Addressing TSO

Maintain Both TSO & KMB

By Bryan Bottarelli
Friday, September 19, 2008 11:34 AM EDT
Fri, 19 Sep 2008 15:34:00 GMT

Dear Bottarelli Research Member,

I’ve received some questions about the pricing of our TSO October 20 Calls (TSO JD), so I’d like to take a moment to address it for everyone. As you can see below, shares of TSO have moved in the direction that we wanted — as shares have bounced strongly above the 50-day moving average.

TSO

But strangely enough, the price premium on our October 20 calls has not moved up in accordance with TSO’s stock price. To be honest with you, I’m yelling at my screen over this. The TSO calls should be priced around the $2.00 level, but they’re struggling to trade over $1.00. Why is this happening?

Well, if you look at the chart of the CBOE Volatiltiy Index (VIX), you’ll see that the level of investor “fear” has substantially come down over the last two days. As a result, I suspect that CBOE floor traders have reduced the volatility levels on most of their options positions, which has let some of the air out any premium that was priced into TSO’s October options string.

VIX

If this is true, then it’ll be a temporary event. After all, TSO is still a stock that’s trending higher, especially with oil prices settling in around $98.00. Although volatility tinkering can effect prices for a day or so, the standard options pricing model will always govern option movements.

In other words, playing around with volatility levels is something that floor traders use to address momentary periods of extreme trading conditions. And the last two days have certainly met these criteria. As things settle back down, I think we’ll see the movements in the TSO calls that we all expect.

The same goes for our KMB October 65 Calls (KMB JM) as well.

KMB

So on that note, maintain each position. And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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