33 PM #

    Donald,
    Only suggestion is to call AT&T or TK. TK may have seen this problem before, but believe solution is with your ISP.
    Regarding software. Has anyone else used this? I am unfamiliar with the product and unwilling to recommend it. Opinions welcome.