Monday, December 21, 2009

Life Technologies (LIFE) - Vol Seller

LIFE is a $7.85 billion global bio-tech tools company. The LIVEVOL™ Pro Summary below.

LIFE averages 1,965 option contracts traded a day. Today nearly 14,000 have traded. The Company Tab snapshot is below. Note not just the volume but that it is equally distributed between calls and puts. Click the image to enlarge it.

The largest trade of the day is a sale of Feb 50/55 strangle @ 2.10 (1.35 in calls and 1.75 in puts). The snap shot below illustrates the trades - note also the vol level that was sold (~31). Click the image to enlarge it.

The snap shot of the Options Tab below demonstrates clearly that these are opening orders (both legs). I can see this by the size of the open interest relative to the trade sizes. Click the image to enlarge it.

This is an opening short vol position. The pay off of the short strangle at Feb expo is included below for reference (based on 5000 sold @ 2.05). Click the image to enlarge it.

If the stock sits between 50 and 55 the max gain is achieved (max loss is UNLIMITED with this trade - very risky). But this is a graph at expo. The trade is short vega; specifically: -0.074 (calls) and -0.079 (puts) = $0.15 for every vol point x 5000 x 100 = $76,500 for every point vol moves down (or negative that number if vol moves up). Note that vega is not constant, so linealy multiplying that number by 31 does not lead to the max payoff (it is some number greater than the max payoff which is not possible).

The Charts Tab snapshot is below (click it to enlarge). You can see clearly that the IV60™ (orange line) is trading well above the HV30™ (blue line). Further, the trades sold ~31 vol. The yellow area below the chart shows the difference between the two. This feature is coming soon to LIVEVOL Pro.

The historical vol is ~ 16% or 15 vol points lower than the trade. The payoff can get a little tricky pre Feb. expo as there is also time decay (theta). Clearly this trade is short theta - so it makes money if all else stays the same and time moves forward.

If vol where to drop to the historical level (30 day historical level) without a stock move, the payoff would be sizeable and the position could be closed pre-expo. Selling strangles is almost certainly not retail - and a short strangle trade this large is definitely (almost) not retail. So it seems that institutional money is taking a vol bet (down) on LIFE.

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