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This is a note on month-to-month vol differences, specifically the front two months. Let’s start with the Charts Tab (6 months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).
Check out the stock moves I’ve highlighted. First, back in early August the stock collapsed off of earnings. On 8-1-2011 the stock closed at $13.00. On 8-8-2011, the stock closed at $6.27. Yeah, 52% in eight calendar days.
Now the good news… On 11-25-11 the stock was trading $6.97, and as of this writing it’s trading $8.83… So a 27% gain in six calendar days. We can see for both of those time periods, the implied traded below the realized movement of the stock, or in English, the vol was a purchase.
Let’s turn to the Skew Tab.
Here we can see the vol diff by month, with the front lying on top of the back. We can also see a parabolic skew reflecting both upside and downside risk. That shape seems appropriate given the stock moves I highlighted above.
Finally, let’s turn to the Options Tab.
I wrote about this one for TheStreet.com (OptionsProfits), so no specific trade analysis here. I will say that the vol diff between the front two months is interesting. A straight calendar (same strikes) is risky in that the stock moves rather large and that hurts to a short gamma position. A way to play the vol diff but also protect against a short gamma face rip-off (that’s a highly technical trading term) is to go diagonal on the strikes. But then you incur a larger risk in premium and delta. What to do?...
Two choices: Bet to one side of the other with deltas, or don’t trade.
This is trade analysis, not a recommendation.
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