Wednesday, January 19, 2011

Adobe (ADBE) - Calendar and Upside Skew

ADBE is trading $34.19, unched with IV30™ up 0.9%. 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. One side in particular looks interesting.

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).

So the front is elevated to the back - which is common this close to expo. Note in particular the upside call skew in Jan. ADBE is a takeover candidate/rumor stock but the skew in Jan is more a function of expo than that, IMO.

Now we can turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see how volatile ADBE stock can be. It gapped up on 9-9-2010 (AAPL eases restrictions on development tools), then down even further on 9-22-2010 (earnings), then up on 10-7-2010 (MSFT takeover rumor) and finally up 12-21-2010 on another earnings report.

Also, we can see how the stock has rallied hard even after the earnings report in Dec and is now just $3 away from an annual high. Basically, it feels like owning some juice at a discount might be worth lookin' at.

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

Potential Trades to Analyze
1. Get some upside on a calendar
Sell the Jan 35 call @ $0.15 (~41 vol).
Buy the Feb 35 call for $0.81 (~30 vol).
This pays $0.66 for some upside and scalps vol in a stock that gaps, is a takeover candidate and has been going straight up of late.

2. Straight Vol in the calendar
Sell the Jan 34 straddle @ $0.80 (~37 vol).
Buy the Jan 34 straddle for $2.30 (~30 vol).
Pay $1.50 to own some Feb vol. Not crazy about this one.
Sell the Jan 34/35 strangle @ $0.46 (~39 vol).
Buy the Feb 34/35 strangle for $1.86 (~30 vol).
Pay $1.40 with a little more room on the Jan side for a stock move in the next few days.

This is trade analysis, not a recommendation.

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