Monday, October 4, 2010

Electronic Arts (ERTS) - Call Buying and Vol Jump Yields Trade Opps

ERTS is trading $16.75, up 1.9% with IV30™ up 16.9%. The LIVEVOL™ Pro Summary is below.

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The company has traded over 23,000 options in the first three hours on total daily average option volume of just 5,500. All but 2,558 contracts have been calls yielding an 8:1 call:put ratio. The action has been in the Oct 16, 17, 18 and Nov 16, 19, 20 calls. Best I can tell, Nov 16 and 19 are long, 20 are short. The Oct trades feel long and with some help from Mike Bristow of Vtrader Group, the color I'm getting confirms that. 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 in Nov and Oct 17 (compare OI to trade size), while Oct 16 and 18 are ambiguous. You can also see that vol is up by month, particularly in Oct where it's up 9.2 points or 28%.

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

A very nice skew chart here. Note that the upside in all months up to and including Jan'11 are bent up to the upside reflecting the call long interest.

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 vs HV180™ - pink). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

We can see the bottom portion shows that IV30™ has spiked well past the short term and long term historical vols as the stock has stayed relatively quiet.

Possible Trades to Analyze
With earnings in the Nov cycle (projected), a sale of the elevated Oct vol and a purchase of Nov feels reasonable. Maybe doing it with OTM calls like Nov 18/ Oct 18, or going to the ATM straddles.

Also, doing an OTM calendar and selling the Oct 16 puts yields a much cheaper trade but does leave naked downside risk for the next two weeks in a stock with vol jumping. Generally I see a bunch of spreads that could be good trades, and for each one, a put sale gives it an extra kick for some extra risk.

This is trade analysis, not a recommendation.

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  1. what I see from the skew is same vol at 18 for Oct and Nov so could we still say that Oct/Nov calendar would be based on vol ?


  2. B/c Nov has earnings I see an "even" vol swap as a vol scalp. Throw in a hefty theta, and that's how I analyzed it.

  3. ok good points
    thanks a lot