Friends,
We’ve been talking about option funding stuff recently in the paid Thursday issues. Recently, I had a trader ask for some help making sense of an option expiry in a single name that trades by appointment but where some chunky size goes through.
It’s a name with lots of hair on it with respect to events and distribution.
[The current mark of a big option trade that went through a few weeks ago is still rattling in my head. I’m looking forward to where the roulette wheel is gonna land on this thing!]
I’m obviously not going to give away the name, but I can recycle some of what I explained to the client using a fake stock.
It’s rooted in funding and why understanding it is frankly critical for making sense of names that have wide markets. You’ll see :
the first thing that caught my eye when I looked at the option chain
put-call parity’s relationship to a vol curve
how to avoid making really dumb trades (or if you’re a broker how to look like a hero to your client)
We can do this with screenshots and commentary to make this tour brisk but rich.
We begin with an invented option chain for our fake stock. I chose these values to be in keeping with the quality of the real stock’s markets without giving anything away.
For any junior traders or trainees this is good diagnostic practice — to eyeball an option chain and take notice of what’s interesting.
Relevant background info:
✅European-style expiry (it’s complicated enough without early exercise)
✅No dividends
✅RFR: 4%
✅DTE: 43
✅Stock price: $108.50
What do you notice:
Don’t start all nerd mastermind. Instead observe. These markets are wide!
Well, before you start thinking “The 125/130/135 call fly is negative, yay free money”, you should recognize that the market widths are obscuring this vol surface. I mean, if you think you can trade at mid-market, there’s free money all over this board. All kinds of bells should be going off but just as a surgeon has a checklist, there is definitely a priority thing to look for.
Think a bit before I offer a hint.
Ok, here are 2 columns that should help: