Friday, June 4, 2010

QuickSilver (KWK) - Risk Reversal Trade Moves Skew In Isolation

KWK is trading 12.41 with IV30™ up 10.2%. The LIVEVOL™ Pro Summary is below.

The company has traded nearly 18,000 options on total daily average option volume of just 1,536. A July 11/13 risk reversal (sell puts/buy calls) has accounted for the vast majority of volume. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates that both the calls and the puts are opening (trade volume >> OI). Also note how the front two month vols are now rising - much more than the back months.

The Skew Tab snap (click to enlarge) for this one is awesome. As most of you who read this know I love skew. This is a great example why. With just the skew chart I am guessing that most of you could have guessed the largest trades today.

You can see clearly that the Jul 11 puts (circled) have an obvious bend downward in vol relative to the rest of the line (this is from the sales). On the other hand, you can see the Jul 13 calls (also circled) have an obvious bend upward (this is from the purchases). When skews change shape like this, opportunities present themselves. These two strikes don't exist in a vacuum, but in the near term, they behave as though they do. This is a trading opportunity.

Finally, 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.

You can see a fairly substantial drop and re-tracement recently.

This is trade analysis, not a recommendation.

Legal Stuff:


  1. What is the trade exactly? Bet that the skew reverts to its previous shape, or more simply take the other side of this large trade?

  2. If you believe the large is correct, you can do it for a better price than the big guy using other options.

    If you believe the trade is wrong, you can obviously unwind his position with great prices.

    But, if you don't know, you can unwind his trade at great prices, take the other side with other options at "unadjusted prices", and scalp the vol.