Friday, May 6, 2011

Rambus (RMBS) - Calendar and Skew Open

RMBS is trading $19.11, up 1.0% with IV30™ up 10.0%. The LIVEVOL® Pro Summary is below.


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Rambus Inc. (Rambus) is a premier technology licensing company. The Company is engaged in designing, developing and licensing chip interface technologies and architectures.

This company is embroiled in patent litigation and rulings quite often as they look to defend their intellectual property and R&D successes. For option traders that means there's lots of vol and skew abnormalities to examine.

The Skew Tab snap (below) illustrates the vols by strike by month. This is a good place to start.

A couple of things to note.
1. The ATM front month vol (red) is well below the ATM second month vol (yellow). I'm talkin' 17 vol points or, in English, Jun ATM vol is 30% higher than May.  I haven't checked, but I'm guessing there's some "news" due out in Jun that is not expected in May.
2. Even given #1, the OTM call skew (vol) in May is higher than Jun.

These two taken together open up a bunch of trades that we can analyze. Let's first look to the Charts Tab. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

It's awesome how high IV30™ trades above the short-term and long-term historical. Sort of dares you to sell it, then the stock moves 300%... Or not... Finally, let's look to the Options Tab and examine some vol trades.

Possible Trades to Analyze
1. Intra-month May call spread:
For the bullish that like to scalp some skew: The May 19 (or 20) calls are priced at ~53 vol while the 22 - 24 calls are priced at 73 vol and higher. Doing this on a ratio is interesting too -- but caution to being short too many wings in a litigation company.

2. Inter-month May/Jun call spread:
An alternative to #1 is to purchase the Jun ATM vol (~70), and sell the May OTM call vol @ ~80. If that works out ok, then a sale of the OTM Jun calls might be in order (also priced @ ~80). That sells two juicy OTM calls while remaining covered the whole time. Doing these on a ratio might also be worth examining.

Keep in mind -- elevated vol reflects elevated risk -- so selling has it's downfalls and is contrary(ish) to the market.

This is trade analysis, not a recommendation.

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