Monday, May 16, 2011

Brigham Exploration (BEXP) - Calendar Spread

BEXP is trading $27.06, up 0.5% with IV30™ down 2.6%. The LIVEVOL® Pro Summary is below.


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Brigham Exploration Company is an independent exploration, development and production company that utilizes advanced exploration, drilling and completion technologies to systematically explore for, develop and produce domestic onshore oil and natural gas reserves.

This is another calendar spread note. BEXP 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.

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

We can see that the May options (red curve) are well above the Jun options (yellow curve) across all four strikes that are bid in May. Note that the ITM option markets are quite wide, so try to focus on the vols that are derived from the tighter OTM markets.

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).


IV30™: 47.71
HV20: 54.26
HV180: 42.08

The HV20 is elevated because of a recent move on the last earnings release. On 5-4-2011, BEXP closed down $3.19 or ~10.1%. Until that move, the HV20 was sitting right around the HV180 level.

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

Potential Trades to Analyze
1. May/Jun calendar spreads:
a. The 27, 28, and 29 strikes show vol differences. Whether it's a May/Jun 27 straddle calendar or strangles or even just call spreads, there are a bunch of trades worth examining.
b. Diagonals are also a possibility here as the May upside priced at the mid 50 vol level.

This is trade analysis, not a recommendation.

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