Wednesday, February 23, 2011

Digital River (DRIV) - Puts Trade, Vol Pops

DRIV is trading $34.14, down 2.1% with IV30™ up 8.8%. The LIVEVOL® Pro Summary is below.


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Digital River, Inc. is engaged in providing end-to-end global e-commerce and marketing solutions to a variety of companies in software, consumer electronics, computer games, video games, and other markets.

The company has traded over 6,600 contracts in the first hour on total daily average option volume of just 1,447. Puts have traded on a 60:1 ratio to calls with ~5,900 Mar 35 puts trading. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the puts are mostly opening (compare OI to trade size). When looking down the entire option chain for DRIV, I don't see any OI larger than 2,700, so this volume is large. The best I can tell, the puts look like mostly purchases.

The Skew Tab snap (below) illustrates the vols by strike by month.

I like the shape of the skew in the front two months -- specifically how the front month upside (red) is elevated to the back (yellow).

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock collapse on earnings a few weeks ago. In terms of vol, we can see how the IV30™ is creeping passed the long-term historical vol (HV180™).

Possible Trades to Analyze
1. Calendar spread the upside:
a. Buy the Mar/Apr 35 call spread (~ 2.5 vol points scalp)
b. Buy the Mar/Apr 38 call spread (~ 4 vol points scalp)
Of course, the other strikes are reasonable to examine as well.

2. Bet with order flow
The Mar 34/35 put spread costs ~$0.55 with $0.86 in parity. That seems like a reasonable trade to analyze if you're bearish, but don't want to risk too much capital. The Mar 32/33 put spread costs ~$0.30 and scalps about 3 vol points.

With vol exploding and the stock dropping again, this might be one to watch for a large skew divergence between months or intra-month. If a large enough vol difference opens up, then re-examining the trades may be interesting.

This is trade analysis, not a recommendation.

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