OSH volatility alert

[wayneL]

Hi folks,

Here is my inaugral options volatility alert

Oilsearch OSH volatilty has presented an opportunity to us.

We see that from the 30 day SV (red line in the top pane) and the 100 day SV the (red line in the bottom pane) that we could consider normal SV for this stock to be around 35% which the 30day SV is at now.

However the 10 day SV has gone quiet and has sagged down into its lowest quintile and sits at about 17% as of today. This is reflected in the price chart where we see a little triangular consolidation zone.
We could reasonable expect OSH to break out of that consolidation at some stage with increasing volatility.

Meanwhile we see that IV has also sagged into its lower quinrtile also, nearly at its lows at 33%

This means that OSH options are comparitively cheap, and we might expect IV to increase once OSH breaks from consolidation and the 10 day SV picks up again.

So what strategies should be look at.

Well I wouldn't be too keen on a directional strategy and if we sell options the short vega and delta combined could hurt us here if we get a volatile move the wrong way at least temporarily but still not pleasant.

I would be looking to be long gamma, long vega and delta neutral.

We won't get a helluva lot of gamma here because of highish absolute level of IV, so vega is what we want to trade mainly.

I'm thinking a longish dated long straddle. Vega is more sensitive the further out we go in expiry as does theta decrease. So we could allow this some time to play out, delta hedging as we go along.

We'll see what option prices we can get tommorrow.

Thoughts?

 

[Porper]

Hi folks,

Here is my inaugral options volatility alert

Oilsearch OSH volatilty has presented an opportunity to us.

We see that from the 30 day SV (red line in the top pane) and the 100 day SV the (red line in the bottom pane) that we could consider normal SV for this stock to be around 35% which the 30day SV is at now.

However the 10 day SV has gone quiet and has sagged down into its lowest quintile and sits at about 17% as of today. This is reflected in the price chart where we see a little triangular consolidation zone.
We could reasonable expect OSH to break out of that consolidation at some stage with increasing volatility.

Meanwhile we see that IV has also sagged into its lower quinrtile also, nearly at its lows at 33%

This means that OSH options are comparitively cheap, and we might expect IV to increase once OSH breaks from consolidation and the 10 day SV picks up again.

So what strategies should be look at.

Well I wouldn't be too keen on a directional strategy and if we sell options the short vega and delta combined could hurt us here if we get a volatile move the wrong way at least temporarily but still not pleasant.

I would be looking to be long gamma, long vega and delta neutral.

We won't get a helluva lot of gamma here because of highish absolute level of IV, so vega is what we want to trade mainly.

I'm thinking a longish dated long straddle. Vega is more sensitive the further out we go in expiry as does theta decrease. So we could allow this some time to play out, delta hedging as we go along.

We'll see what option prices we can get tommorrow.

Thoughts?

My thoughts Waynel are what does all that mean in English, I thought a straddle was something you put on a horse, oh sorry, no that's a saddle .

Now I know why I struggled with Guy Bowers options book, thank goodness for CFD'S.

I'll get off and let somebody answer your question seriously

 

[wayneL]

My thoughts Waynel are what does all that mean in English, I thought a straddle was something you put on a horse, oh sorry, no that's a saddle .

Now I know why I struggled with Guy Bowers options book, thank goodness for CFD'S.

I'll get off and let somebody answer your question seriously

Errrr... yes....hmmm.... I forget sometimes that it's almost a foreign language,all this options jargon

What we're doing is trying to profit from 1/increases in the price of options due to incresed volatility, irrespective of price movement and 2/ changes in price no matter which way it goes and 3/ locking in profits as we go along.

In this strategy the biggest risk is if OSH becomes moribund and does absolutely nothing.

So what we want is for OSH is to do SOMETHING...ANYTHING....SOON

 

[RichKid]

There's some stuff on straddles and strangles in this Derivatives forum, from last year, I was trying to learn about em too so had to post stuff, have a read porper, do the exercises in Bower's book.
I reckon the price of oil will tell us where OSH is heading but it's never that certain. Thanks for the great tute Wayne and the excellent graphs.

