AsiaInfo (ASIA) - Exploding Vol, Dropping Stock, Stock Halt Risk

ASIA is trading $9.19, up 5.2% with IV30™ up 3.2%. The LIVEVOL® Pro Summary is below.



-----------------------------------------------------------


Click for Free Trial

-----------------------------------------------------------

AsiaInfo-Linkage, Inc. (AsiaInfo-Linkage), formerly AsiaInfo Holdings, Inc., is a provider of telecommunications software solutions and information technology products and services in China.

The stock is down over 35% since 8-3-2011 (so 20 calendar days) with a poorly received earnings report on 8-4-2011 AMC. After earnings, the stock has continued to drop dramatically. Here's a nice summary from The Motley Fool on 8-12-2011:

---
What: A week after plunging as much as 25% on disappointing guidance, shares of AsiaInfo-Linkage fell as much as 16% in early trading and stayed down much of the day, closing off 13.7%.

So what: It's hard to say exactly what spurred the selloff, but it's worth noting that, over the past quarter, AsiaInfo-Linkage had become a favorite buy among institutional investors seeking Chinese names. Perhaps poor guidance has enticed Big Money managers to flee the stock?
Source: AsiaInfo-Linkage Shares Plunged: What You Need to Know, by Tim Beyers.
---

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



The stock was as high as $22.91 in early April, so it's down ~60% in four and a half months. But check out the vol chart! Specifically:

IV30™: 274.11
HV20: 118.42
HV180: 59.70

The Sep ATM options are priced at ~290 vol. Putting that into actual dollars -- the Sep ( straddle has fair value of ~$5.20, or ~57% of the stock value for options expiring in a few weeks.


Let's turn to the Skew Tab snap (below) to examine the vols by strike by month.



While the vol is extraordinarily elevated, the skew shape itself is quite normal. There aren't any weird kinks or even parabolic skews. The downside is bid relative to the upside, and the term structure is monotonically increasing from the back to the front.

Finally, let's turn to the Options Tab, for completeness.



Possible Trades to Analyze
This one is wrapped up in so many risks it's hard to really take a position. A few things that I do note:

- The Sep 4 puts are priced to over 350 vol.
- The Sep 4/5 1x2 (buy 1 Sep put and sell 2 Sep 4 puts) can be done for a credit (I think). That would be safe to under $3.00 in stock by Sep expo.
- This is a Chinese stock with some serious risk -- it has happened before (ad may happen again) where the stock is halted over multiple option expirations and exercise decisions become quite a task; especially if you have short options as well, given that getting exercised on is random.

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:
http://www.livevolpro.com/help/disclaimer_legal.html

Silver Metals (SVM) - Elevated Vol, Parabolic Skew and Double Systematic Risk

SVM is trading $8.35, down 4.1% with IV30™ up 3.2%. The LIVEVOL® Pro Summary is below.







-----------------------------------------------------------





Click for Free Trial



-----------------------------------------------------------



Silvercorp Metals Inc. (Silvercorp) is engaged in the acquisition, exploration, development and mining of high-grade silver-related mineral properties in China and Canada. Silvercorp is the primary silver producer in China through the operation of the four silver-lead-zinc mines at the Ying Mining Camp in the Henan Province of China.



I found this stock using the real-time custom scan that searches for high vols.



Custom Scan Details

Stock Price GTE $7 and LTE $70

IV30™ - HV20 LTE 10

HV180 - IV30™ LTE -8

Average Option Volume GTE 1,200

Industry isNot Bio-tech

Days After Earnings GTE 10 and LTE 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.



Let’s start with SVM Charts Tab (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™: 99.24

HV20: 76.21

HV180: 59.92



So, IV30™ is elevated relative to the short-term and long-term realized movement of the stock. The HV10 is 58.38, so the stock has actually moved with less volatility in the very recent term. On the stock side, we can see the price drop off of earnings from $10.40 to $8.95 or ~14%.



Let’s turn to the Skew Tab.







The front month shows a parabolic shape while Oct is sort of “normal.” That skew shape difference opens up some calendar spread opportunities in the OTM calls and puts between Sep and Oct.



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







Possible Trades to Analyze

I wrote about this one for TheStreet.com (Options Profits), so no specific trade analysis. I will say that there are a bunch of interesting trades to examine here.



