Friday, February 4, 2011

Nokia (NOK) - Calendar Spread Opens on Vol Spike

NOK is trading $10.98, down 1.9% with IV30™ up 0.3%. 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.

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). I have also included the third month (green line).

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 need to stop for a sec here to note that the IV30™ is elevated. In English, the options market is reflecting the risk of near-term volatility. We can see that the IV30™ dropped off of earnings (as expected), but it has now re-traced that drop nearly 50% to the upside.

There have been pretty serious articles of pointing to the poor R&D investments of late. Bernstein analyst Pierre Ferragu said, “at this stage, we believe that even a good success of Symbian^3 would barely stabilize the business,” he says. “A real comeback will need much more effort … and a lot more time, unlikely to happen in the next couple of years, in our view.”

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

Potential Trades to Analyze
1. ATM Calendar:
Sell the Feb 11 straddle @ $0.84 (~48 vol)
Buy the Mar 11 straddle for $1.25 (~42 vol)
Pay $0.41 to own the back.

2. OTM Calendar:
Sell the Feb 10/12 straddle @ $0.24 (~52 vol)
Buy the Mar 10/12 straddle for $0.52 (~42 vol)
Pay $0.28 to own the back. This is a cheaper bet with a bigger vol scalp.

3. Flip it around and bet with the market:
Buy the Feb 10/12 strangle for $0.25 and bet on an abrupt move in the next few weeks.

This is trade analysis, not a recommendation.

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