Wednesday, September 29, 2010

Ebix (EBIX) - Elevated Vol Trade and Scalping Earnings

EBIX is trading $24.20, up 0.8% with IV30™ up 1.3%. The LIVEVOL™ Pro Summary is below.

I found this stock using another real-time custom scan. This one hunts for high vols.

Custom Scan Details
Stock Price >= 5
IV30™ - HV20™ >= 10
HV180™ - IV30™ <= -8
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >=10 <=60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated IV30™ simply because earnings are approaching.

The EBIX Charts Tab is included (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

We can see IV30™ is ~57 vs HV20™ of 41. Also, the long term trend of realized vol, HV180™, is just 42, so vol is elevated. You can actually find a bunch of stocks with short term implied that's elevated relative to short term realized as the market has been in a steady upswing and we're going into Oct, which can be "jittery" to say the least. I like EBIX in particular because the long term HV (HV180™) is also quite low.

Finally, let's look to the Options Tab (click to enlarge).

We can see that the Oct 24 straddle is priced at about 55 vol or a $2.20 sale. The Nov 24 straddle is at 56 vol (or $4.10 to purchase) but earnings are probably in the Nov options cycle. This is interesting as earnings are a volatility event and present a nice little cover to a possible sale.

Possible Trades to Analyze
1) The riskiest trade would be a naked straddle sale in Oct @ $2.20. In this new found world of takeovers, I think a touch more prudence may be appropriate.

2) With the above in mind, selling the Oct straddle at $2.20 and buying 2 Oct 27 calls for $0.50 total, or a $1.70 net credit, may be a bit safer. Note this still has naked downside risk.

3) Noting that earnings are in the Nov cycle, another trade seems reasonable. A sale of the Oct 24 straddle and a purchase of the Nov 24 straddle yields a $1.90 debit. Last earnings cycle the IV30™ reached as high as 64.69, so a 56 vol purchase in Nov might actually be a winner using the Oct straddle sale to fund the time decay. The hope here would be that EBIX sticks close to $24 on Oct expo, then the Nov 24 straddle (long) should be worth well over the $1.90 debit. A sale of that straddle right before earnings on elevated vol is one approach to exiting the strategy. Keep in mind, this trade loses to a takeover unlike #2, as it's long vega through the calendar spread. Unlike #1 though, it has a capped max loss of $1.90.

This is trade analysis, not a recommendation.

Legal Stuff:


  1. Ophir,
    Is there any fast way you calculate price of straddle in Nov earnings if IV30 reach 60sh? As you said "well over 1.90" - did you calculate exactly? Thanks!

  2. Quick, back of the envelope type stuff, I believe with stock here and vol here the Nov straddle would be worth ~ $3.10. With vol at 60 the straddle would be worth ~ $3.50. I'm talking about the Monday after Oct expo.

  3. so theta decay will not be fully offset by vol increase anyway as Nov straddle is around 3.80 now. In bad scenario we will lost .7 in Nov straddle price, am I right? Thanks!

  4. Check out the call options in FEED today 9/29. 27,949 volume on the Feb $3's with open interest of 322. Something is off there???????

    Greg G

  5. Darren Story from Student Options told me this yesterday which I posted to the Twitter feed (@Livevol_Pro): FEED feb 3 $call bot 25k .30 vs flex (euro feb 19, 2011 .12 $call) sold 10k at 2.165...