Bloomberg Option Blooper

There are no end of erroneous statements regarding options that appear in financial publications. Today I'm going to pick on an article in Bloomberg, because I just happened to do something I don't often do... and that is read Bloomberg. (Nothing worse about Bloomberg than other Wall Street Cheerleaders, I don't often read much of any of them).

This is what they had to say:

Oil Options Hit Highs as Verleger Predicts 44% Plunge

Sept. 21 (Bloomberg) -- Oil traders are paying more than ever in the options market to protect against a plunge in crude prices.

Oil options are something I follow pretty closely, so fearing a volatility spike that I had missed, I immediately pulled up $OVX (The VIX of oil options)

Hmmmmm IV near recent lows, no spike there. What could our B'berg author be on about here. Reading further:

The gap between prices of options betting on a decline and those that would profit from a rise in oil widened to a record 10 percentage points, according to five years of data compiled by Banc of America Securities-Merrill Lynch...

...Options granting the right to sell, or put, oil in December below current prices have a so-called implied volatility of 54.3 percent, compared with 43.3 percent for the equivalent options to buy, or call, data from the New York Mercantile Exchange show.

What's this? The arbitrage opportunity of the century? As I pulled up the option chain for December crude, I was multitasking and transferring every cent of spare cash in my trading account for mountains of reversal margin. Alas, I was disappointed as both ATM calls and puts were priced equally in terms of volatility.

What the f*** were they on about?

The subtle clue is what I have retrospectively bolded in the above quote. The author was comparing the IV of WOTM puts to WOTM calls. This is nothing more than a downside price skew. Skew is common in all sorts of markets; in fact it would be a little unusual for a market not to have some degree of skew to one side or another.

It's true that event sensitive commodities usually have skew to the upside and therefore skew to the downside in oil is noteworthy. The hypothesis that oil probably will experience some downside pressure is a fair one. But I wish they would call a spade a spade rather than dishing out erroneous bullshit on on options like this article has. Options are confusing enough for the neophyte, without inaccuracies from supposedly authoritative sources.

Give yourself an uppercut Bloomberg.

What Are Gold & Oil Telling Us...

...if anything?

Well yeah, it's partly to do with the dollar doomage, but I think there is more to it than that. Both gold and oil are threatening, or threatening to threaten multi year highs. In the case of oil, all time highs.

First gold: There is the gold is money argument, so it's natural that gold will rise as the dollar tanks. I don't go along with that 100% but what I think matters nought. If enough folks with enough capital think so, it is so. Perception is reality. Add to that the speculative froth once the public gets onto the bandwagon and in the current environment we could see some real boomage here. To a certain extent, I think this could be starting to happen. The gold bugs are certainly starting to froth at the mouth on all the trading forums.

weekly continuous gold

In recent months it's been grinding sideways frustrating the crap out of all but option writers, but this move is starting to look fair dinkum.

On the the other hand, oil is threatening to take out its all time high. There are probably plenty of bullshit fundamentals to justify this, and if of an apocalyptic bent, one simply must be a crude oil bull.

weekly continuous west texas sweet crude

The $64,000,000 question is the future of the price of oil in the medium term, presuming the world economy goes into recession. It would be expected that a recession would lessen oil consumption and result in declining prices, sans any killer 'canes obliterating the Gulf of Mexico or similar.

Long term, you just have to be a bull.

I'm glad I have some rudimentary charting skills because the fundamentals are often too full of biases, bullshit, short term considerations and rigs getting blown over.

An all time high in pretty short shrift seems like a high probability in the near term.

Back to the question posed at the beginning. Is this trying to tell us something? Something other than the purely native fundamentals of these two commodities? If it is, I suppose it will be loud and clear in a relatively short space of time.

Charting Support & Resistance on Futures... Hmmmmm

Charting support and resistance on commodity futures charts can be a bit tricky. The futures price will be the cash price of the commodity plus carrying costs, so deferred contracts can be higher priced than the nearest contract as the physical commodity may have to be held in storage longer. This is referred to as contango.

However, some factors may make the deferred contracts price less than the nearer contracts. This may be lack of immediate demand for deferred delivery, new crop verses old crop supply, as a couple of quick examples.

This has ramifications when looking at charts over the longer term. When looking at a chart of a single contract where cost of carry has been priced in that cost will naturally decay as time goes by, similar to, but nowhere near the extent, of an options contract. This also affects the continuous chart. When one contract expires the next contract is simply tacked on to the continuous chart. The expiring contract's cost of carry will have decayed away to zero, while the new contract being added will have carrying costs reflecting the time till expiry.

Consider the two charts below. The first is The August 2007 contract and the second is the continuous contract.



Notice the difference between the two charts. The August contract shows the recent $70 resistance as have just been broken, yet the continuous shows resistance at a lower level. It also shows some other differences shown by the lower red line in each chart.

This is a profound difference for those used to charting share prices where such factor do not exist.

My approach is to chart short term support and resistance on the individual contract, but to chart long term support and resistance on the continuous chart. Where is the dividing line? That's a tough one; over the time frame of the above two charts is a grey area which I don't have an answer for.

In the end it depends how you trade and what your view of technical analysis. I'm more of a swing trader so the long term charts are more of an academic interest and do analysis on individual contracts, but that's just my way.

Something to be aware of for chartists.

Oil above $70... Again

Yesterday we had the news of dwindling Gasoline stocks resulting in a nice setup for a potential flag breakout in Crude. Not surprisingly, demand on Crude has pushed the price up for both a technical break of the flag, but also overhead resistance at ~$70.

Longs will be watching closely at this level to see if they can break the $70 convincingly.

Oil Hits $70 a Barrel

Oil Chart Juicing Up

News on Gasoline stock released today:

http://www.philly.com/philly/wires/ap/business/8204342.html

Oil Tops $68 on Gasoline Supply Concerns
J.W. ELPHINSTONE
The Associated Press

NEW YORK - Crude oil and gasoline prices rose Wednesday after a government report showed gasoline inventories unexpectedly shrinking last week.

Heating oil prices also increased after a surprising decline in distillate stocks.

Light, sweet crude for August delivery on the New York Mercantile Exchange gained 31 cents to $68.08 a barrel in morning trading. The contract had fallen $1.41 on Tuesday.

Brent crude futures edged up a penny to $70.18 on London's ICE Futures exchange.

Gasoline futures rose less than a half-cent to $2.2515 a barrel.

The Energy Department reported Wednesday that gasoline inventories dropped 700,000 barrels in the week ended June 22, contrary to the 1.1 million gain that had been expected by analysts polled by Dow Jones Newswires. Total gasoline stocks are well below the lower end of average for this time of year.

This news bumped up the price to the upper edge of the little flag shown on the chart.


The obvious point of interest is whether this breaks out tomorrow and has another shot at $70 on the August contract