Thursday, November 11, 2010

Massey (MEE) - Time Spreading the Holidays

MEE is trading $47.19, up 2.5% with IV30™ up 4.2%. 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 second and third months.

Custom Scan Details
Stock Price >= $5
Sigma2 - Sigma3 >= 7
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 and <=50
Sigma2, Sigma3 >= 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 third months that are cheaper than the second month by at least 7 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 second month vol simply because earnings are in that month.

Looking to the Skew Tab (below), we can see the elevated vol in the second month (yellow line) relative to the third month (green line).

I've filtered out a bunch of strikes to focus on the near the monies. We can see the clear vol difference between Dec and Jan. Something to note here, the Jan cycle includes Christmas/Vaca, etc. That vol can be frustrating to be long unless you were able to spread it off... which we may be able to do. Dec vol tends to die as well though, as people leave the trading desks early.

In general, long Jan still gets you the new year, which tends to be more active than the end of the year. Selling the Dec vol is a reasonable approach, just in general.

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

Potential Trades to Analyze
1. Sell the Dec 47 straddle @ $7.10 (~60 vol) and purchase the Jan'11 47 straddle for $8.85. That's a total debit of $1.75 (max loss, other than pin risk). The goal here would be for MEE to move less than $7.10 away from $47 by Dec expo.

2. Any number of strangles with the same idea, selling Dec and purchasing Jan. Watch out getting too long the premium in this type of calendar.

This is trade analysis, not a recommendation.

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