 

[sails]

Wayne, how is the OSH paper straddle going as it has moved down from the triangle - interested to follow your ideas here.

I have traded OSH from time to time with mixed results. Found these small priced shares become quite expensive with fees (made even worse by the ACH $1 per contract. Also, I have found the bid/ask spreads to be relatively wide when compared to higher priced shares, so for these reasons I now mainly only watch for the larger priced shares with liquid options.

So, I am interested to see if you can find a way to profit

Cheers,
Margaret.

 

[wayneL]

Wayne, how is the OSH paper straddle going as it has moved down from the triangle - interested to follow your ideas here.

I have traded OSH from time to time with mixed results. Found these small priced shares become quite expensive with fees (made even worse by the ACH $1 per contract. Also, I have found the bid/ask spreads to be relatively wide when compared to higher priced shares, so for these reasons I now mainly only watch for the larger priced shares with liquid options.

So, I am interested to see if you can find a way to profit

Cheers,
Margaret.

The straddle I am paper trading is way out the back so gamma is low. The reason for this is to increase vega, unfortunately this is at the expense of gamma, so we will need a lot more movement than that to develop any delta.

Front month strategies, as you point out, are more disadvantaged by the spread on these cheapies.

Whether they will end up being worth trading in this fashion, I don't know yet.

But finding things out in this market.

compare the vol charts I've been posting with what I'm used to trading\/ ...a range of IV on this one from 30% - 80% and this is one of the quiet ones, you should see some of the wild thing

 

[wayneL]

Also the bigger stocks don't range in their IV enough to give a real volatility advantage. So will persevere with these.

Maybe I'll still play with a few US options EOD, who knows.

 

[sails]

Whether they will end up being worth trading in this fashion, I don't know yet.

But finding things out in this market.

Still, will be interesting to see how you go as I have not specifically gone looking for IV extremes as candidates - rather look for potential chart set-ups (possible sideways or directional moves) and then use IV levels as a guide to the most suitable strategy - eg a directional set-up on support with IV at high extremes, would look for spreads rather than long calls or even add a reverse type calendar.

We do usually get some pre-earnings IV increases, but certainly not to the degree I have also seen in US options - especially some of their biotechs which were discussed some time ago on another forum. The other thing I have found here in Aus is that if there is a large price movement with a useful IV spike, the MM's immediately unreasonably widen the bid/ask spread - but reading recently about some US traders who got badly burned with Google where the MM's went wild with their quotes - I guess these problems can be found anywhere.

Anyway, enjoying your posts with these ideas for volatility trading and hopefully there are other opportunities hidden in our market that could be another string to the bow

 

[professor_frink]

hello all. the young professor has dipped his toe in the oily water after a 6 week break from trading oil stocks. got a few osh calls. gone in very small-I'm a little girl
How's the paper trade on this one going wayne?

 

[wayneL]

hello all. the young professor has dipped his toe in the oily water after a 6 week break from trading oil stocks. got a few osh calls. gone in very small-I'm a little girl
How's the paper trade on this one going wayne?

Good luck Prof,

Re my OSH paper trade: So far in this trade, because of the bid/ask spread, lack of increase in IV, and the skinny gamma, we have no open profits. We need a volatile move to profit and this has not materialised as yet.

Plenty of time to wait though and in a market like oil, we should get one in good time.

Interestingly the shorter dated straddles are in the same boat. But they don't have time, and Vega, on their side.

 

[professor_frink]

Funny that. You'd think with the recent move up from these levels that the shorter dated options would have moved enough for some profit. I should change"you'd think" to I'd think actually. Probably why I don't place many straddles- don't think well enough
Hope it goes well for you

 

[wayneL]

Anyone still following this strategy?

It's working as expected with vega and what gamma there is delivering the profit.

Will update with live prices during the week.