Wednesday, December 15, 2010 (CTRP) - Volatile Stock and Three Day Straddle

CTRP is trading $41.34, up 7.0% with IV30™ down 7.2%. The LIVEVOL™ Pro Summary is below. International Ltd. is a travel service provider for hotel accommodations, airline tickets and packaged tours in China.
The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months. In order for a trade to have any legs that sells the expiring month this close to expo, there's gotta be a stock move... And we have one with this stock, today.

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).

We can see how the front month is elevated to the back (which is normal this close to expo). What isn't normal is the size of the spread (vol diff). The Dec/Jan 41 straddle vol diff is ~22 points, or nearly 50% of the IV30™. Whoa...

Last expo (three days prior), the vol difference was more like 11 points. I've included that Skew Chart below.

So the vol difference this time around is due to the stock gap down yesterday, which was pretty size. Today it has rebounded. The thing is, nobody seems to know why the stock gapped down. Here's the news from Motely
Shares of Chinese travel agency (Nasdaq: CTRP) dropped more than 13%, on four times the typical day's trading volume. The company has not publicly released news that would explain the large move in shares, but the company's stock is richly valued and tends to be volatile.
Source: MotelyFool


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

Potential Trades to Analyze
1. Sell the Dec 41 straddle @ $1.65 (~66 vol)
Buy the Jan 41 straddle for $5.00 (~48 vol)
Pay $3.25.

2. Do a calendar strangle:
Sell the Dec 40/42 strangle @ $0.85 (~67 vol)
Buy the Jan 40/42.5 strangle for $3.85 (~48 vol).

3. Ok, here's a total 180:
Buy the Dec 41 straddle for $1.80. I mean, think about it, the stock moved ~$6 yesterday and $2.70 today... Sheesh, $1.80 feels cheap, no?

4. Continuing the contrarian play:
Do #3 and sell the Dec 39/43 strangle @ $0.45 to reduce the net debit to $1.35.

This is trade analysis, not a recommendation.

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