Friday, November 11, 2011

Level 3 Communications (LVLT) - Calendar Spread, Depressed Vol and Gamma Priced to Sell Against Vega

LVLT is trading $21.36, down 1.4% with IV30™ down 8.1%. The LIVEVOL® Pro Summary is below.


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Level 3 Communications, Inc. (Level 3) is engaged in the communications business. Level 3 is a facilities-based provider of a range of integrated communications services. It offers a range of communications services, which include network and Internet services, colocation service, media services and voice services.

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months. I figure we're on Friday before expo, this is a cool one to look at.

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 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 turn tot he Skew Tab, below.

We can see similar skew shapes across both months with the Nov options above the Dec. I do note that dip in the 23 strike for Dec, but that's just bc of wide markets. In fact, the width of the markets in general, and in Dec in particular, are disturbing in that trades may not be had for reasonable prices.

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).

What I'm interested in here is the vol portion. Check out how low IV30™ is relative to the short-term historical vol (HV20) and the long-term historical vol (HV180). Specifically:

IV30™: 52.08
HV20: 69.70
HV180: 60.08

Se we've got depressed vol while the gamma in Nov is priced to sell relative to Dec.

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

Potential Trades to Analyze
The calendar is interesting, ratios are interesting, diagonals as well. The real problem here is the width of the markets. This one is less interesting to analyze unless reasonable prices can be had. You would need to do vol calcs on the actual execution prices to really understand and / or realize a vol scalp.

This is trade analysis, not a recommendation.

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