VirnetX (VHC) - Elevated Vol for a Reason. Takin' on the Tech Giants

VHC is trading $12.69, down 5.7% with IV30™ up 1.6%. The LIVEVOL™ Pro Summary is below.



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I found this stock using a real-time custom scan. This one hunts for high vols. But, this one has high vol for a good reason.

Custom Scan Details
Stock Price >= $7 and <= $70
IV30™ - HV20™ >= 10
HV180™ - IV30™ <= -8
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >=10 and <=60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). 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 IV30™ simply because earnings are approaching. The VHC 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).

 

We can see:
IV30™: ~103.39
HV20™: 88.31
HV180™: 77.70

So, IV30™ is elevated relative to the short term and long term realized movement of the stock. Note that this stock has been ~$5 as of a few months ago and went as high as $20 less than two months ago. Hello?...

Here's some news from Motely Fool:
-------------------------------------------
Nov. 10, 2010

The company posted a third-quarter report with the Securities and Exchange Commission on Monday night, but did not follow up with a press release. Today's massive price jump and yesterday's late-action drop of more than 16% are delayed reactions to this report as investors stumbled across new information outside the traditional news channels.

Now what: VirnetX landed a $200 million patent license payment from Microsoft (Nasdaq: MSFT) in the previous quarter, but booked no new revenue this time around, which explains the panicked drop. Today's bounce brings the stock back to a 652% gain over the past year, most of which came after that Microsoft payment. VirnetX has patent infringement lawsuits outstanding against Cisco Systems (Nasdaq: CSCO) and Apple (Nasdaq: AAPL) among other tech luminaries, and hopes to land another payday or two in the near future.
-------------------------------------------

So this guy is a takeover candidate that has been a huge trading range, with patent issues, weird SEC filings, stocks pops and collapses, potentially no revenue or a lot, and is in the face of the A-list of tech stocks (AAPL, CSCO, MSFT). Umm, that would equal high vol.

The Skew Chart actually illustrates that the ATM vol is cheaper than the wings on both sides. The Skew Tab is included below. I have highlighted the ATM strike (13), though it's the 14 strike that has the lowest vol.



Let's finally look to the Options Tab (below).



Possible Trades to Analyze
1. Kinda Psycho:
Sell the Dec 13 straddle @ $2.80. This trade wins on Dec expo if VHC is in ($10.20, $15.80). That seems like a great trade - huge profit window, I mean other than the fact that stock has been as low as $5 and as high as $20... This trade can also be shut down earlier than Dec. expo if vol drops, or if the stock just sits and the trade wins to theta (time decay).

2. Not as psycho, but still under psychiatric evaluation:
Sell the Dec straddle @ $2.80, buy 3 Dec 15 calls for $0.70. That yields a $0.70 credit, wins huge to a takeover for $20.

3. Normal, sort of:
Sell the Dec 12/13 strangle @ $2.15.
Buy the Dec 9.5/14 strangle for $1.35.
This yields $0.80, has just $0.20 upside risk, but has a substantial downside risk. Let's look to the PnL chart for this one on Dec. expo.



4. Given what the Skew Tab showed us, you can approach this differently by purchasing the meat (ATM) and selling the wings (OTM). I can't even write that down in a number, it makes me ill. But that doesn't mean it's not a legitimate trade, I just can't get myself to buy that much premium.

Ultimately, with markets this wide and uncertainty this high, this might just be an interesting one to watch rather than one to trade... I'm just sayin'...

This is trade analysis, not a recommendation.

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UPDATE: SPY, AMZN - One Day Trade Analysis

SPY is trading $119.53, down 0.4% about 10 minutes after the open. The LIVEVOL™ Pro Summary is below.



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Yesterday I posted this blog:SPY - One Day Skew Trade.

Specifically we looked at:
Buy the Nov 26 weekly 119 put for $0.59 and sell the Nov monthly 119 put @ $0.18. This spread pays $0.41. I like this trade for a few reasons: ...snip...

