Sunday, August 29, 2010

Check Point (CHKP) - Call Buyers, Vol Buyers and Skew Shifts

CHKP closed at $35.20,up 1.0% on Friday with IV30™ up another ~3%. The LIVEVOL™ Pro Summary is below.

The company traded over 10,000 options on total daily average option volume of just 1,734. The action was in the Oct 39 calls which traded 5,200+ times (mostly purchases) on essentially no option interest. 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 calls are mostly opening (compare OI to trade size).

Note at the top of the Options Tab we can see that the Oct vol is higher than all the other months. The buying interest pushed the Oct vol up 1.1 points, which was more than any other month. Also note the OI in the Oct 37.5 calls. This interest looks long to me, I'm probably 80% certain of that. The CHKP vol is an interesting animal. Let's loook a bit closer.

The Skew Tab snap (click to enlarge) illustrates the vols by strike by month.

Note how Jan'11 (green) has a nice normal shape (smirk). The Oct options (yellow) however have a kink upward from the premium long order flow. The Sep options have reacted a bit, with the upside showing a slight turn to the upside as well. Going all the way out to the 42.5 line, the Oct vol is a full 7 points higher (i.e. 28% higher) than the Jan'11 vol.

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.

The vol chart is pretty interesting. From 3-1-2010 through 6-15-2010, the IV30™ was a sale to the HV20™. Then after a short break in that pattern, it was a sale again for a month or so in to mid July. The underlying moved more than the vol for about a month, then since 8-9-2010, vol has been a sale again.

As of right now, the divergence between IV30™ (27.8) and HV20™ (16.5) has grown to more than 11 points. Said differently, the IV30™ is 67% higher than the HV20™. With the stock up on Friday, this divergence widened on the call side buying.

Possible Trades To Analyze
An interesting trade could be to sell the Sep 35 straddle @ $1.80. Then purchase the Sep 34/36 strangle for $0.95. This yields an $0.85 credit with a max loss of $0.15. At expiration this trade makes money if CHKP is in [$34.15, $35.85]. The odds are this trade loses (thus the great payoff ratio), but if you felt the payoff was better than the odds, it could be an interesting bet.

For the more adventurous, an Oct 35 straddle sale @ $3.00 and covering up with the Sep 34/36 strangle gets shorter even more vega. This trades hopes for CHKP to stay at $35 into Sep expo, then close the Oct straddle out winning to time decay and a potential vol convergence.

This is trade analysis, not a recommendation.

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