Tuesday, September 7, 2010

BMC Software (BMC) - Upside Skew and Bearish Bets


This is an update to the article I wrote for TheStreet.com which was later posted on Yahoo! Finance: An Unusual Opportunity in BMC

BMC is trading $38.37, basically unchanged with IV30™ up 1.8%. The LIVEVOL™ Pro Summary is below.

On 8-19-2010 I wrote that with BMC trading $37.11:
"BMC has traded over 4500 contracts in the first hour today on total daily average volume of just 1096. In particular, the September 37 calls have traded 2200+ times; substantial buying interest. This order flow has created a trading opportunity in the skew."

The skew chart from that day is included below.

We can see the obvious kink in the upside on the bullish order flow. Today the company has traded over 11,000 options on total daily average option volume of just 1,205. However, the largest trade looks like an Oct 37/38 risk reversal (buy puts/sell calls) 5,000x accounting for 10,000 contracts. This is bearish order flow. The Stats Tab and Day's biggest trades snapshots are included.

The Options Tab (click to enlarge) illustrates that both legs of the risky are mostly opening (compare OI to trade size).

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

What's interesting to note is that the Sep skew is still bent upwards - forming a parabola rather than a smirk.

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 how the stock has stayed range bound, though recently it certainly has risen. In mid August this was a $34.50 (ish) stock.

Possible Trades to Analyze
Selling that upside in Sep in a spread is still a possibility. A 38/40 call spread for less than $0.75 is a bullish play with a vol scalp. 1 x 2 is more of a vol play, naked the upside and losing above $42.

A time spread could be in play. Maybe buy the Oct 40 calls, sell the Sep 40 calls. Doing that 1 x 2 does more of the same, sells higher vol, but also risks naked upside.

For you bears, a risk reversal selling Sep calls and buying Oct puts could work. If the Sep calls expire worthless, you can sell the same calls again in Oct for two premium collections.

This is trade analysis, not a recommendation.

Legal Stuff:

1 comment:

  1. However, the largest trade looks like an Oct 37/38 risk reversal (buy puts/sell calls) 5,000x accounting for 10,000 contracts...
    I can't see this in your detail... I see 4700 puts & calls but not 5000... OK, you are using round numbers but don't see how you can tell if these are being bought or sold... they both look the same, just opposite... I'm a rank novice but am reading your excellent post and many thanks!!!