Forex Investment

Ahead of the week’s most closely watched economic report, traders did a fair job of trimming and maybe adding in some cases, to existing positions in very orderly fashion. One place, though, which the outcome is already being decided and likely due for some hard-hitting T’RIMMing of premiums is IBD 100 heavyweight Research In Motion (). In the following two-part piece, I’d like to delve into the world of earnings plays and options pricing and illustrate the process with RIMM and a side-by-side comparison of sorts.

This evening and on the heels of strong fiscal Q2 results, shares of RIMM have been volatile by many investors’ standards. With a closing price just above 100 and the stock up roughly 4 points on the session, the report sent RIMM plunging initially by more than 7 points. However, that apparent momentary lapse of good judgment was quickly reversed into the plus column with current activity near its official 4:00 PM ET closing price. With that said, while “sell the news” artists, bargain-hunters, bulls and regular bears go at it in a tug-o-war in the after-hours session, one near-certainty at the opening bell will be RIMM’s option premiums doing one of those phantom gaps, otherwise known as the “vol crush.”

Leading into this evenings close, premiums as seems to be always the case with RIMM, have soared. For instance, over the last five trading days the implieds have increased from roughly 72% for the ATM front month to this evening’s roughly 92% IV reading. At the same time, one month out, the November ATM premium has gone from 59% to about 70%. While both months went up handily, which would have done better for traders? I’m glad you asked, as it’s the type of opportunity which many seasoned options strategists look for when making earnings-related plays.

For those unfamiliar with the Greeks or the components which make up the pricing of an option, doing a simple math comparison, like the numbers shown above for RIMM, could very well result in the wrong answer. Somewhat unfortunate, but not really, option traders can’t just blindly perform a side by side comparison of which set of implieds went up the most or take the larger implied volatility reading and come up with the correct answer. Of course, sometimes that will lead to the correct choice. Quite often though, the trader would be both wrong and uninformed as to why they lost or made money in the options market.

The reason for this puzzle is that it’s necessary, at a minimum, to evaluate the Vega (volatility risk) and Theta (time decay) factors in order to find a much more informed answer. The Greek Delta is also very important. However, its impact on the price of the options over the said period will be related to how the stock moves during that time. In the case of RIMM, we have a very good illustration of prices staying mostly unchanged (closing basis), so it offers the opportunity for us to focus almost exclusively on the two fore-mentioned Greek factors. With that said, tomorrow evening I’d like to move into the actual nitty gritty specifics by illustrating the “How’d that happen” reality with a five-day Straddle comparison. The report will use the fore-mentioned optionable months and the ATM Straddles to find our answer and maybe; a fresh way for some traders to make an earnings play down the road

Visit the «www.investors.com» for an extensive list of option-related terms.

The observations provided are not investment advice or a recommendation, the suitability of which is considered the responsibility of the trader.

Copyright 2007 through Optionetics, Inc. All rights reserved. «www.optionetics.com?source=ibdweb» is a Trademark or a registered Trademark of Optionetics, Inc., in the United States and/or in other countries.

Ahead of the week’s most closely watched economic report, traders did a fair job of trimming and maybe adding in some cases, to existing positions in very orderly fashion. One place, though, which the outcome is already being decided and likely due for some hard-hitting T’RIMMing of premiums is IBD 100 heavyweight Research In Motion (). In the following two-part piece, I’d like to delve into the world of earnings plays and options pricing and illustrate the process with RIMM and a side-by-side comparison of sorts.

This evening and on the heels of strong fiscal Q2 results, shares of RIMM have been volatile by many investors’ standards. With a closing price just above 100 and the stock up roughly 4 points on the session, the report sent RIMM plunging initially by more than 7 points. However, that apparent momentary lapse of good judgment was quickly reversed into the plus column with current activity near its official 4:00 PM ET closing price. With that said, while “sell the news” artists, bargain-hunters, bulls and regular bears go at it in a tug-o-war in the after-hours session, one near-certainty at the opening bell will be RIMM’s option premiums doing one of those phantom gaps, otherwise known as the “vol crush.”

Leading into this evenings close, premiums as seems to be always the case with RIMM, have soared. For instance, over the last five trading days the implieds have increased from roughly 72% for the ATM front month to this evening’s roughly 92% IV reading. At the same time, one month out, the November ATM premium has gone from 59% to about 70%. While both months went up handily, which would have done better for traders? I’m glad you asked, as it’s the type of opportunity which many seasoned options strategists look for when making earnings-related plays.

