Here we are on the Monday of expiration week. By Saturday morning, every December option either has to go to zero or get exercised. Even with all of the turmoil in the financial markets, that is one thing that still has to happen. It's like the sun coming up in the morning. So with that in mind, here is some activity from early trade today that demonstrates the expected ranges on some stocks between now and Friday's close.
Right out of the gate this morning, there was a seller of the
December 300-330 strangle over 2,200 times for around $7.20, with the stock trading at $314. (A strangle means trading the 300 put and the 330 call at the same time.) Because the customer is short the 300 put and short the 330 call, it means he believes the stock will stay between 300 and 330 between now and Friday's close.
So what can we say about this put strangle sale? Since the customer took in $7.20 to make the sale, we can say that that is 2.3% of the stock price. It also means that the break-evens on the trade are $292.80 on the downside, and $337.20 on the upside. So the investor is betting that GOOG will not drop more than 7%, or rise more than 7%, by the close on Friday.
Another way to look at this strangle is relative to some other securities to see if the expectation is for more or less volatility. Take
, for example. With JPM trading at $29, the equivalent December strangle would be the 27.7 to 30.5 strangle. Since those strikes do not exist, we will look at a further out-of-the-money strangle, the Dec. 27.5 to 31 strangle.
It is currently bid 86 cents in the puts and 52 cents in the calls, for a total of $1.38, or 4.7% of strike. Because the strikes are further out of the money on a percentage basis than the Google strangle, we can safely say that for the next week, investors expect more volatility, and a wider range out of JPM than out of Google.
Expiration week is always a busy week for option traders, and it inevitably bleeds over into stock volumes as well. This simple example of looking at two strangles on two highly liquid large-cap stocks can give you insights into what traders are predicting for the different stocks for the week ahead. Due to the continuing financial turmoil, there is more volatility expected from a bank like JPM than from a tech bellweather like GOOG.
Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Pyle writes regularly about options investing for TheStreet.com.
Jud Pyle is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."