Tuesday, February 8, 2011

Take-Two (TTWO) - Earnings Vol Creates Calendar

TTWO is trading $14.40, down 0.3% with IV30™ up 5.0% with earnings today AMC. The LIVEVOL® Pro Summary is below.


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A quick note before earnings come out in a few minutes. I just noticed how much higher the front month vol is than the back - granted earnings are out today, but it feels like it might be worth examining.

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 there you go. The vol difference is more than 20 points. Note that TTWO does have a tendency to gap on earnings.

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

Potential Trades to Analyze
1. Trade the upside skew vol difference in a calendar:
Sell the Feb 15 call @ $0.40 (~66 vol).
Buy the Mar 15 call for $0.70 (~52 vol).
Pay $0.30 to own the upside in Mar, but note how close it is to ATM - so a big move up or down could hurt this trade.

2. Trade the skew, but further OTM:
Sell the Feb 16 call @ $0.20 (~70 vol).
Buy the Mar 16 call for $0.40 (~52 vol).
Risk $0.20 and have some room if TTWO moves up on earnings - obviously, if stock gaps down, this won't work very well (at least in the short-term).

3. Calendar spread the puts:
Sell the Feb 13 put @ $0.15 (~70 vol).
Buy the Mar 13 put for $0.35 (~51 vol).
Pay $0.20, but this time for the downside.

4. Trading the ATM seems reasonable as well, but be aware of the risk and the bet that's being made.

5. Off-set strikes in call or put spreads are also a possibility.

This is trade analysis, not a recommendation.

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