For those unfamiliar with the Greeks or the components which make up the pricing of an option, doing a simple math comparison, like the numbers shown above for RIMM, could very well result in the wrong answer. Somewhat unfortunate, but not really, option traders can’t just blindly perform a side by side comparison of which set of implieds went up the most or take the larger implied volatility reading and come up with the correct answer. Of course, sometimes that will lead to the correct choice. Quite often though, the trader would be both wrong and uninformed as to why they lost or made money in the options market.

The reason for this puzzle is that it’s necessary, at a minimum, to evaluate the Vega (volatility risk) and Theta (time decay) factors in order to find a much more informed answer. The Greek Delta is also very important. However, its impact on the price of the options over the said period will be related to how the stock moves during that time. In the case of RIMM, we have a very good illustration of prices staying mostly unchanged (closing basis), so it offers the opportunity for us to focus almost exclusively on the two fore-mentioned Greek factors. With that said, tomorrow evening I’d like to move into the actual nitty gritty specifics by illustrating the “How’d that happen” reality with a five-day Straddle comparison. The report will use the fore-mentioned optionable months and the ATM Straddles to find our answer and maybe; a fresh way for some traders to make an earnings play down the road

Visit the «www.investors.com» for an extensive list of option-related terms.

The observations provided are not investment advice or a recommendation, the suitability of which is considered the responsibility of the trader.

Copyright 2007 through Optionetics, Inc. All rights reserved. «www.optionetics.com?source=ibdweb» is a Trademark or a registered Trademark of Optionetics, Inc., in the United States and/or in other countries.

Ahead of the week’s most closely watched economic report, traders did a fair job of trimming and maybe adding in some cases, to existing positions in very orderly fashion. One place, though, which the outcome is already being decided and likely due for some hard-hitting T’RIMMing of premiums is IBD 100 heavyweight Research In Motion (). In the following two-part piece, I’d like to delve into the world of earnings plays and options pricing and illustrate the process with RIMM and a side-by-side comparison of sorts.

This evening and on the heels of strong fiscal Q2 results, shares of RIMM have been volatile by many investors’ standards. With a closing price just above 100 and the stock up roughly 4 points on the session, the report sent RIMM plunging initially by more than 7 points. However, that apparent momentary lapse of good judgment was quickly reversed into the plus column with current activity near its official 4:00 PM ET closing price. With that said, while “sell the news” artists, bargain-hunters, bulls and regular bears go at it in a tug-o-war in the after-hours session, one near-certainty at the opening bell will be RIMM’s option premiums doing one of those phantom gaps, otherwise known as the “vol crush.”

Leading into this evenings close, premiums as seems to be always the case with RIMM, have soared. For instance, over the last five trading days the implieds have increased from roughly 72% for the ATM front month to this evening’s roughly 92% IV reading. At the same time, one month out, the November ATM premium has gone from 59% to about 70%. While both months went up handily, which would have done better for traders? I’m glad you asked, as it’s the type of opportunity which many seasoned options strategists look for when making earnings-related plays.

For those unfamiliar with the Greeks or the components which make up the pricing of an option, doing a simple math comparison, like the numbers shown above for RIMM, could very well result in the wrong answer. Somewhat unfortunate, but not really, option traders can’t just blindly perform a side by side comparison of which set of implieds went up the most or take the larger implied volatility reading and come up with the correct answer. Of course, sometimes that will lead to the correct choice. Quite often though, the trader would be both wrong and uninformed as to why they lost or made money in the options market.

The reason for this puzzle is that it’s necessary, at a minimum, to evaluate the Vega (volatility risk) and Theta (time decay) factors in order to find a much more informed answer. The Greek Delta is also very important. However, its impact on the price of the options over the said period will be related to how the stock moves during that time. In the case of RIMM, we have a very good illustration of prices staying mostly unchanged (closing basis), so it offers the opportunity for us to focus almost exclusively on the two fore-mentioned Greek factors. With that said, tomorrow evening I’d like to move into the actual nitty gritty specifics by illustrating the “How’d that happen” reality with a five-day Straddle comparison. The report will use the fore-mentioned optionable months and the ATM Straddles to find our answer and maybe; a fresh way for some traders to make an earnings play down the road

Visit the «www.investors.com» for an extensive list of option-related terms.

The observations provided are not investment advice or a recommendation, the suitability of which is considered the responsibility of the trader.

Copyright 2007 through Optionetics, Inc. All rights reserved. «www.optionetics.com?source=ibdweb» is a Trademark or a registered Trademark of Optionetics, Inc., in the United States and/or in other countries.