Wednesday, June 2, 2010

US Ariways (LCC) - How Pros Parlay Big Bets into Year Makers

LCC is trading 9.24, up 6.9% with IV30™ up 8.6% even as the stock climbs. The LIVEVOL™ Pro Summary is below.

The company has traded over 94,000 options today on total daily average option volume of just 7,678. All but 4,688 contracts have been calls yielding a 19.1:1 call:put ratio. The largest trade has been a Jun 10/11/ Jul 12 call spread (sell 10, buy 11 and 12). This trade accounts for over 75,000 of the contracts traded today. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates that the Jun 11 and Jul 12 calls are opening orders (new long positions). The Jun 10 calls are closing (sales of previously long open interest).

Interestingly, the Jun 10 calls were opened just a few days ago (5-26-2010.). They were purchased for $0.23. Today they were liquidated @ $0.45. That's $0.22 on ~30,000 options or 30,000 * 100 * $0.22 = $660,000 in a week.

That $0.45 sale was turned into a purchase for $0.32 (Jul 12 calls) + $0.24 (jun 11 calls) = $0.56. It feels like the trader has parlayed the win in the Jun 10 calls into a Jun 11/Jul 12 call stupid (purchase/purchase). More on that at the end.

The Skew Tab snap (click to enlarge) illustrates vols of the three options in play relative to the rest of the options chain.

I've highlighted the strikes. You can see an upward bend is developing in the Jun options. The Jun 11 calls have a higher vol than the Jun 10 calls - which is backwards to "normal" skew. To read why skew exists and what it means you can click here.

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.

We can see the recent run up in the stock which afforded this trader the quick win in Jun 10 calls, and the ability to turn it into a bigger bet with the profits.

Parlaying wins into bigger bets on the same side is essentially the life blood of a number of traders down here on the floor. The idea being, three wins in a row on parlay make the year. One down...

This is trade analysis, not a recommendation.

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