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7/27/2019 Expmonthly Vol3no5 Sep 1
1/17
September 2012 | Vol. 3 No.
MONTHLYT H E O P T I O N T R A D E R S J O U R N A L
THE
STRADDLE
Short Sellers &
Option Traders as
MARKET
PREDICTORSHard to Borrow
OPPORTUNITY?
Making Time
STOP The FOMC
3+3 Trade
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www.expiringmonthly.com September 2012 2
ONTHLYT H E O P T I O N T R A D E R S J O U R N A L
editorial
bill LuyJad Woodad
mak Sasian
Andw Giovinazzi
design/layout
Laun Woodow
contact information
edioial cons: [email protected]
Advising and Sals
exiing monhly psidnmak Sasian: [email protected]
phon: 773.661.6620
th infoaion snd in his ulicaion dos no consid you
sonal invsn ojcivs o nancial siuaion; hfo, his
ulicaion dos no ak sonalizd condaions. this info-
aion should no consud as an o o sll o a soliciaion o
uy any scuiy. th invsn sagis o h scuiis ay no
suial fo you. W liv h infoaion ovidd is lial;
howv, exiing monhly and is aliad sonnl do no gua-
an is accuacy, ilinss, o colnss. Any and all oinionsxssd in his ulicaion a sujc o chang wihou noic. In
sc o h coanis o scuiis covd in hs aials, h
sciv son, analys, o wi cis o exiing monhly ha
h viws xssd accualy c his o h own sonal viws
aou h sujc scuiis and issuing niis and ha no a of h
sons consaion was, is, o will lad o h scic co-
ndaions (if ad) o viws conaind in his ulicaion. exiing
monhly and is alias, hi loys, dicos, consulans, and/
o hi sciv faily s ay dicly o indicly hold osi-
ions in h scuiis fncd in hs aials.
Oions ansacions involv colx ax considaions ha should
cafully viwd io o ning ino any ansacion. th isk of
loss in ading scuiis, oions, fuus, and fox can susanial.
Cusos us consid all lvan isk facos, including hi own
sonal nancial siuaion, fo ading. Oions involv isk anda no suial fo all invsos. S h oions disclosu docu-
n Chaacisics and risks of Sandadizd Oions. A coy can
downloadd a h://www.oionsclaing.co/aou/ulicaions/
chaac-isks.js.
exiing monhly dos no assu any liailiy fo any acion akn
asd on infoaion o advisns snd in his ulicaion.
No a of his aial is o oducd o disiud o ohs y
any ans wihou io win ission of exiing monhly o is af-
lias. phoocoying, including ansission y facsiil o ail scan,
is ohiid and sujc o liailiy. Coyigh 2012, exiing monhly.
contents
4 e n
Bill Luby
5 s s o t
mk p
Jared Woodard
7 tradeexample: mk t s
Mark Sebastian
10 The FOMC 3 + 3 Trade
Bill Luby
13 tradeexample: t sb 2012
FOMC 3 + 3
Bill Luby
15 w d h t B
s p V B
o?Andrew Giovinazzi
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www.expiringmonthly.com September 2012 3
About the
Expiring Monthly Team
Bill Luby
bill is a iva invso whos sach
and ading inss focus on volailiy,
ak snin, chnical analysis,
and etFs. His wok has n has n
quod in h Wall S Jounal,
Financial tis, baons and oh
ulicaions. A coniuo o baons
and minyanvill, bill also auhos h VIX
and mo log and an invsn
nwsl fo jus noh of San
Fancisco. H has n ading oions sinc 1998.
pio o coing a full-i invso, bill was a usinss sa-
gy consulan fo wo dcads and advisd clins acoss a
oad ang of indusis on issus such as sagy foula-
ion, sagy ilnaion, and ics. Whn no ading o
logging, h can ofn found unning, hiking, and kayaking
in Nohn Califonia.
bill has a bA fo Sanfod Univsiy and an mbA fo
Cangi-mllon Univsiy.
Jared Woodard Jad is h incial of CondoOions. Wih ov a dcad of
xinc ading oions, quiis,
and fuus, h ulishs h Condo
Oions nwsl (ion condos) and
associad log.
Jad has n quod in vaious
dia ouls including th Wall
S Jounal, bloog, Financial
tis Alhavill, and th Chicago Sun-tis. H is also a con-
iuo o thSs Oions pos svic.