I have included the Options Tab as of the open (ish).



As of this snapshot, the Nov 26 (W) 119 put can be sold @ $0.75 and the Nov monthly can be purchased for $0.17. That's a $0.58 credit on a $0.41 bet. That's a nice gain on a low risk bet even after commissions, that's ~ $0.13 or 31%.

Similarly, we looked at a trade in AMZN for one day. You can read that post here:
Amazon (AMZN) - Short-term Skew Peaks on Market Fear. The Summary for AMZN as of ten minutes after the open is included below.



We analyzed:
Buy the Nov 26 weekly 155 put for $0.58 and Sell the Nov Monthly 155 put @ $0.14. Pay $0.44 for the one week spread. Look to close tomorrow possibly.

Let's look to the AMZN Options Tab:



As of this snapshot, the Nov 26 (W) 155 put can be sold @ $0.43
and the Nov monthly can be purchased for $.02. That's a $0.41 credit on a $0.44 bet. Adding commissions back, this was like a $0.07 loser... blah...

This is trade analysis, not a recommendation.

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SPY - One Day Skew Trade

SPY is trading $120.20, ripping up 1.7% with IV30™ down 13.4%. The LIVEVOL™ Pro Summary is below.



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As I mentioned in an earlier post today (Amazon (AMZN) - Short-term Skew Peaks on Market Fear), the downside vol is remaining elevated in these expiring options because the fear of a big down day has been re-introduced to the market by it's recent drop.

Let's take a look at the SPY skew today.



I've highlighted the 119 strike and the vol difference between the Nov 26 weeklies and the Nov monthlies (expiring tomorrow). The weeklies are priced 8 vol points higher, or ~50% more expensive than the Nov 26 weeklies.

Let's look to the Options Tab and talk about some trades to analyze.



Possible Trades to Analyze
1. Buy the Nov 26 weekly 119 put for $0.59 and sell the Nov monthly 119 put @ $0.18. This spread pays $0.41. I like this trade for a few reasons:

1. It's a one day trade on the super elevated expiring monthlies. If SPY sits here, it should be a winner if vol remains unched in the weeklies as the put would be worth $0.50 and the sale would expire worthless.

2. If the market catapults down, say $2.00, like today, here's the scenario I see:
SPY closes: $118.2
Short puts are worth $0.80 (parity).
Long puts with vol unched would be worth: $1.41
So the $0.41 spread would be worth $0.61, nice... But, if the SPY goes back down $2.00, the vol would go up in the long puts. So the spread would more likely be worth ~$0.72 (that's a two point vol jump in those puts after decay). So, really, the downside is not the problem (other than a total market collapse, like 7+%)

3. If SPY goes to 120 (down small) and vol remains unched, the spread would be worth ~ $0.55. Another nice little win.

The risk is if the market goes up. I see breakeven ~ SPY at 120.40. This allows for a small dip in vol as well (maybe 0.5 point).

So, in conclusion, this trades could win if SPY <= 120.40 and risks just $0.41 for that bet. Of course, this is just hypothetical mumbo jumbo, but it's really fun mumbo jumbo. Alternatives are all kinds of 1 x 2 or diagonals with time spreads. This is trade analysis, not a recommendation.

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Energy XXI (EXXI) - Re-visiting Elevated Vol

EXXI is trading $24.10, up 4.6% with IV30™ also up 3.1%. The LIVEVOL™ Pro Summary is below.



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I posted a blog on this stock on 10-20-2010 based on it's elevated vol. You can read that post here:
Energy XXI (EXXI) - Elevated Vol Starts to Drop

The trades we analyzed surrounded selling strangles. All of them have ended lookin' pretty sweet and today this stock showed up again on the same elevated vol scan.

Custom Scan Details
Stock Price >= $7 and <= $70
IV30™ - HV20™ >= 10
HV180™ - IV30™ <= -8
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >=10 and <=60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). 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 IV30™ simply because earnings are approaching. Alternatively, I've included this scan in the "Trading Opportunities" folder. You can see that result below.



