Tuesday, December 29, 2009

Avalonbay (AVB) - Opening Bearish (lopsided) Straddle

AVB is trading ~85.16 today with IV30™ at 34. The LIVEVOL™ Pro Summary is included below.

The company averages 2,189 option contracts traded a day. In the first hour and a half of trading today nearly 3,300 contracts have traded. Further, 3,173 of those were puts (26:1 put:call ratio). The Company Tab snapshot is included below (click the image to enlarge it).

The day's biggest trades snap below (click image to enlarge) illustrates that the Apr 80 puts have been trading on the offer (green coloring is on the offer) over 3,000 times. You will note that the condition reads "Spread" which is in fact incorrect from the exchange. The exchange incorrectly marks a trade as a "Spread" if it has to adjust prices later. The trade went up against 85.40 stock (traded delta neutral) not against the 85.25 stock that the exchange originally reported. Thus, the incorrect condition from the exchange.

An easy way to see that this was not a spread is simply to go to the Options Tab. A snapshot of the Apr options is included below (click the image to enlarge). Since only 3,300 contracts in total have traded and 3,155 of Apr 80 puts traded - it obviously wasn't spread against any other options. The Options Tab snap also demonstrates that the OI (218) is much smaller than the trade volume (3,155); this was an opening position.

The Apr 80 puts traded 4.70 vs. 85.40 stock delta neutral (let's assume a 34 delta per the Options Tab). That is the equivalent of buying 2 puts and 1 call. Here is the calculation for the call purchase based on 85.40 stock purchase with puts:

Call = Put + parity + interest - dividend
= 4.70 + 5.40 + ~0.20 - 0.89
Call = 9.41

So the trade buys one straddle for 9.41 + 4.70 = 14.11 and one additional put for 4.70.

The straddle makes money at expo. if the stock goes above 94.11 or below 65.89. Since the trade also has a long put which makes money at expo. with the stock below 75.30 (80 - 4.70) this is a bearish bet. It also gets long vol, which is generally bearish.

The snapshot of the Charts Tab below fills in the rest of the picture. The stock has run from 69 to 85 in the last couple of months. Click the image below to enlarge it. Note you can also see the IV30™ (red line) relative to the HV30™ (blue line) on the bottom portion of the image.

This is a bearish bet on a stock with a $17 (25%) run up in recent months. Keep in mind AVB's business (Real Estate Investment Trust).

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