Monday, November 8, 2010

Thoratec (THOR) - Severe Skew Bend Yields Vol Scalp

THOR is trading $32.88, down 0.9% with IV30™ up 3.3%. The LIVEVOL™ Pro Summary is below.


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This is a skew trade I found. The stock 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.

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

Check out the vol difference between the Nov 36 and Dec 36 calls. It's ~59 to ~44, or 15 points. It looks like there was a call buyer in the Nov 36's and that market has popped hard while Dec 35 popped but Dec 36 didn't. This is a great example of price discovery and how long it takes in the options market.

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

Potential Trades to Analyze
1. Buy the Dec 36 calls for $0.85 and sell the Nov 36 calls @ $0.35 for a net debit of $0.50. This scalps 15 points of vol (ish).

2. A Dec 34/35 call spread purchases 44 vol and sells 46 vol. It's not the greatest vol scalp of all-time, but it does purchase lower vol than it sells in a call spread which is rare. The markets are pretty wide, I would say $0.40 or less seems reasonable, though it is a bullish bet as opposed to trade #1 which is more vol than delta.

3. The Dec 35/36 call spread, if it can be done for $0.10 looks tasty at that price (though the delta is low i.e. low probability of success).

This is trade analysis, not a recommendation.

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