DBA - Order Flow Reverses the Skew

Discussion in 'Options' started by livevol_ophir, Aug 2, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    DBA is trading $26.05.

    <img src="http://3.bp.blogspot.com/_hMry1m7UF10/TFcLBtRv4AI/AAAAAAAAD3A/NKFIdpknO2k/s1600/dba_summary.gif">

    The ETF has traded over 18,000 options on total daily average option volume of just 2,099. All but 1,138 contracts have been calls. The largest trade was 8,000 Oct 25/27 call spread sales, accounting for 16,000 contracts (sell 25 strike, buy 27 strike). The Stats Tab and Day's biggest trades snapshots are included (<A href="http://livevol.blogspot.com/2010/08/dba.html">in the article</a>).

    The Options Tab (<A href="http://livevol.blogspot.com/2010/08/dba.html">in the article</a>) illustrates that the OI is greater than the trade volume. Looking back over the historical Time & Sales, I believe the trades today are re-opening on the OI (i.e. Oct 25 calls are short OI and Oct 27 are long OI).

    The Skew Tab snap (<A href="http://livevol.blogspot.com/2010/08/dba.html">in the article</a>) illustrates the vols by strike by month.

    We can see the skew shape is backwards from 25 to 27; the 25 line is below the 27 line. This is from the overwhelming order flow and is very interesting as a case study. Note that the skew goes back the right way in the lowest strike.

    Finally, the Charts Tab (6 months) is below (<A href="http://livevol.blogspot.com/2010/08/dba.html">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30&#8482 - red vs HV20&#8482 - blue). The yellow shaded area at the very bottom is the IV30&#8482 vs. the HV20&#8482 vol difference.

    You can see the immense stock jump recently from ~$23. The call spread sale @ $0.90 gives it a 1.1:0.9 max loss:max gain ratio, but at this moment parity is $1.05. I don't love this trade, but if you're a player in this type of ETF, it's a reasonable payout for a limited downside bet on a ripping upswinging price. I don't like the backward vol scalp though.

    Details, trades, prices, skews, vols, charts here:
  2. dba is a nice solid commodity etf, some other powershares are nice vehicles as well. It's up because of the week dollar, however I would probably be reducing my position around 26 and wait to rebuy around 24. It's well managed and a good inflation hedge for portfolios that don't want to mess with futures.