In 2008, h was old as a o oions no in Socks,
Fuus, and Oions magazin. H is also an associa
of h Naional Fuus Associaion and gisd incial of
Clinan Financial Gou LLC, a coodiy ading adviso.
Jad has ass dgs fo Fodha Univsiy and h
Univsiy of edinugh.
Mark Sebastian
mak is a ofssional oion ad
and oion no. H gaduad
fo Villanova Univsiy in 2001 wih
a dg in nanc. H was hid ino
an oion ad aining oga y
Gou 1 tading. H sn wo yas
in Nw Yok ading oions on h
Aican Sock exchang fo
oving ack o Chicago o ad SpX
and DJX oions Fo h nx v
yas, h add a vaiy of oion oducs succssfully, oh
on and o h CbOe oo.
In Dc 2008 h sad woking as a no a Shidan
Oion mnoing. Cunly, mak wis a daily log on all
hings oion ading a Oion911.co and woks a i
as isk anag fo a hdg fund. In mach 2010 h ca
Dico of educaion fo a nw ducaion Oionpi.co.
AndrewGiovinazzi Andw Giovinazzi sad his ca in
h nancial aks af gaduaing
fo h Univsiy of Califonia, Sana
Cuz wih a b.A. in econoics in 1989.
H joind Gou On, Ld. and quickly
ca a of h pacic Sock
exchang (and la h CbOe), wh
h add oh quiy and indx
oions ov a 15 ya san. Duing
ha iod h nv had a down ya.
A h sa i, Andw sad and an h Dsignad
piay mak mak os fo GouOn on h oo of h
CbOe. I ca on of h highs-gossing oss fo h
coany in 1992 and 1993. Whil acivly ading, Andw was
insunal in caing and anaging an oion ad ain-
ing oga fo Gou On.
H lf Gou On, Ld. o co-found Hny Caial managn
in 2001. Andw hn joind Aquin LLC (20082011) o hl
ing 3D quoing and analysis o nancial daa. H is Chif
Oions Sagis a Oion pi.
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Editors
NotesBill Luby
Wha a dinc a lil cnal ank invnion aks.
Wih h cnal anks in h Unid Sas, uo zon,
China and Jaan all doing hi s o siula h gloal
conoy, liquidiy is high and volailiy is low. I is indd a
din landsca fo h nancial aks in gnal and
oions ads in aicula. Ls lun: any invsos
a now having a ga dal of diculy dining how
uch aco isk o ic ino oions. Whil i ay s
lik a conadicion of sos, so vn s o unc-
ainy and lss isk in h cun nvionn.
Fo h S diion, exiing monhly sks o cov
a oad ang of oics, fo oions as a ak dico,
o long and sho saddl ads, o h inlay wn
had o oow scuiis and ilid volailiy.
In Sho Slls and Oion tads as mak pdicos,
Jad Woodad xains a cn a y r. Jad DLisl,
bong Soo L, and Nahan mauck which as o d-
in whh sho slls o oions ads hav
infod oinions aou h ak.
th aicls in his onhs agazin addss saddls.
In making ti So, mak Sasian discusss h accu-
acy of ha and ilid volailiy inus ino oions icing
odls and alks aou h ilicaions fo a Googl long
saddl osiion. elswh, I look a a ad I call h FOmC
3 + 3 tad ha as o caializ on incasing ilid
volailiy in advanc of FOmC announcns and falling
IV af h announcns. In on aicl I discuss so
of h hisoical VIX daa in h conx of FOmC announc-
ns and in a follow-u I ansla so of his hinking
ino long and sho SpX saddl ads fo h S
FOmC ing.
Las u no las, Andw Giovinazzi has a hough-ovok-
ing look a how had o oow scuiis diso so of h
Gks in Facook oions in Whn Dos a Had o boow
Siuaion psn a Volailiy buying Oouniy?
As always, ads a ncouagd o snd fdack
o gus aicl coniuion idas o dio@
xiingonhly.co.
Hav a good xiaion cycl,
bill Luy
Contributing Editor
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www.expiringmonthly.com September 2012 5
Short Sellers and Option Traders as
Market PredictorsJared Woodard
theresearchliausuggss ha oh sho slling
and oions ading aciviy sv
o dic fuu ak uns.
Sho slls ay indusy
insids o oh infod ak
aicians who a osiion-
ing hslvs asd on info-
aion ha has no y n
discound y h ak. th
addiion of lisd oions o h
ak fo an ass has gnally
n found o ovid addiional,
non-dundan infoaion aou
fuu uns ov and aov
h infoaion conaind in h
quiy od ow. A cn sudy
valuas which y of ading aciv-
iysho slling o oions adingis
o diciv and whh h wo
a colnay.
In Who a o infod, sho
slls o oion ads? r. Jad
DLisl, bong Soo L, and Nahan
mauck a o con whh
infoaion fo oions aks
acually is non-dundan and o
din which gou of ads is
o infod. On of h challngs
fo any coaison of sho sll-
s and oions ads is ha h
is likly signican ovla wn
h aicians in hos wo gous.
Addiionally, h inoducion of liquid
lisd oions acs h aoun and
h cincy of sho slling: so
sho slls uy us o wi calls
insad, whil so sachs hav
found ha oions duc sho slling
coss. Disnangling h wo gous
in od o analyz hi sciv
cs is no asy, and h conclusions
in h io liau viwd y h
auhos vay widly.
to s fo a laionshi, h
auhos hyohsiz ha:
if option traders act independently
of or before short sellers, this
would indicate informed traders
engaging in the options market and
supports the theory of non-redun-
dancy. On the other hand, if option
traders simply follow the lead of
short sellers, then the short sell-
ers are the more informed tradersacting in the equities market, and
this suggests the options market
is not adding any completeness
to the equities market and rejects
non-redundancy.
th hodology of h s is
coosd of a gssion of oion
on ins agains sock sho
ins o chck fo coln-
aiy and a i sis gs-
sion odl agains quiy uns
o xain which y of aciviy
is o infoaiv. th auhos
us onhly sho ins aios
on U.S. socks fo 1996 o
2009 and onhly aggga
oion on ins on h sa
undlyings.
thi conclusions un conay
o uch of h xising lia-
u. Fis, hy nd ha onhly
oion on ins dos no
conain infoaion aou fuu
quiy uns and ha oions
aks gnally follow sho ad-
s. So sho slls a laivly o
infod; howv, hy also nd ha
sinc sho slls ac o innsly
o as ngaiv foanc, sho
slls a also no scially infod
W can hink of wo ways o n
h analysis of his sudy. by agg-
gaing all oion on ins and
y doing so a a onhly hoizon, h
auhos includ a lo of ncssaily
uninfod aciviy ha ay oscu
h lvan hoizon of infod ad-
ing. Fis, hy could consid wok-
ing wih daa a a wkly o daily
ifaincluding sho aios,
on ins, and ass unso
din whh h snc of
infod ading is dcal in h
sho . Scond, hy could y o
l oion on ins o focus on
anoal lvls as a onial indica-
o of infod ading, .g. gssing
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2139600http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2139600http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2139600http://papers.ssrn.com/sol3/papers.cfm?abstract_id=21396007/27/2019 Expmonthly Vol3no5 Sep 1
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www.expiringmonthly.com September 2012 6
quiy uns agains on on in-
s whn i is a vaious cnag
hsholds aov o low noal.
Oh cn sudis of oion on
ins (Khl and puhan (2012) and
Fodo, Kig and Doan (2011)ni-
h a cid in his a) hav u-
sud oh of hs ous, and hav
found conoically signican uns
fo sagis ading on h infoa-
ion fo oion on ins. W
will follow u on so of hs o
daild sudis in a fuu no. EM
r
DLisl, Jad, L, bong-Soo and mauck,
Nahan, Who are More Informed, Short
Sellers or Option Traders? (Augus 31,
2012). Availal a SSrN: h://ssn.co/
asac=2139600
Fodo, Andy, Kig, Kvin and Doan,
Jas S., Do Option Open-Interest
Changes Foreshadow Future Equity
Returns? (July 12, 2011). Financial maks
and pofolio managn, Vol. 25, No.
