Monday, August 16, 2010

Perfect World (PWRD) - Earnings Play on Elevated Vol

PWRD is trading $24.80 with IV30™ up 9.2% and earnings today after the bell. The LIVEVOL™ Pro Summary is below.

The company has traded over 5,600 options on total daily average option volume of just 1,181. The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates the action and the current prices. Last earnings cycle PWRD gapped down hard, closing at $24.71 down from $32.94 the day before. The vol is elevating into the earnings release today.

Looking at the front month ATM and the wings around it, an interesting trade arises.
Trade Stats
Sell 1 PWRD Aug 25 call @ $0.90
Sell 1 PWRD Aug 25 put @ $1.10
Buy 1 PWRD Aug 26 call for $0.50
Buy 1 PWRD Aug 24 put for $0.65
Total credit = $0.85. The max loss is $0.15. MaxGain/MaxLoss is 5.67:1. If the stock stays in the range ($24.15, $25.85) by expo, the trade is a winner ex-commissions. The implication is of course, the odds of the stock staying in that range are worse then ~ 1:5 (ok, so I'm being very rough). This is a trade with a higher likelihood of loss than gain.

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

Notice how high the front month is (red line) relative to the rest since it is essentially entirely earnings 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.

I've highlighted where the stock gapped down last earnings. This thing can move on earnings; naked sales are probably not a good idea.

DISCLOSURE: I hold this position at the time of writing.

This is trade analysis, not a recommendation.

Legal Stuff:


  1. When trade entered got message "paying more for this trade then maximum potential value" ????
    Believe I entered it correctly

  2. Sorry, don't know what you mean. Can you try me again?

  3. Dear Ophir,

    what would you think of selling Aug 22.5 P (high vol) and buying Sept 22.5 (low vol) and making it gamma delta neutral? If non silly, have you a esay way to make comparison with the straddle sell



  4. How did you quickly estimate "the odds of the stock staying in that range are worse then ~ 1:5"

  5. is it right to say that from a volatility view point your analyzed position is close to vol neutral ?

    in fact we have
    + 102 - 2*96 + 90

    I am not sure to have the "right" to add the vol as I understand that vol is a approx of standard deviation. I guess we should add the square?


  6. To mfgamma:

    To analyze a vol position you look at the vega. This is the amount of $ the position changes for a 1 percent change in vol. Vega is additive so it's a handy tool.

    Selling the front 22.5 to fund the back is ok; but keep in mind the back will collapse as well once earnings are done.

    To Alexey:
    I used ther max gain/ max loss ratio as a proxy for odds since the straddle + cover are in such a small range. It's an approximation, that's all.

  7. Dear Ophir:

    Would you consider a diagonal backspread, short Aug and long Sept? Or even a reverse calendar that benefits from a volatility collapse?

  8. I'm ok with that, but not in love with it. That is a long vega position. Also, selling the front without covering up is basically selling gamma for very little. Not a huge fan of that. If this was 3 weeks from expo, then we may have a different story. But, it's just personal preference. I like the creativity, make sure the end position echoes your beliefs (whether they be vol, delta, etc). Again, long the back = long vega.