The EXXI 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).



We can see:
IV30™: 68.40
HV20™: 40.32
HV180™: 51.45

So, IV30™ is again elevated relative to the short term and long term realized movement of the stock.

Let's look to the Options Tab (below).



Possible Trades to Analyze
1. For naked vol sellers, selling the Dec 22.5/25 or 22.5/27.5 strangles trades ~68 vol. The Dec 22.5/25 strangle @ $2.50 requires EXXI be in the range ($20, $27.5) if held to Dec expo. to be profitable.

The Dec 22.5/27.5 strangle @ $1.80 requires EXXI to be in the range ($20.70 ,$29.30). So the trade off between these two is more upside room but collecting less premium and losing a touch of downside room for the 22.5/27.5 strangle.

Both are naked short options.

2. Sell the Dec 22.5/27.5 strangle @ $1.80 but purchase the Dec 20/30 strangle for $0.85 for protection. This receives $0.95 (MaxGain) and locks in a MaxLoss of $1.55. The PnL Chart on Dec expo. for this trade is included below.



3. Sell the Dec 22.5/25 strangle @ $2.50 and purchase the Dec 20/27.5 strangle for $1.25 for protection. This yields a 1:1 MaxGain:Max loss rather than the 0.61 for trade #2, but leaves less upside room. The PnL chart for this trade is also included below.



Another little bonus here, this would be selling Dec vol and Dec is a month which can sort of drift off into nothingness as holidays approach... Or not...

This is trade analysis, not a recommendation.

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Amazon (AMZN) - Short-term Skew Peaks on Market Fear

AMZN is trading $163.90, up 3.5% with IV30™ down 5.6% as the market finally broke out of a nasty downward spiral. The LIVEVOL™ Pro Summary is below.



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The VIX jumped from ~18.25 to over 23 and now is down to ~19.10. The fear of a large down day (I mean, LARGE) has returned so the two day options need to reflect that. This means they have to have at least some value, and with expo approaching this pushes the vol up. Let's look to the AMZN Skew Chart (below).



I've highlighted the Nov (Monthly)/Nov 26 (Weekly) 155 strikes. We can see the vol difference is about 30 points, or, another way to say it, the Nov monthly expo 155 strikes are ~200% the IV30™.

Let's look to the Options Tab (below).



Possible Trades to Analyze
1. Buy the Nov 26 weekly 155 put for $0.58 and Sell the Nov Monthly 155 put @ $0.14. Pay $0.44 for the one week spread. Look to close tomorrow possibly.

2. Get crazy, do 1 x 2: So sell 2 of the Nov monthlies and buy 1 of the Nov 26 weeklies and pay $0.30.

3. Use the Dec monthlies. Get long those 155 puts and sell the Nov monthlies, then the Nov 26 weeklies, then the Dec 3 weeklies, Dec 10 weeklies, etc until Dec expo. Tricky...

This is trade analysis, not a recommendation.

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ReneSola (SOL) - Elevated Vol in Chinese Solar Company

SOL is trading $9.25, down 5.8% with IV30™ up another 5.7%. The LIVEVOL™ Pro Summary is below.



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SOL is a manufacturer of solar wafers and producer of solar power products based in China.

I found this stock using a real-time custom scan. This one hunts for high vols.

Custom Scan Details
Stock Price >= $7 and <= $70
IV30™ - HV20™ >= 10
HV180™ - IV30™ <= -8
Average Option Volume >= 1,200
Industry != Bio-tech
Days After Earnings >=10 and <=60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). 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 IV30™ simply because earnings are approaching.

The 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). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.



We can see:
IV30™: ~81.68
HV20™: 63.89
HV180™: 71.07

So, IV30™ is elevated relative to the short term and long term realized movement of the stock. An added bonus can be seen in the Skew Tab below.