3, . 265-280, 2011. Availal a SSrN:
h://ssn.co/asac=1918778
Khl, Ksin and puhan, tajana-Xnia,
The Information Content of Option Demand
(Augus 31, 2012). Swiss Financ Insiu
rsach pa. Availal a SSrN: h://
ssn.co/asac=2005763
Short Sellers and Option Traders as Market Predictors (continued)
http://ssrn.com/abstract=2139600http://ssrn.com/abstract=2139600http://ssrn.com/abstract=1918778http://ssrn.com/abstract=2005763http://ssrn.com/abstract=2005763http://www.condoroptions.com/http://ssrn.com/abstract=2005763http://ssrn.com/abstract=2005763http://ssrn.com/abstract=1918778http://ssrn.com/abstract=2139600http://ssrn.com/abstract=21396007/27/2019 Expmonthly Vol3no5 Sep 1
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www.expiringmonthly.com September 2012 7
Making Time
StopMark Sebastian
itisinterestingha any insiuional invsos hav a d undsanding how highilid volailiy in an oion can ak h ony in an oion ha has n sold, u fw uly
undsand how o ak ony ads iu fo h long sid. today, w a going o walk
hough a classic xal of how a saddl acually aks ony fo h long sid.
Whn askd how o ak ony ading a saddl in low volailiy, os ads will say
ih fo gaa scaling o fo ilid volailiy going u. In uh h answ is ih o
oh. Whil in his xal w a no going o walk hough gaa scaling, i would hav
wokd vy wll in his xal. W a going o walk hough IV going u, u in h adiional
way os ad look a IV going u. th oions w a going o look a a, unil h vy nd,
no going o incas in valu. In fac, unil hy nd hy will no ak any ony a all.
Ls walk hough:
On Augus 16h a ad noics ha GOOG 30 day IV is a an all i low. On could also us
VXGOG, u in his cas w a looking a LivVolpo analyics.
Figure 1
LivVolpro
th ad should no ha vy i h IV gs his low i quickly incass. th ad
innds o ad ha an, looking fo an vsion.
Now fo oving on a quick no on an vsion. man vsion can icky, as IV
can always go low o high in h idia, if i is xcud a xs, i is a ha h
ad will g caugh adly y volailiy. tha said, i is ioan o awa ha an v-
sion is no a 1 o 2 day conc, i is no vn a 1 o 2 ya conc, i is a lifi of h sock
conc. th VIX gos hough 45 ya iods of ing wll aov and wll low h an.
tads us awa of cyclicaliy in IV o s xcaions of an IV ound.
Looking a GOOG h a sval ways o lay IV, if on has a dicional oinion, on can
uy o sll a u of call. In his cas w a going o look a a saddl. W xcu a saddl on
Aug 16h.
t r a d e e x a m p l e
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Figure 2
OtionVu7
W wan ads o noic h Gks ing u ou y his icing odl, noic ha h high
ha ha is ing oducd y h icing odl. r, a odl is only as good as h inus,
volailiy ing on of h. If w hav a slowly ising IV, ha ha nu is going o vy
wong. Which is xacly wha hans?
Figure 3
OtionVu7
this is akn a full wk la, whn accoding o ou odl a ons w should hav n down
clos o h housand dollas. Y, h osiion is ssnially a. Wha hand?
Making Time Stop (continued)
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Ilid volailiy acually incasd. Whil w an u ony on h osiion, w a no down
ony on h GOOG saddl. th slow incas in IV sos ha fo acually occuing. Whn
woking wih insiuions, I usually dsci his occuncs f gaa. Whil no acually f,
h ad dos hav o uy h saddl, caus h ad dosn los ha ov h holding
iod, h ad has gon a f look a sock ovn. Whil in his cas h GOOG osiion
dos no ak ony, wha if GOOG had ad a 30 o 40 dolla ov ov h wk. th ad
would hav had xosu o h ov, wihou having o ay h ha fo is.
In his cas, whil h ad dos no ak ony, h ad is also no choking on iu.
this allows h ad o say in h ad fo a long iod of i han h o sh iniially likly
lannd fo. If a ad has o isk anagd h ad should al o si in a long iu
ad fo only so long fo h o sh is focd o sll ou.
