Friday, February 11, 2011

JDS Uniphase (JDSU) - Stock Rising, Vol Rising, Skew Opening

JDSU is trading $26.22, up 3.8% with IV30™ up 2.8%. The LIVEVOL® Pro Summary is below.


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JDS Uniphase Corporation (JDSU) is a provider of communications test and measurement solutions and optical products for telecommunications service providers, wireless operators, cable operators, and network equipment manufacturers.

The stock popped last week on an earnings blowout, rising ~27% in one day.

The company just 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).

We can see how the front month is elevated to the back (which is normal this close to expo). I also note that the OTM skew (calls and puts) shows an even larger vol difference. The upside skew for both Feb and Mar is bent upwards from the news, stock movement and order flow. I've included the skew chart for JDSU as of 11-24-2010 - note how the upside was flat back then.

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).

Obviously the HV20™ is super elevated off of the earnings move. The IV30™ is rising, but is still below even the long-term historical stock vol (HV180™).

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

Potential Trades to Analyze
1. ATM Calendar Spread:
a. Sell the Feb 26 straddle @ $1.66 (~56 vol).
Buy the Mar 26 straddle for $3.23 (~50 vol).

b. Sell the Feb 26/27 strangle @ $1.26 (~57 vol).
Buy the Mar 26/27 strangle for $2.80 (~51 vol).

2. OTM Calendar Spread; one-sided:
a. Sell the Feb 28 call @ $0.27 (~59 vol).
Buy the Mar 28 call for $0.96 (~51 vol).

b. Sell the Feb 25 put @ $0.35 (~56 vol).
Buy the Mar 25 put for $1.05 (~50 vol).

3. Trade the vol difference, but accumulate deltas:
a. Sell the Feb 28 call @ $0.27 (~59 vol).
Buy the Mar 27 call for $1.30 (51 vol).
The risk here is two-sided. If JDSU explodes in Feb, that spread could turn to $1 (and it costs $1.03). Of course, the bigger risk is that JDSU goes down.

b. Sell the Feb 29 call @ $0.15 (~62 vol).
Buy the Mar 28 call for $0.96 (~52 vol).

4. Do #3, but take on some more risk:
Sell the Feb 29 call @ $0.15 (~62 vol).
Buy the Mar 28 call for $0.96 (~52 vol).
Sell the Mar 30 call @ $.52 (~52 vol).
Buy the Feb 30 call for $0.10 (~66 vol).
Pay $0.39 in anticipation of JDSU going to ~ $29 on Feb expo. Skipping the fourth leg is also doable, but leaves naked upside in a ripping tech stock that may be a takeover candidate.

This is trade analysis, not a recommendation.

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  1. Absolute novice here and trying to figure out the prices that you are paying... you are paying a combination of some price between the bid and ask since I can't nail down where the totals come from - again I'm new at this and appreciate your time! Charlie

  2. You've actually got it right. Pay less than the offer and sell @ more than the bid unless you're realing with penny markets. Don't trade the NBBO the bad way if possible.