A look back to June 23

At this time, lots of trades look attractive. However, I remind myself, that I am out of synch with the markets right now, and that many times the best thing to do is nothing. There will be better days, better opportunities, than just doing something out of boredom. To put it in plain terms, I am still a chicken.

Back in June, I wrote about big premiums skewed to one side for GLD and SPY. The small time punters were leaning heavily towards bets on the SPY crashing and GLD going through the roof. I admit that to my surprise, for a short time after that blog entry, SPY did tumble down and GLD did spiral up. However, like so many gamblers that get ahead by a small amount then lose that gain, plus everything they have, those option buyers paying the big premiums that are still holding are now in a total loss situation.

Going back to June, those buying the options highlighted as poor value, the SPY Sep 110 puts and GLD Sep 103 calls, have lost virtually everything. There was a brief time when both those options were up big, but as expiration draws near, all the money is gone.

>>my entry from Monday, June 23, 2008
Sentiment and option pricing

On Friday I mentioned that puts are priced higher than equivalent calls on SPY. For example, today the SPY closed at 131.45.
Sep 120 put is bid 2.18, the Sep 110 bid 0.85
Sep 143 call is bid 1.21, the Sep 153 call 0.12

So the put 11 points out of the money costs almost twice as much as the call. The put twenty-one points out is six times as much as the call that far out. Six times! What does that mean? It means that option buyers and sellers are pricing in the probability of a big drop in stock by September, with minimal chance of a big rise.

Options on GLD show the opposite expectation. With GLD closing at 86.86
Sep 76 put is bid 0.65, the Sep 70 put is bid 0.20
Sep 97 call is bid 1.60, the Sep 103 call is bid 0.90
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