Wednesday, March 2, 2011

NASDAQ Stock Market (NDAQ) - Calendar and Complex Vol Comps

NDAQ is trading $27.79, up 0.4% with IV30™ up 1.9%. The LIVEVOL™ Pro Summary is below.


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The NASDAQ OMX Group, Inc. is a global exchange group that delivers trading, exchange technology, securities listing, and public company services across six continents.

I wrote about NDAQ on 2-15-2011. You can read that post here:
NASDAQ Stock Market (NDAQ) - Elevated Vol on NYSE News.

I know, I know, what's worse than clicking to see an old article? So here are the highlights:

"Allow me to quote myself from The article:
I believe the vol in NDAQ has been spiking based on the takeover/merger news in NYSE Euronext and Germany’s main stock exchange company, Deutsche Börse. Whether or not that merger goes through, it takes NDAQ to the top of the list of potential takeover candidates."

I just quoted myself quoting myself, or in the wise words of Austin Powers, "allow myself to introduce myself."

Anyway... The stock's vol has been rising, but the price has also been moving a lot. Today NDAQ 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 also note that the third month (green line) is well below the front two months and what do ya know... there's an earnings cycle in that expiration.

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). I've added another color as I figured it's already convoluted so why not go further...

The white line is the HV10™ -- it's the realized volatility of the stock over the last 10 trading days. The point here is to recognize that while IV30™ seems fair value(ish) to HV20™, that HV20™ number is artificially elevated because of a move off of earnings. But, When comparing the IV30™ to the shorter-term HV10™, you could make an argument that the IV30™ is elevated. Specifically:

IV30™: 43.83
HV10™: 36.71
HV180™: 28.09
HV20™: 47.16

Again -- you can make an argument that NDAQ implied vol is high when factoring out that earnings move.

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

Potential Trades to Analyze
This is similar to the post earlier today on BKS in that the third month has the earnings event.

1. Calendar spread Mar/Apr:
Sell the Mar 27/28 strangle @ $1.75 (~46 vol).
Buy the Apr 27/28 strangle for $2.85 (~42 vol).
The risk is that NDAQ moves far away from the ($27, $28) range by Mar expo.

2. Calendar spread Mar/Jun:
Sell the Mar 27/28 strangle @ $1.75 (~46 vol).
Buy the Jun 27/28 strangle for $4.10 (~39 vol).
The risk again is that NDAQ moves far away from the ($27, $28) range by Mar expo. This trade costs more than #1 as you own longer term options with the benefit of also owning an earnings cycle. An extension here if it works out to Mar expo is to then sell the Apr strangle -- this sells options 2:1 but is never naked short.

3. Calendar spread Apr/Jun:
Sell the Mar 27/28 strangle @ $1.75 (~46 vol).
Buy the Jun 27/28 strangle for $4.10 (~39 vol).
The risk is that NDAQ moves far away from the ($27, $28) range by Apr expo.

4. A little trickier:
It's reasonable to analyze selling further OTM options in Mar (wings) and to buy the meat in Jun (or Apr). This costs a bit more but also allows for the stock to move more before the front month expo.

This is trade analysis, not a recommendation.

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