Figure 4
OtionVu7
Ou ailiy o wai nds u aying o. by ing al o in h ad hough Lao Day wihou
colly lding o dah fo ha h ad is al o lay h f gaa. by h wk
af Lao Day GOOG has gun o ov quickly again, and y xiaion h undlying has co-
lly akn o. A ad would hav ndd u douling h saddl caus of h ads ailiy
o say in h ad. EM
Making Time Stop (continued)
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The FOMC
3 + 3 TradeBill Luby
eighttimesvy ya, hFdal On mak Coi
(FOmC) s o discuss h onay
olicy of h Unid Sas and aks
vaious olicy changs, as aoia,
in od o fulll h Fds dual an-
da o ncouag oh ic sailiy
and axiu loyn.
In foal s, h dual an-
da das fo a 1977 andn o
h Fdal rsv Ac of 1913 and
scis:
The Board of Governors of the
Federal Reserve System and the
Federal Open Market Committee
shall maintain long run growth of
the monetary and credit aggre-
gates commensurate with the
economys long run potential
to increase production, so as to
promote eectively the goals of
maximum employment, stable
prices and moderate long-term
interest rates.
In acical s, his has hisoi-
cally an ha h Fd has focusd
is aciviis on anaging h fdal
funds a, which is an uncollaal-
izd ovnigh inank lnding a.
Sily sad, low as ak o
ony availal o fund nw conoic
aciviy whil high as sic h
aoun of ony availal fo nanc-
ing uoss.
Givn h onially lag co-
noic iac of Fd olicy changs
o h fd funds a, h igh annual
FOmC ings a highly aniciad
y h nancial a-
ks. Dnding uon
ak condiions and
invso xcaions,
h oucos of hs ings hav
h onial o daaically ov h
aks.
th highnd aniciaion asso-
ciad wih FOmC ings yically
ushs ilid volailiy high in
advanc of h ing and o
ofn han no, is sonsil fo a
susanial do in ilid volailiy
idialy following h FOmC olicy
san. this chang in ilid
volailiy xcaions is asonaly
dical and ss u so ading
oouniis, including on sagy
I call h FOmC 3 + 3 tad, which I
oulin low in gnal s and dis-
cuss in h conx of h os cn
FOmC ing in th S 2012
FOmC 3 + 3 tad.
Strategy and Rationale
to u h FOmC 3 + 3 ad in hisoi-
cal conx, I xaind h las 182
FOmC ings and lookd a h
ovns in h CbOe Volailiy
Indx (VIX) in h n days lading u
and following h olicy announc-
n, wih daa going ack o 1990.
In Figu 1 low, I hav noal-
izd h daa and s h avag
clos on h da of h FOmC olicy
san o 100. No ha h daa
show a an of a ising VIX lading
u o h FOmC announcn, fol-
Figure 1 Normalized VIX, +/- Ten Days from FOMC Meetings, 1990Present
7/27/2019 Expmonthly Vol3no5 Sep 1
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lowd y a sha dclin in h VIX
af h announcn and a sus-
qun incas in h VIX ha gins
sval days af h announcn.
In oh wods, invsos hav a n-
dncy o xc a ig suis and
disaoind, hn uon cion,
gin o consid h agniud of
h uncainy and isks in h iod
lading u o h nx FOmC ing,
yically aou six wks hnc.
In h gahic, I hav usd a gn
aow and a gn ox o highligh h
an 2.5% incas in h VIX fo
fou days io o h FOmC ing o
on day io o h ing. Siilaly,
I hav usd a d aow and d ox
o highligh h an 3.0% dcas
in h VIX fo on day io o h
ing o wo days af h -
ing. each aow and ox coo sans
h days; h 3 + 3 lal fs o
h days of incasing volailiy -
ing and h days of dcasing
volailiy os-ing.
Of cous i is always dangous
o dal wih avags. Whn I hink
of avags I ofn chuckl a h
hough of h aocyhal saisician
who downd cossing a sa ha
was, on avag, six inchs d. In
h cas of h VIX daa, h cn-
ag of winning ads (i.., a ising
VIX) fo day -4 o day -1 is only 52%.
Fo day -1 o day +2, h hisoical
daa a o favoal, wih 69%
winning ads. On can coin h
wo ads and g a 60% win a,
wih a an coind un of 5.4%.
Wih igh ings ya, his y
of xcd un ovids a fil
nvionn fo caing succssful
oions ading sagis.
Structuring the FOMC
3 + 3 Trade
Invsos ay choos h hisoical
FOmC-lad VIX daa as a ju-
ing o oin fo addiional sach o
ay conclud ha h daa snd
aov a sucin o iln an
oions ading sagy o ak advan-
ag of ha an.
