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I posted an article on this reverse skew on 9-7-2010.
Brocade (BRCD) - Stock Up, Vol Pops & Skew Goes Backwards on Takeover Rumors
Today Cathy Clay of the Livevol Strategy Group pointed out that the Dec 6/7 call spread is going for crazy cheap (in my opinion) in a takeover stock with earnings in the Dec cycle. Let's look to the Skew Tab first (below).
So the Dec 6 calls are priced at 53.5 vol and the Dec 7 calls are priced at 68 vol. Even better, BRCD has earnings in the Dec cycle and the 6 strike is the ATM. The cherry on top?... The markets are a cab ($0.01) wide.
The Options Tab (below) illustrates the prices.
Possible Trades to Analyze
1. Buying the Dec 6/7 call spread for $0.17 seems like the bet here. It's a small bet with a MaxGain:MaxLoss of 4.89:1. It scalps skew in a call spread, trades on tight markets, buys earnings vol ahead of the rise and has the added benefit of a possible takeover (or takeover rumor).
The fact that it's this cheap actually implies the likelihood of the stock going to $7 is pretty low... Just to temper expectations...
This is trade analysis, not a recommendation.
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