Wednesday, August 24, 2011

Computer Sciences (CSC) - Calendar Spread and Skew Kinks

CSC is trading $29.14, up 0.4% with IV30™ unched. The LIVEVOL® Pro Summary is below.


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Computer Sciences Corporation (CSC) is engaged in the information technology (IT) and professional services industry.

Today CSC came up on a real-time custom scan. This one hunts for calendar spreads between the front two months. For the first time in a while, we'll look at a non-financial, non crazy vol, non-Chinese stock. Just a plain vanilla techy, that has some interesting term-structure vol.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry != Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 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 start with the Skew Tab.

We can see the vol diff between the front two months. In particular, there's a little kink up in the Sep 32.5 calls corresponding with a little kink down in the Oct 32.5 calls. The company last reported earnings this month, so as far as i can tell, there should be no earnings vol in either of these expos.

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).

The stock has gapped down a couple times. Once on 5-3-2011 and then again on 5-26-2011, the latter was off of an earnings report. On 5-2-2011, this was a $51 stock. Today, it's trading in the high 20's.

On the vol side, we can see the elevated recent movement (realized vol). The implied has traded up with the realized volatility, but is still priced in between the short-term and long-term HVs. It is worthy to note that before the most recent earnings release, the HV20 was ~20 -- so very low vol relative to both the IV30™ and HV180.

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

Potential Trades to Analyze
Without getting too fancy, here are a few sort of plain vanilla calendar spreads to examine.

1. Sep/Oct call side
The 32.5 line vol diff between Sep and Oct is ~11.5 vol points.

2. Sep/Oct put side
The 27.5 or 25 line vol diffs are ~7 vol points.

3. Sep/Oct ATM
For a position that bets on the HV20 returning to the low 20's, an ATM or slightly OTM calendar (straddle or strangle) is a reasonable position to analyze.

This is trade analysis, not a recommendation.

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