Wednesday, March 16, 2011

Exxon Mobil (XOM) - Vol Rise and Skew Formation

XOM is trading $81.05, down 0.4% with IV30™ up 8.8%. The LIVEVOL™ Pro Summary is below.


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Exxon Mobil Corporation (Exxon Mobil) is a manufacturer and marketer of commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a range of specialty products... duh...

I found this stock using a real-time custom scan that looks for rising IV30™

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

We can see:
IV30™: 26.19
HV20™: 20.24
HV180™: 17.11

So, IV30™ is elevated relative to the short-term and long-term realized movement of the stock. Obviously, world events are driving the uncertainty in the market, and more precisely, in the energy sector.

Let's look to the Skew Tab.

A couple things to note:

1. The front month is elevated to the back months (which is normal this close to exp).

2. The upside skew in XOM is bid, creating a parabolic (or even 'V') shaped curve.

Let's look to the Options Tab (below).

Note that the Mar/Apr 85 call spread shows a 24 vol point difference. In English, the Mar 85 calls are twice as expensive (in vol) than the Apr 85 calls.

Possible Trades to Analyze
1. Trade the calendar upside skew:
If you're bullish but don't think XOM will go up $5 in the next two days, you can examine the Mar/Apr 85 call spread for $0.63.

If XOM does stay below $85 into Mar expo, this trade can be extended with a sale of the XOM Apr 90 calls at around the same price (maybe) as the Apr 85 calls. That would leave a $5 call spread for less than $0.50 or a better than 9:1 MaxGain:MaxLoss.

2. Trade the calendar downside skew:
If you're bearish but don't think XOM will go down below $80 by Mar expo, you an examine the Mar/Apr 80 put spread for $1.42. This trade sells ~ 10 points higher vol than it purchases. Like #1 above, if the trade works out well into Mar expo, this trade can be extended by selling the XOM Apr 75 puts to create a $5 put spread for ~$0.80 (maybe) creating > 5:1 MaxGain:MaxLoss ratio.

This is trade analysis, not a recommendation.

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