Thursday, August 11, 2011

Deutsche Bank (DB) - What's in a Calendar?

DB is trading $41.72, up 3.4% with IV30™ down 4.4%. The LIVEVOL® Pro Summary is below.


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Deutsche Bank AG is a global investment bank. The Company offers a variety of investment, financial and related products and services to private individuals, corporate entities and institutional clients around the world.

The stock 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 GTE $5

Sigma1 - Sigma2 GTE 8

Average Option Volume GTE 1,000

Industry isNot Bio-tech

Days After Earnings GTE 5 LTE 70

Sigma1, Sigma2 GTE 1

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), to examine the vol diff inter-month.

We can see how the front month is elevated to the back and there is a nice little parabolic bend up in Aug to the OTM calls yielding an even larger calendar opportunity.

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).

So the stock drop is pretty obvious, and it’s likely more systematic than firm specific (duh). It is interesting to see how the implied has tracked the historical – sort of a fair vol rise. Specifically:

IV30™: 81.58

HV20: 77.18

HV180: 39.83

Obviously the long-term trend (HV180) is a bit less relevant for the next few weeks (or two weeks), but the HV20 to IV30™ comp is pretty nice and they track well.

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

I wrote about this one for, so no specific trade analysis here. But, one thing to remember, a calendar trade has two greek positions that pop out to me.

1) Short Gamma

2) Long Vega

In English, greek position (1) loses to a large stock move. Is there any reason to assume that’s a salient risk? Greek position (2) loses to a drop in vol. Is there any reason to assume that’s also a salient risk? Hmmm...

For you naked put sellers, there may be some viability, as that position is short gamma but also short vega (note the difference to the calendar). It also of course carries a greater delta risk than the calendar.

This is trade analysis, not a recommendation.

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