Friday, November 19, 2010

Brocade (BRCD) - Scalping the Skew For a Small Bet

BRCD is trading $5.80, up small with IV30™ up 2.2%. The LIVEVOL™ Pro Summary is below.


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I posted an article on this reverse skew on 9-7-2010.
Brocade (BRCD) - Stock Up, Vol Pops & Skew Goes Backwards on Takeover Rumors

Today Cathy Clay of the Livevol Strategy Group pointed out that the Dec 6/7 call spread is going for crazy cheap (in my opinion) in a takeover stock with earnings in the Dec cycle. Let's look to the Skew Tab first (below).

So the Dec 6 calls are priced at 53.5 vol and the Dec 7 calls are priced at 68 vol. Even better, BRCD has earnings in the Dec cycle and the 6 strike is the ATM. The cherry on top?... The markets are a cab ($0.01) wide.

The Options Tab (below) illustrates the prices.

Possible Trades to Analyze
1. Buying the Dec 6/7 call spread for $0.17 seems like the bet here. It's a small bet with a MaxGain:MaxLoss of 4.89:1. It scalps skew in a call spread, trades on tight markets, buys earnings vol ahead of the rise and has the added benefit of a possible takeover (or takeover rumor).

The fact that it's this cheap actually implies the likelihood of the stock going to $7 is pretty low... Just to temper expectations...

This is trade analysis, not a recommendation.

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