Tuesday, October 5, 2010

Pride International (PDE) - Calendar Spreads Sits Up with Earnings Vol

PDE is trading $30.88, up 3.8% with IV30™ down 3.3%, down 3.1% with IV30™ up 2.1%. The LIVEVOL™ Pro Summary is below.

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The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.

Custom Scan Details
Stock Price >= $5
Sigma1 - Sigma2 >= 8
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 <=70
Sigma1, Sigma2 >= 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol Pro™.

The goal with this scan is to identify back months that are cheaper than the front by at least 8 vol points. 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 front month vol simply because earnings are approaching.

The PDE Charts Tab is included (below), just the stock portion (we'll look at vols in a sec.)

We can see the stock has been in a strong upward trend of late going from ~$22 all the way over $30 in the last month (ish). Now, we can look to the Skew Tab (below).

We can see the elevated vol in the front month (red line) relative to the second month (yellow line).

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

We can see that not only is the back month cheaper than the front, but also earnings should be in the Nov cycle (this is a projection, last earnings were 7-29-2010). Earnings are a volatility event so buying cheaper vol and getting earnings is a nice trick.

Potential Trades to Analyze
1. Buy the Nov 30 straddle for $4.20 (47 vol), sell the Oct 30 straddle @ $2.20 (~53 vol) for a net debit of $2.00. This trade needs PDE to stay in a tight range before Oct expo and loses to a takeover, big stock moves and a vol crush in Nov.

2. Sell the Oct 29/32.5 strangle @ $0.85 (53.5 vol) and buy the Nov 29/32.5 strangle for $2.65 for a total debit of $1.80. This gives a bit more room for movement in Oct.

3. For a directional play with vol, possible trades include just one side (just calls or just puts).

This is trade analysis, not a recommendation.

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