Risk Laboratory: Ophir Gottlieb

Wednesday, November 3, 2010

National Semi (NSM) - Calls Bid and Skew Bends

NSM is trading $13.54, up small with IV30™ up 8.7%. The LIVEVOL™ Pro Summary is below.

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The Options Tab (below) illustrates that the calls have traded less than OI so it's hard to tell if they are opening. The vol reaction makes me feel like it's a purchase.

The Skew Tab snap (below) illustrates the vols by strike by month.

We can see that the front month upside is bid, vol is higher to the calls.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock has steadily climbed of late and the IV30™ has now passed the HV20™ and HV180™. Feels like more spec in the takeover mill.

This is trade analysis, not a recommendation.

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ITT Education (ESI) - Time Spread Opportunity

ESI is trading $61.69, down 5.4% with IV30™ up 2.6%. The LIVEVOL™ Pro Summary is below.

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Second one of this flavor today...

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 >= $5
Sigma1 - Sigma2 >= 8
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 <=70
Sigma1, Sigma2 >= 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.

Looking to the Skew Tab (below), we can see the elevated vol in the front month (red line) relative to the second month (yellow line).

Note the vol difference between the front two months. I've highlighted a strangle, but the entire term structure is clearly priced with front > back.

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).

This stock can move a lot. It's an expensive stock with pretty high vol. This makes for expensive options and a substantive amount of risk.

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

We can see Nov vol is priced at ~62.5 and Dec at about 55.

Potential Trades to Analyze
1. Strangle calendar: Sell Nov 55/67.5, Buy Dec 55/67.5. The fair value for the Dec 67.5 calls using 51 vol is $2.31 (note there is no bid there yet on max wide markets). This calendar would pay ~$4.70, sell ~$2.05 so a net debit of ~2.65. Buying 55 vol (ish) selling 65 vol (ish).

2. The strikes don't have to be even, putting on more risk could sell a closer to the money strangle and buy further OTM for a net even (ish) trade.

3. The opposite of #2 above. If you feel like a move is coming, sell further OTM front and buy closer to the money back. This allows a bit of wiggle room for the stock to move but is more expensive.

This is trade analysis, not a recommendation.

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Entropic (ENTR) - Time Spread in Play

ENTR is trading $8.40, up 1.2% with IV30™ up 11.8%. The LIVEVOL™ Pro Summary is below.

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ENTR is a semiconductor company that designs, develops and markets systems solutions to enable connected home entertainment.

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 >= $5
Sigma1 - Sigma2 >= 8
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 <=70
Sigma1, Sigma2 >= 1

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol Pro™.

Now we can turn to the Charts Tab, vol only (below). IV30™ - red vs HV20™ - blue vs HV180™ - pink.

Note how the IV30™ has popped past both the short-term realized and the long-term realized.

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

Note that Nov vol is ~90 while Dec is ~76.

Potential Trades to Analyze
There are couple ways to play this, one would be a straight vol sale, the other is calendar spread.

1. Buy the Dec 7.5/10 strangle for $0.85 and sell the Nov 7.5/10 strangle @ $0.40 for a total debit of $0.45. That purchases ~74 vol and sells ~89 vol.

2. Sell the Nov 7.5/10 strangle naked, risky. I actually like the calendar better, oddly enough.

This is trade analysis, not a recommendation.

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Tuesday, November 2, 2010

Aetna (AET) - Earnings Preview

AET is trading $30.20, up 1.3% with IV30™ up 7.5% into earnings tomorrow before the bell. The LIVEVOL™ Pro Summary is below.

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The Options Tab (below) illustrates that the calls are mostly opening (compare OI to trade size), puts are ambiguous. It seems to me that both are purchases today.

The Skew Tab snap (below) illustrates the vols by strike by month.

Normal looking skew with front month elevated to the back as expected.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock gap down hard on last earnings. In general AET is actually a reasonable bet to sell the earnings vol and then cover the next day (ATM straddle one day sale). The average IV over the last four cycles according to my calculations was 42.14; today the ATM is priced at ~42.8, so basically, the same place. The strangle buyers (even if it's different people buying the calls and puts) is noticeable in terms of size. I feel like a 1x2 OTM could be worth analyzing, but I'm not in love with selling the straddle naked this time, though a $2.25 straddle is pretty juicy.

This is trade analysis, not a recommendation.

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Rackspace (RAX) - New High, Vol Pop, Abrupt Moves into Earnings

RAX is trading $26.37, up 4.0% with IV30™ up 10.8%. The LIVEVOL™ Pro Summary is below.

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The stock blew through the 52 wk high of $26.50 this morning, touching as high as $27.94. At around 12pm EST, the stock suddenly gapped down and vol spiked, then returned to normalcy though the price has not fully recovered. The Livevol Pro Tick Chart is included below (stock is on top, vol on the bottom). Note that earnings are in six days (11-8-2010).

