Option Block 408: Juicy Apple Puts

Trading Block: Earnings today after the bell:  AIG, Groupon, King Digital Media (Candy Crush). Earnings before the bell today: Avon, McGraw Hill, Kellogg Co. Insuring against Apple blow-up just got a lot more expensive. Tesla shares fall after earnings, despite musk apple comparison. Oil prices rally from sharp losses.

Odd Block: Call buyers in Domtar Corp (UFS), call buyers on fire in FireEye Inc (FEYE), and put spreads trade in Morgan Stanley (MS)

Xpress Block: Alex discusses the OX Help Desk.

Mail Block: Listener questions and comments

• Question from Nick Snow - Hello Mark and other guests. I was wondering if you have ever put together a quick review of other people or newsletters in the industry. For years I have come to options insider because it doesn't spam me, it does not ask for my credit card, and above all I find the information on all shows greatly beneficial. There seem to be so many hacks out there ready to take others money, I think it is time you rate a bunch of other professionals with a simple "Put or Call" rating meaning that company or person is worthless to listen to or actually useful. So of course the options insider would get a call rating from me since it is about the only premium I would be willing to purchase. Thanks again look forward to listening into the future.


• Question from Tom A Bomb - Distinguished Gentlemen, This is a follow-on to a question I posted a few weeks ago regarding a back-of-the-envelope method to price vertical spreads. Last time, I got a vote of at least 50% crap, and I am really shooting to get the crap content down to around 25%. The panel identified that skew and vol estimates were the weak spots in my method. I am somewhat disappointed on the skew aspect. I do not think there is any quick way to incorporate skew into a calculation on a napkin. So, bummer there… But on to my real question: Some of the panel members speculated I might be getting my vol estimates from delta. Not true. I am not using implied either. In large part, the point of my method is to remove any short-term noise to arrive at a “stable” or “normal” estimate. To that end, I will usually match my input vol figure to realized vol of over a comparable period. For example: I want to buy a XYZ 95-100 vert call spread that is 100 days from expiration. 100-day realized vol is currently around 15%. I use that 15% vol input and calculate there is a 30% chance that XYZ will finish above $100 at expiration. Therefore, $5 (width between strikes) x 30% would put the mid-price of the spread around $1.50… Now, I totally understand that historical performance is not an indicator of future yada-yada-yada. The main goal here is to avoid buying when, historically speaking, prices are pumped; or selling when prices are depressed. So, there is my volatility angle. Admittedly, I’m still beat on the skew angle. I will get back to you on that I suppose. Gentlemen, estimates on the crap content...? (Sorry Longo I know this is a long question – tried 3 times to make is shorter! Please cover this on the Option Block again, if you can! Thanks!)

Around the Block: Earnings before the bell today: Avon, McGraw Hill, Kellogg Co.Earnings tomorrow: Time Inc.