Vol Junkies’ Delight

I’ve been thinking about how to hedge out some of my exposure to junior miners and developmental pharma companies.

I can’t afford to buy a member of the FDA review board, and my ability to change margin requirements at the CME or to convince Hugo Chavez to arrange and insure a few hundred air freight shipments from London to Venezuela is similarly limited.

In other words, I’ve got no special pull, sources of information, or any of the things the really big players can use.

What I do have is the ability to see a wildly careening ball on the market pinball machine, and a spare few hundred dollars to try to take out some of the variance in my daily net worth.

A recent addition to my quiver of arrows has been TZA, a 3x inverse on the Russell 2000.  Most of those small listed precious metals companies and the developmental drug companies happen to be part of the index.  More important to me, though, is that when the “risk off” trade is the Trade of the Day, TZA goes flying upward, just about the time my portfolio of dogs and cats is getting crushed.  Lately TZA has been trading north of 15 million shares a day, so there’s plenty of liquidity for small traders.

And here’s where this wildly volatile triple inverse on the inherently volatile Russell small cap index gets interesting to the adrenaline set:

It has options.  In fact, it has options for every dollar, not every $2.50 or $5, even though the stock can move many times that much in a day (today it’s down over $8 a share).  This gives the potential for huge swings in price on the options, and for “legging into” vertical spreads.

When I first bought calls near the end of a trading day last week, the $42 September calls were trading just under $7 apiece.  By the time the first half hour of the next day had gone by, I managed to sell the September $47 calls for more than I paid the night before for the $42’s.  To vol junkies, this is paradise!  A costless $5 spread in less than an hour of trading!

But now the dark side of playing:

The bid/ask spreads on the options are positively obscene.  With less than four weeks left in them, those $42’s and $47’s had a full dollar of bid/ask spread in them this morning.  That’s eight times as wide as the spread on options were in the mid-70s.  It’s as if all the profits taken away by penny trading on stocks is being taken back in the options pits.

Having said all that, I do think that people looking to protect big paper profits in small cap stocks might look at this one, or its options, as a cheap leveraged way to get disaster insurance.

For you volatility junkies, and you know who you are, this thing is a daily roller coaster ride that lets you live dangerously without even leaving the house.



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