What's the hotness here is that the ATM strike is elevated (per chart above) and is elevated per the surrounding strikes. The Dec 9 line is priced at ~83 vol. On the other hand, the Dec 7.5 puts are priced at ~75 vol and the Dec 10 calls are priced at ~81 vol.

Let's look to the Options Tab (below).



Possible Trades to Analyze
1. Vol is elevated, though the stock looks like the stock might decide to go back down to $3. That's one ugly stock chart...
Sell the Dec 9 straddle @ $1.75 or ~ 82 vol.

2. Do #1, but cover with a Dec 7.5/10 strangle for $0.80, or a total $0.95 credit. This sells the elevated vol and buys the "cheaper" wings (see skew chart). It sells 82 vol and purchases ~78 vol. The risk is to the downside, as the upside has a max loss of $0.05. I've included a PnL chart of this strategy below.



3. Do #1, and buy just one side to cover (i.e. buy a call or put but leave the other side naked).

NB: This is a Chinee solar stock, so ya know, there's some risk to being naked short options here.  The 52 wk. range for this stock is [$3.65, $15.34]. That's pretty wide. Also note that the Dec 13 calls are bid, so upside risk is reflected in the options market.

This is trade analysis, not a recommendation.

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Regis (RGS) - Takeover Ride, Stock Gaps and Huge Skews

RGS is trading $18.04, up small with IV30™ up 3.9%. The LIVEVOL™ Pro Summary is below.



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This one has a good story. Short and sweet, they were lookin' for bidders to takeover the company and the stock popped on that news. Two days ago the New York Post leaked a story that claimed the bids they got were in the teens (substantially lower than they anticipated). The stock gapped back down a couple of bucks. You can read about it by clicking HERE.

And today...

The company has traded over 16,000 options on total daily average option volume of just 970. Over 15,900 calls have traded yielding a 43:1 call:put ratio. Over 12,000 Dec 20 calls have traded, substantially purchases as I see it. So, the order flow is buying calls, though the news seems to be "bad." The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates that the calls in Dec have a large OI. I see that interest as long, and opened in Oct, so this is a double down.



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



We can see two things. First, Dec is substantially elevated to Mar. Second, the upside has turned up from this order flow. I haven't included Nov because it ruins the scale, but that upside is hugely bid. The Nov 20 calls are trading at 133 vol, the Nov 22.5 calls are trading at 194 vol (if done @ $0.10).

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 pop in early Aug and the recent drop as of two days ago. The IV30™ has traded above the historicals since early Sep and is now rising to a 52 wk high today.

Possible Trades to Analyze
1. Nov/Dec 20 call spread. Buy Dec for $0.60 and sell Nov @ $0.15, net debit is $0.45. Believe it or not, that's selling 133 vol in Nov.

2. Nov/Dec 22.5 call spread. If that can be done for $0.10, that looks like a nice cheap bet. $0.15 is ok, above that is probably too pricey.

3. A Nov/Dec 17.5 put spread, paying $0.70 would be ok. If the stock stays above 17.5 into expo, you can close that out or buy stock 1:1 to options and turn those puts into calls. Then a Dec 20 call sale to spread it off might work.

4. With all of those trades, selling the Dec 15 puts @ $0.20 (or better) makes everything cheaper but adds a new dimension of downside risk.

This is trade analysis, not a recommendation.

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VMware (VMW) - Market Fear Yields Calendar Spread

VMW is trading $77.05, up 0.6% with IV30™ down 0.7%. The LIVEVOL™ Pro Summary is below.



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The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months. As I have said all this week, since we're approaching expo, I am looking for a big vol diff and a big skew diff. Keep readin' for details.

Custom Scan Details
Stock Price >= $5
Sigma1 - Sigma2 >= 8
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 and <=70
Sigma1, Sigma2 >= 1

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



It's also available on the Scanner Tab, in the "Trading Opportunities" folder.

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).



We can see how the front month is elevated to the back (which is normal this close to expo). The extra step is the skew. I've highlighted the 75 strike which is $2.05 OTM. With the market's recent big down days, these three day options have to hold a substantial value making the vol very high.

