Thursday, August 18, 2011

Citigroup (C) - Popping Vol, Diagonal Calendar to Vega

C is trading $27.39, down 8.2% with IV30™ ripping up 35.3%. The LIVEVOL® Pro Summary is below.


Click for Free Trial


Citigroup Inc. (Citigroup) is a global diversified financial services holding company. Citigroup businesses provide consumers, corporations, governments and institutions with a range of financial products and services. Ya know… Citigroup….

The stock came up on a couple of scans today – both the calendar spread scan and the rising vol scan. It’s the rising vol that caught my attention, so we’ll focus on that. The scan details are below.

Custom Scan Details

Stock Price GTE 10

Average Option Volume GTE 1,200

Days After Earnings GTE 5 and LTE 60

IV30™ Percent Change GTE 10%

IV30™ GTE 10

The goal here is find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.

Let’s start with the stock and vol charts first, this time. The C 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).

On the stock side we can see that the price action has fallen to scary levels – the potential for new lows looms ever so large, whether it be by the end of the day, tomorrow, or in the near-future (read: this Fall).

On the vol side, we can see the massive spike in IV30™ of late – well above the long-term historical realized trend. But, the implied is actually printing well below the HV20 (and the HV10). In English, the rise in the implied vol has been less than the actual recent realized volatility in the stock price. Specifically we can see:

IV30™: 81.76

HV20: 101.07

HV180: 41.63

HV10: 140.54

Let’s turn to the Skew Tab snap (below) to examine the vols by strike by month.

I’ve included the Aug options (expiring tomorrow) and the Sep options. I’ve excluded the Aug (W) that expire next Friday. Note the parabolic skew in the Aug options which isn’t apparent in the Sep options. For pure calendar spreaders, that upside vol diff is quite large. That however, isn’t quite where my attention is. Let’s look to the Options Tab, and do a little math to discuss a different possibility.

I wrote about this one for, so no specific trade analysis here. But, there's a lot to examine. First we can see that the Sep ATM are trading at around 82 vol while the Aug ATM are trading more like 100 vol. Keep in mind the vol comps above from the Charts Tab – 82 vol might actually be “cheap” relative to the movement of the stock in the recent past.

While a straight calendar spread is interesting, there is another alternative here given that the front month we’re examining expires in two days and the back has a full month to go. For example, if we look at owning the Sep 25 puts against a sale of the Aug 26 puts, that receives essentially 20% of the Sep premium for a day and a half in Aug. Granted, it’s a risky day and a half in Aug. Hypothetically, this trade could lose the entire premium paid AND the difference in the strike prices, so ~ $2.40.

But, with a little math, we can see that even if the stock gapped down to $25 tomorrow, the trade would still look like a win. Here’s the math:


Pay ~$1.40 to own the put spread.

Tomorrow (if vol stays the same in Sep):

Stock closes at $25

Short Puts PnL: ($0.32 - $1.00) = -0.68

Long Puts PnL: ($2.60 - $1.72) = +$0.88

So, a $0.20 win.

Another way to look at the spread value in this event, is simply to unwind @ $1.60 (which also yields the $0.20 gain). Of course, if the stock is down another $2.00, the vol will likely go up in Sep, making the trade a bigger winner.

Doing the same math if the stock goes to $24, yields a $1.04 value in the put spread (if vol stays the same), so ~ $0.36 loser. Should vol go up 10 points, that trade is close to breakeven. Obviously if C falls apart tomorrow (below $24), that diagonal strike difference will catch up to the trade an d create a loss (a least for the one day).

Yet another way to do this math, and in fact the way I do it so it takes just a few seconds, is to look at the calls in Sep. The puts are worth parity + calls (negligent interest rates right now), so move $1 away from the money and do some math that way.

Anyway, the point? The risk of this type of trade is to the upside, not the downside, even though the diagonal strikes are long delta as the stock drops. The opportunity to cover a short put (call) with a lower (higher) strike put (call) saves a lot of premium (in this case ~ $0.30, which protects an upside (downside) move) yet leaves the position fairly safe to the downside (upside). That means less upside (downside) risk (less premium invested) and still downside (upside) PnL likelihood if there’s another down (up) day and substantially better PnL if the stock stays here (ish) for one more day.

In times of extreme vol in the front, this type of diagonal calendar opportunity does appear fairly often as an alternative to a plain vanilla calendar spread.

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:

No comments:

Post a Comment