I ad h FOmC ings on a
gula asis and gnally f o
k hings sil, oning u a long
SpX o SpY saddl osiion a h
clos fou days io o h FOmC ol-
icy san and closing ha osiion
on day io o h announcn.
A ha oin, I yically ansiion o a
sho SpX o SpY saddl and hold ha
osiion unil h clos wo days fol-
lowing h announcn.
On of challngs of his y
of dnd duaion ad is whh
invsos should auoaically xi h
ad in h days af i is ond
o whh on can oiiz xis o
lii losss o nhanc os. I ouch
on so isk anagn aoachs
o his ad low in th S
2012 FOmC 3 + 3 tad.
Of cous h is a onial hid
lg o his ad, no discussd aov,
which calls fo a six day holding iod
fo day +3 o day +9 and, on av-
ag, has sn a hisoical un of
aoxialy 3.0%.
Conclusion
th FOmC 3 + 3 tad sagy ou-
lind aov is a scic insanc of
a oad y of oouniy ha is
ofn snd aound a schduld
vn fo which invsos anicia a
onial incas in volailiy. Oh
xals includ vyhing fo h
nonfa ayoll and GDp os o
ky uo zon ings, lcions, c
th fac ha hs a schduld in
advanc and civ a ga dal of
anion in h dia lading u o
h vn ak i asi fo invsos
o co ovly oional aou
h onial oucos and aach
o signicanc o h ailiy of h
ouco o ov h aks han is
The FOMC 3 + 3 Trade (continued)
th gnal incils ofising
ilid volailiy xcaionslading u o an vn and dcliningilid volailiy following havn a ioan o k in ind fo
all oions ads.
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waand y h hisoical daa. On
can asily xnd h sa lin of
hinking o cooa anings os
fo so of h os oula socks,
such as Al, Facook o whav
sock hans o cau h iagi-
naion of h ail invso duing
h qua.
In a lad vin, h is noh-
ing agic aou h h day hold-
ing iod ih. Duing h las v
yas, fo insanc, a v ya holding
iod fo h sho saddl oion of
h FOmC 3 + 3 tad has signicanly
oufod all oh holding iods.
Invsos should also k in ind
ha vy FOmC ing is di-
n (xcaions and suis on-
ial a always in ux) and h FOmC
shi changs vy ya. by
h sa okn, ach Fd Chaian
loys a din aoach o ans-
ancy and wih sc o sing
xcaions in advanc aou olicy
changs. In so cass h signaling
is ov and in oh cass i is o
sul.
Whh o no on looks a ading
oions aound FOmC ings, invs-
os should k in ind ha ach
volailiy vn has is own uniqu s
of oouniis. So can o
asily highlighd wih h us of his-
oical daa, u h gnal incils
of ising ilid volailiy xcaions
lading u o an vn and dclining
ilid volailiy following ha vn
a ioan o k in ind fo all
oions ads. EM
f r
th S 2012 FOmC 3 + 3 tad
Expiring Monthly, S 2012
The FOMC 3 + 3 Trade (continued)
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The September 2012
FOMC 3 + 3Bill Luby
theresponsetoh cnad suvy indicad a song in-
s in wha I call y oof-of-conc
ads, which a ssnially ad
idas ha a o xloaoy han
fully fod and sk addiional info-
aion fo hy can dloyd
wih a asonal xcaion ha
hy igh oal ov an
xndd iod. Wih ha in ind, i
is y innion going fowad o y o
link o oof-of-conc ads o
vaious sach and analysis aicls
ha I ulish in h sa issu.
today I ak y s s in ha
dicion y using his sac o
ansla h gnal hinking -
snd in th FOmC 3 + 3 tad o h
S 13h FOmC olicy sa-
n and susqun ss conf-
nc y bn bnank.
Background and Rationale
th aional fo his ad is sil.
I ho o us a long saddl o cai-
aliz on incasing ilid volail-
iy xcaions fo fou days io
o h FOmC announcn o on
day io o h announcn. I hn
wish o un aound and us a sho
saddl o n fo an anici-
ad dclin in ilid volail-
iy fo h day fo h FOmC
announcn o wo days fol-
lowing h announcn. p
daa snd in th FOmC
3 + 3 tad aov, I ho o
al o cau h an 2.5%
gain (52% win a) wih h is-
ing volailiy lg ov h cous
of h days and hn add anoh
3.0% gain (69% win a) wih h fall-
ing volailiy lg.
