Friday, May 7, 2010

PMC-Sierra (PMCS) - Straddles, Vols and Trends

PMCS is trading 7.76 with IV30™ up 33.0%. The LIVEVOL™ Pro Summary is below.

The company has traded over 8,400 options in the first hour on total daily average option volume of just 1,241. All but 168 contracts have been calls. Someone is closing the short May 7.5 calls (buying them back). The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates the vols per month as well as the resulting straddles.

The fromt month ATM straddle is worth ~$1.05 at 81 vol while the second month ATM straddle is worth ~$1.40 at 65 vol. Back to that in a sec...

First, the Charts Tab (6 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

We can see two distinct things.
1) Stock has plunged recently while...
2) The IV™ has spiked.

Now back to those straddles...

One possible trade is to sell the expensive vol and buy cheaper. i.e. Sell the front straddle @ $1.05 (ish) and buy the back for $1.40 (ish). If the stock pins at or near 7.5, you've got a winner - you can sell the back month straddle out after expo or hold it if you think a move is coming.

The May straddle is only "alive" for two more weeks (May expo. is 5-21). You could also hold off - see if the market continues to crash and maybe even seller higher vol. Who knows, on the week of expo maybe you can sell the front straddle for some still juicy premium (the actual $ amount will almost certainly be lower than current levels though b/c of decay).

Alternatively, you could just buy a straddle. The stock has gone from $9.73 (4-21-2010) to as low as $7.68 in two and a half weeks. That's $2.05 in two weeks and you can see what the straddles are piced at (i.e. much less than that).

The vol in the front seems to be pricing a possible company specific event.

This is trade analysis, not a recommendation.

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