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 high IV30™ is relative to the short-term historical vol (HV20™) and the long-term historical vol (HV180™). Specifically:

IV30™: 45.90
HV20™: 33.75
HV180™: 38.94

I'm weary of buying the Dec vol because of this chart, but if you gotta cover, then what are you gonna do?

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



Potential Trades to Analyze
1. Sell the Nov 75 Puts @ $0.65 (there's liquidity in these puts for small). This sells 60 vol.

2. Do #1, but buy the Dec 75 puts for $3.20. That's a net debit of $2.55, purchases ~47 vol against the 60 vol sale. If this trade works out, I would look to sell that Dec vol probably on close Friday. Actually, even if it doesn't work out I might do that.

3. Get a little more creative: Sell the Nov 75/80 strangle @ $0.95, and buy one side in Dec. Those Nov 80 calls are still elevated vol.

This is trade analysis, not a recommendation.

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Harbin Electric (HRBN) - A Wild Story and Wild Vol

HRBN is trading $19.91, down 2.5% with IV30™ up 6.0%. The LIVEVOL™ Pro Summary is below.



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The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.  Just a heads up, this ain't your average time spread - this is a pretty crazy story.

Custom Scan Details
Stock Price >= $5
Sigma2 - Sigma3 >= 7
Average Option Volume >= 1,000
Industry != Bio-tech
Days After Earnings >=5 and <=50
Sigma2, Sigma3 >= 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 third months that are cheaper than the second month by at least 7 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 second month (yellow line) relative to the third month (green line).



I've circled three strikes: 17.5, 20 and 22.5. Each are elevated in Dec to March. The company had earnings on 11-10-2010, so there shouldn't be any kind of earnings event in the Dec options, yet that vol is substantially elevated to March. Further, Dec can be a month of dead vol... when stocks wither to nowhere and short premium can collect a nice win to end the year. These factors sort of mitigate the fact that HRBN has some wide(ish) option markets to trade on.

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 there's a lot goin' on here:
1. The IV30™ has exploded from ~30 to ~80 in ~8 weeks. Hello...

2. The stock gapped up from ~$20 to ~$25 on 10-8-2010.
News from AP: The head of China's Harbin Electric Inc. is teaming up with a private equity fund to try taking the company private.

The electric-motor manufacturer said Monday that CEO Tianfu Yang and Baring Private Equity Asia Group are offering stockholders $24 per share for the stake Yang doesn't already own.

Yang holds just over 31 percent of the company's stock. His bid amounts to a 20 percent premium over Harbin's closing share price Friday.

3. The stock gapped down from $24 back to $20 on 10-25-2010.
This was based on concerns over the company's operations and the buy-out itself.

4. After the flashy show in #2 and #3 above, the stock climbed into earnings on an upgrade, then lost all that momentum after earnings.

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



Potential Trades to Analyze
1. Start simple, though simple may not suffice:
Sell the Dec 20 straddle @ $3.25, buy the Mar 20 straddle for $5.40, so pay $2.15 in the time spread.

2. An alternative is to be long the juice. So, purchase the Mar 20 straddle for $5.40 and sell the Dec. 17.5/22.5 strangle @ $1.40, paying $4.00. The problem with this - if the stock moves hard, there is only $2.50 between the strikes, so that's "bad."

3. Skip the calendar, sell the Dec. 20 straddle @ $3.25, buy the Dec 17.5/22.5 strangle for $1.50. This receives $1.75 (MaxGain), with MaxLoss $0.75.

4. Slightly more adventurous than #3: same trade but sell the Dec. 12.5 puts @ $0.20. Naked short the downside, but collect more premium. This sells 115 vol... 115 vol!

5. Just sell the straddle in Dec and... pray for no takeover.  And if there is one, pray that the lawsuits haven't "inspired" the takeout price ove $24.

This is trade analysis, not a recommendation.

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