Setup and Entry
this ad can xcud using
wkly oions, u wih h S
xiaion jus on wk af h
FOmC announcn, I lcd o us
SpX oions fo h sandad onh
S xiaion cycl, which
ndd on S 22nd.
th hisoical daa suggs an oi-
u ny fou days io o h FOmC
announcn, so wih h FOmC
announcn du on S
13h, I ond h long saddl a h
clos on Fiday, S 7h. th
SpX closd a 1437.92 on ha day and
wih h indx alos a h idoin
of wo siks, I lcd o go wih h
1435, givn ha h was a ga
dal of volu a ha sik going
ino h clos. Long on u and on
call cos a oal of 14.30. (S Figu 1
low fo full daa chonology.)
Position Management
th aas of h his oof-
of-conc ad calld fo assiv
onioing and an xi h days af
h on, followd y an idia
ny ino a SpX Atm sho saddl.
Of cous, a of h aional fo a
oof-of-conc ad is o isk a li-
id aoun of caial wih h xc-
aion ha h a ofn unsn isks
ha aa only af h osiion has
n iniiad.
Wha hand o h long
saddl was ha h VIX did indd
incas, u h SpX aind in a
vy igh ang, so h uick in vola-
iliy was no nough o os h i
dcay and h long saddl los 1.30
ov h cous of h h days.
Whn i ca i o n h
sho saddl osiion, h SpX was
vn clos o 1435, so I k h
sa S 1435 sik, slling
h saddl fo 13.00 a h clos.
As i uns ou, socks sikd high
on h Qe3 announcn and h
VIX fll shaly. th nd of ising
sock ics and a falling VIX sisd
houghou h h day holding
iod fo h sho saddl and in a
nushll, h sho osiion go killd. I
vnually sld wih a loss of 12.70
on h scond lg and a cuulaiv
t r a d e e x a m p l e
Figure 1 Table of Values for September 2012 FOMC 3 + 3 Trade
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loss of 14.00 fo oh lgs. As Figu 1
aov shows, h VIX dclind shaly,
as had n aniciad, u h lag
ov in h SpX ngad any gains
ha igh hav n alizd du o a
dclining VIX.
Epilogue and Takeaways
As i uns ou, h 11.1% dclin in
h VIX on h FOmC announcn
day was h sixh lags dclin
ov h cous of 182 osvaions.
Fo hos hinking jus aou h VIX
a of h quaion, on would hav
xcd a oal ouco, u h
o colx laionshi wn
h VIX and h SpX aound ajo vol-
ailiy vns ad h foulaic ad
unoal.
th ouco of his aicula
ad aiss any o qusion han
i answs. Fo sas, how valid
is i o us VIX hisoical daa o s
xcaions fo SpX saddl ading
sagy oucos? Fuh, a VIX
hisoical daa suid o dvl-
oing sagis fo VIX fuus ads
o ads involving VIX xchang-
add oducs han SpX ads?
In s of isk anagn, wha
so of sof oiizaion should
xlod? Scically, wha so of
ways a h o lii losss y xi-
ing aly insad of holding losing osi-
ions fo h full days? Addiionally,
how igh succss o failu in h
long volailiy lg ovid infoaion
aou h dsiailiy of iniiaing h
sho lg o assing on ha ad? Las
u no las, how can on incooa
infoaion aou xcd FOmC ou-
cos ino sus wih high ah-
aical xcaions?
th qusions aov should ly
hough sas. tads ha a ig
loss a nv fun, u unlik ads
ha ak vn o sul in sall of-
is and losss, hs ys of ads
should ovid a ga dal of fodd
fo addiional sach and analysis. In
h conx of a oof-of-conc ad
I hav o consid his ad a succss.
Whil i los a lag aoun of ony
in cnag s, h oof-of-con-
c conx iniizd h aoun
ading caial xosd o losss and
axiizd infoaion valu in s
of qusions aisd and onial ls-
sons land. EM
f r
th FOmC 3 + 3 tadExpiring Monthly,
S 2012
The September 2012 FOMC 3 + 3 (continued)
How valid isi o us VIX hisoical daao s xcaions fo SpX saddlading sagy oucos?