Here's the news from Motley Fool:
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There are twin engines behind this move: speculation that Dell (Nasdaq: DELL) might choose to buy Rackspace to expand its cloud-computing acumen, and a halo effect around strong results from rival Terremark Worldwide (Nasdaq: TMRK). Rackspace has now returned 43% over the last three months to its shareholders, or 52% in six months.
Source: Click Here for Full Article
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The company has traded over 22,000 options on total daily average option volume of just 5,128. Nov is active with the OTM calls and puts trading, though calls are trading about 2x as much as puts. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the calls are mostly opening (compare OI to trade size) while the puts are ambiguous. I have lost the ability to read order flow some how (my guess is a zombie ate my brain cuz I left the bedroom window open) - the calls really do look ambiguous, maybe two sided, not sure. Note also that Dec vol is up nearly 8 points while Nov is up just 4. With vol up, it feels like more premium buying than selling.

The Skew Tab snap (below) illustrates the vols by strike by month.

The back months are pretty flat, but Nov looks kinda normal (ish) giving us little clue to the order flow if it is one-sided.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock is on a recent rise from $22 (ish) up to over $26 in the last three weeks. Just recently the IV30™ has jumped past both HV20™ (short-term realized vol) and HV180™ (long-term realized vol). The IV30™ is also now passed the peak from the last earnings cycle.

This is trade analysis, not a recommendation.

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TriQuint Semiconductor (TQNT) - Calls Trade After Earnings Pop

TQNT closed at $10.06, down 2.4% yesterday. The LIVEVOL™ Pro Summary is below.

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The Options Tab (below) illustrates that the calls are mostly opening (compare OI to trade size). Note the OI in the Nov 10 calls as well - it's over 10,000. I actually can't tell if it's long or short, could make an argument for both.

The Skew Tab snap (below) illustrates the vols by strike by month.

Pretty normal, but note the drop off in vol after the Dec 10 line to the upside.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock rise since mid Sep, up substantially in terms of percentage. What's interesting is that earnings are done, there was a nice gap up, but the calls opened yesterday.

This is trade analysis, not a recommendation.

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Monday, November 1, 2010

Direxion Small Cap Bear 3x (TZA) - Market Now Prices More Downside Risk

TZA (Small Cap Bearish) is trading $22.69, up 0.3% (up?) with IV30™ up 2.6%. The LIVEVOL™ Pro Summary is below.

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The Options Tab (below) illustrates that the action is spread all around in Nov. Note that Nov vol is up more than 3 points and Dec is up 1.9 points.

The Skew Tab snap (below) illustrates the vols by strike by month.

This is pretty cool b/c up means bearish so the skew looks backward though in reality it is how it should be. We can see a rather abrupt upward skew. I have included the Skew Tab from 9-1-2010, i.e. two months ago (below).

We can see that a couple months ago the skew was less pronounced and in fact the back was more expensive than the front across all strikes. Hmm...

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the on the bottom portion that the IV30™ has just now popped above both long-term and short-term realized vols. That combined with the skew chart now as compared with two months ago reflects the option market's general pricing of greater downside risk (upside in this bearish ETF).

Possible Trades to Analyze
This opportunity is all about comfort with the broader market. If you feel like the downside in the market (upside in this ETF) is in fact "in play", then this is nothing more than an, "Oh, I see..." But, if you think the market's downside isn't more risky, then selling that skew reveals a potential opportunity.

1. Sell the Nov 28/29 1x2 call spread @ $0.25 credit. This is safe until TZ goes past $30.25, then it's naked upside. This trade also wins if "nothing happens" or if the market has an abrupt down day but the ETF doesn't really get too close to the 29 level. This trade really is more like a "get out of the way" trade. The lower strikes yield a larger credit but are definitely more risky.

2. Naked sales of the skew are also in play, though more risky.

3. A 1x2 put spread (maybe 18/19) for a credit is sort of a play the other way. I'm not in love with selling that part of the skew for obvious reasons.

This is trade analysis, not a recommendation.

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Avanir Pharma (AVNR) - Examining the PDUFA Bio-tech Trading Results

AVNR is trading $5.10, up 110.7% with IV30™ down 75.2% on the FDA drug approval. The LIVEVOL™ Pro Summary is below.

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For convenience I have included a snippet from the last blog here:
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"Generally in bio-techs one rule of thumb is that the meat (ATM) is too cheap and the wings are too expensive. Conveniently there are Nov 0.5 puts to use.

If you want to gamble (and that's what this is, a gamble), you can find some premium to play with by selling the Nov 0.5/1 put spread @ $0.10 (or better b/c there is liquidity in the 1 line). That max loss is just $0.40 and hypothetically there is ~ 20% chance that gets realized. Selling the spread @ $0.15 yields a max loss of just $0.35.

You can use that $0.15 of premium, sell some OTM call, and then use that to buy an option. Of course, this assumes you want to gamble on good news. A gamble on "not-good news" is pretty easy. You could just pay $0.05 in the Nov 0.5 puts, or go ahead and do the Nov 1 puts."
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The Nov 3 straddle was priced fair value ~$2.40 and we can see the stock has moved $2.68 at time of this writing, so pretty good options market pricing. The general rule is to buy the meat and sell the wings in bio-techs but to be 1:1 long:short contracts. In this case a front month straddle purchase with any strangle sale would have been a nice winner.

For those that gambled on this one, I hope you won... Please keep in mind, the "general" rule does NOT win this easily all the time. You can get housed being long premium in a PDUFA stock, don't use this as the apotheosis, just as one example of many.

This is trade analysis, not a recommendation.

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