Wednesday, April 14, 2010

Ambac (ABK) - What Option Prices Imply About the Stock

ABK is trading 1.85. The LIVEVOL™ Pro Summary is below.

For those not following it - it's gone from as low as $0.51 on 3-29-2010 (i.e. 16 days ago) all the way to $3.39 yesterday finally to close at $1.62 and now it's $1.85. The low to high move in 16 days was a 564% gain. Even at 1.85 it's 262% - in the words of Adam Sandler - "not too shabby."

I find a few things pretty interesting when looking at the Options Tab (click to enlarge).

First, the Aug and Nov 1.5 calls are the same price as their respective puts. Why is that weird? Becasue the stock is trading $1.85. The reversal is sitting up there for a fat credit - which implies that the rate is negative (hard to borrow). You can see this is not quite the case with the May 1.5 calls and puts (i.e. calls > puts as we would expect.)

Negative rate means a lot of bets on this thing going down...

An interesting bet here is to sell the Nov 1.5 puts @ 0.75 naked. This has a max gain of $0.75 (i.e. the credit) and a max loss if the stock goes to $0.00 - also $0.75 (i.e. $1.5 - $0.75). This is a 1:1 payoff maxLoss:maxGain.

So, sort of stretching the analysis it feels like the market is implying that there is a 1:1 (i.e. 50%) chance these things actually end up in the money (below 1.5). That's weird, b/c usually we think of stock as random in a small area (50% chance up or down) - so this would make more sense if the hypothetical Nov 1.85 calls and puts were equally valued, not the 1.5 strike.

The option chain is full of trading opportunities really - whether you feel like this thing is worth zero or if you believe in a comeback - because the markets are tight (ish) and very liquid. You can find very strong opinions abound from it going to $0.00 or to as high as $5+.

It's a cool stock to watch in the morning as it easily moves 20% in a few minutes for all of you stock day traders out there.

This is trade analysis, not a recommendation.

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