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When Does a Hard To Borrow
Situation Present a Volatility Buying
Opportunity?Andrew Giovinazzi
inalotofways,h hado oow is on of h las und-
sood chanical acions in h a-
k lac. W snd a fai aoun of
i a Oion pi disscing had o
oow siuaions o s if h a
any oouniis in h focd acions
ha could han o h shosll-
s. I wo a fw onhs ack on h
chanics of h had o oow fo
Expiring Monthly(mach 2012). this
i I wan o dig o ino a coi-
naion of facos y uing ogh
chanics, ak volailiy and h
anings cycl siulanously o s if
ha will oduc a adal vn.
th sock ha cos o ind is
Facook (Fb). As I wi his, h
na is aking a coack fo
h high ns o aound $23. Fo
his aicl, I will focus on h acion
fo, duing and af h inaugual
Fb anings o. Fis hing I do is
g acquaind wih h volailiy his-
oy (ali sho) of Fb. th on nic
hing aou h na is ha i ca
ou of h IpO ho. Los of aly volu
hld salishd so lial vola-
iliy nus.
Looking a h d lin low, Fb
oducd a low 30-day ilid volail-
iy of aound 42% jus af h an-
ings cycl. r, whn using
a volailiy of consan duaion, h
nu is ying o k a viw of
volailiy 30 days ahad. th oions
volailiis jus fo h 30-day and
af h 30-day ak can din.
In gnal, os oion classs a
in conango, so h fon onh and
wklys ad cha laiv o h
ack onhs. Fb is no din.
th volailiy cha igh af Fb
anings shows a ig do in 30-day
ilid volailiy (Figu 1). tha in
and of islf is no al suis, sinc
ilid volailiy nds o collas
af anings. Howv, Fb was going
hough sohing ls a h i.
On of h aly lockus fo Fb was
coing, and h sock was suing
fo a os IpO ldown. th shos
sad iling in. How can you ll? th
slid low shows h aks on h
clos on July 19h, 2012. th Fb S
29 coinaion closd a a .20 cdi.
Figure 1
LivVolpro
Figure 2
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Fo h sil synhic coo cal-
culaion (Figu 2):
tak h call id (2.45), suac
h u o (2.65), and add h
suling di o cdi (-.20) o h
sik (29). tha lavs a 28.75 long
coo ic, which is .25 low h
ic fo h coon.
th ida is o us h id/ask h
sa way a liquidiy ovid would,
so us h ics hy would ad on.
Going ino anings, Fb was
alady had o oow. In gnal, a
had o oow will oos h ilid
volailiy of h class, sinc h ossi-
iliy of coving adds an xa lay of
uncainy (us g ici oo).
righ af h anings, no how
h ilid volailiy dod clos o
h lows of h ya, vn hough h
aks w showing coninud s-
su fo sho slling (Figu 1). th
Fb S 23 coo was ading fo a .45
cdi ( duc h uchas
ic y h cdi), which us h
synhic sock aound $23.55. evn
wih h sock doing y a lag
aoun, h volailiy ca in vy
had and h oow a sayd aou
wh i was fo anings.
by Augus 2nd (Figu 4), hings
sad o chang a i. th ilid
volailiy sad o ak u vy
had. Ilid volailiis hi h high
60s y aly Augus, ousid of h
anings cycl. No ha h oow
a dod aound a .01 fo h
Figu 3. Which is no ha signican
in ony s, u i sad a a-
n of coninud dclin in h a
h shos w chagd o k on
h osiion.
th an ha was os is-
siv duing his i was h 30 day
volailiy, caus i aind und
h 10 day alizd volailiy du-
ing h whol squz. Noally, h
ilid volailiy shoos way aov h
alizd volailiy, caus h oow
as div u h u valus. Fb nv
go ha ad, u his is h s hin
of h ading ida I had fo his i
iod.
by h nd of Augus look a how
h oow icu sad o chang
(Figu 5). As Fb add na h
lows sinc h IpO ond, h a h
ony coo go down o $.05. th
When Does a Hard To Borrow Situation Present a Volatility Buying Opportunity? (continued)
Figure 4
Figure 3
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