Thursday, March 24, 2011

TIVO - Skew Shape Changes, Risk Still Looms Large

TIVO is trading $8.68, up 1.6% with IV30™ up 2.1%. The LIVEVOL® Pro Summary is below.


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I wrote about TIVO on 3-4-2011. You can read that post here:
TIVO - Implied Risk Criss Crosses on Upside Skew

Just to pull things together, I've also included the Livevol® Pro Summary as of that day.

So, stock is down and vol is up since then -- both substantially at -7% and +19% respectively.

In the earlier post I wrote about the upside skew, specifically that the front month upside skew was higher than the second while the ATM vol was lower from month 1 to month 2. Let's look at the skew as of 3-4-2011.

Today I see some completely different vol phenomena. The Skew Tab as of a few minutes ago (3-24-2011) is included below.

First, the ATM vol in the front (which is now Apr, not Mar) is above the ATM vol in the second month (which is now May, not Apr). Second, the upside skew in month 2 is downward sloping. In English, now the upside risk that's reflected in the front month is no longer as abrupt in the back months. Tricky...

Let's look to the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Umm, hello. The vol is exploding -- obviously there's a vol event (likely a lawsuit result/hearing). The interesting part can be seen in the Options Tab, below.

The ATM straddle in Apr is priced at ~122 vol, and ~120 vol in May (so a 2 point vol difference). But, the upside skew difference is 20 points on the 11 strike and 26 points on the 12 strike. That seems like a trade worth examining, if for nothing else, just to understand what the option market is reflecting.

Possible Trades to Analyze
1. Upside skew calendar between Apr and May:
a. Buy the Apr/May 11 call spread for $0.48.
b. Buy the Apr/May 12 call spread for $0.39.

2. Upside skew calendar between Apr and Aug:
Note that Aug ATM vol is just 88 (lol, "just 88"). The upside skew in Aug (see skew snap, above) is flat, so there isn't any "extra vol" to be paid to own the upside wings.
a. Buy the Apr/Aug 11 call spread for $0.67.
b. Buy the Apr/May 12 call spread for $0.58.
These two trades scalp ~55 and ~60 vol points respectively. By scalp all I mean is, selling higher vol than purchasing. The trick here is that owning Aug vs Apr is long vega, so a vol crush can destroy this position.

An extension to consider here is looking at #2 (a. or b.), and if TIVO kinda hangs right here, to sell the May options against it. Maybe even diagonal to own some deltas (so sell a higher strike in May than is owned in Aug). This could leg into a very cheap call spread for a volatile stock.

3. Just watch and wait for other opportunities to analyze.

NB: All of the trades discussed above are quite risky as we're dealing with a super volatile lawsuit heavy company which is nearly impossible to predict.

This is trade analysis, not a recommendation.

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