11/09/13 Simon Says

http://www.minyanville.com/businessmarkets/articles/trading-1987-trader-investing-tips-good/10/19/2007/id/14495?refresh=1 Simon back on the radar. (a) It's not 1987. June 2014 SPY 160 puts (June is a little over six months out, and SPY 160 is +/- 10% from Friday's close of 177) closed the week around 3.60. Not exactly 0.02%. (b) Let's back up to December 2013, where SPY 160 puts last changed hands at a quarter. The contract high was $48 in November 2011. You remember November 2011, right? The SPX had just corrected -10%, giving back most of October's phenomenal +17% gain. (c) Traders are pricing in very low odds of a -10% drop in the next few weeks, and low odds of a -10% drop in the next 7 months. In my opinion, the odds of a -10% correction are far higher than implied by options contracts. Is it possible to game the odds? (d) There are complicated options strategies (spreads or straddles) that limit both risk and upside potential, but let's focus on simple calls and puts. (d) Sell out-of-the-money calls. We'd be sailing with the wind, since the majority of options expire worthless! Consider selling calls into any parabolic spikes. (e) Buy out-of-the-money puts. Sailing against the wind (unlike betting against the crowd) isn't my style, so we'd have to see 'Simon pricing' first. We're a long way from 1987. But if 1987 is located in Manhattan, we may be closing in on White Plains.