The risk in this company does feel two-fold though, from a purely systematic point of view. Is it possible this stock dips (and vol rises) if the US market free falls? Is it also possible this stock dips and vol rises if there's some more accounting scandals with other Chinese companies? If you believe both are yes, that could mean double the risk (or whatever) -- and that means vol should be elevated.



This is trade analysis, not a recommendation.



Follow Live Trades and Order Flow on Twitter: @Livevol_Pro



Legal Stuff:

http://www.livevolpro.com/help/disclaimer_legal.html

Lender Processing Services (LPS) - Elevated Vol to Annual Low

LPS is trading $17.54, up 2.6% with IV30™ down 6.0%. The LIVEVOL® Pro Summary is below.



-----------------------------------------------------------


Click for Free Trial

-----------------------------------------------------------

Lender Processing Services, Inc. (LPS) is a provider of integrated technology and services to the mortgage lending industry, with mortgage processing and default management services in the United States.

Last time I wrote about this company (on 6-6-2011), IV30™ was trading at ~57 and I noted how high the vol was in the front month relative to the second. Today, I found this stock using the real-time custom scan that hunts for high vols relative to the short-term and long-term historical measures.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 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.

Let's start with the Skew Tab.



We can see a smooth, normal looking skew, with the downside and upside front month vols elevated to the back. Oddly, the ATM vol in Oct is actually higher than the vol in Sep. But the story here is really in the overall vol chart.

The LPS 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™: 84.18
HV20: 59.96
HV180: 36.77
HV10: 81.29

So, IV30™ is elevated relative to the short-term and long-term realized movement of the stock, unlike a number of other companies we've looked at together where the implied has popped, but not to the same level as the short-term realized movement. I do note that the shortest term measure of HV (HV10) is the highest (and thus the closest to the IV30™). In English, the 30-day implied has been trading closest to the 10-day realized, of late.  The next earnings release should be after the Oct cycle (ish), so this is likely not earnings related.

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



Possible Trades to Analyze
1. ATM covered front vol sale
An interesting trade to analyze, sort of plain vanilla, is a sale of ATM vol (either straddle or one-sided) and covering with the wings.

2. OTM covered front vol sale
Another approach is to dabble in the wings, particularly the downside where the skew does bend up to the OTM puts.  Covering with a further OTM option protects the position (limits loss).

3. Uncovered front OTM vol sale
The 52 wk range for LPS is [$15.57, 34.75], like most of the market, this stock is trading much closer to it's annual low than high (the low was made on 8-8-2011, so a few weeks ago). A sale of the OTM puts (14 or 15 strike) has limited downside by virtue of the realities of stock -- it can't go below $0 and is interesting to examine.

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:
http://www.livevolpro.com/help/disclaimer_legal.html

U.S. Bancorp (USB) - The Market Prices... Disaster?

USB is trading $20.80, up 1.2% with IV30™ down 7.6%. The LIVEVOL® Pro Summary is below.



-------------------------------------------------------------------


Click for Free Trial

-------------------------------------------------------------------

U.S. Bancorp is a multi-state financial services holding company. U.S. Bancorp provides a range of financial services, including lending and depository services, cash management, foreign exchange and trust and investment management services.

The elevated vol in the market is obviously affecting the vast majority of individual stocks, but the financial industry is one of particular interest to me as the "fear" of catastrophic failures still looms. For those interested in the note I posted on BAC, you can go here:
Bank of America (BAC) - The Odds of the Largest Bankruptcy... Ever...


Today USB came up on a real-time custom scan for calendar spreads between the front two months. As I looked it over, I noticed some interesting phenomena in the option chain beyond the calendar vol diff. Let's start simple and take a look at the other "stuff" after.

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 start with the Skew Tab (below).



We can see a rather pretty skew shape for both months -- consistent and smooth. I don't like either of those adjectives when looking for a skew trade, but that's what we got. Obviously, the front is elevated to the back (red line is above the yellow line). I believe the next earnings cycle for USB will be after the Oct cycle (i.e. in Nov), so owning Oct doesn't own an earnings report. For what it's worth, the Dec cycle is priced below both Sep and Oct (in terms of vol) for you vega buyers out there.

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).



We can see the almost obligatory stock drop, vol spike and implied trading below short-term realized vol. This is how a number of stocks look right now on the vol side. So far, this looks like a reasonable calendar spread to analyze, nothing really out of the ordinary other than, yeah, some nice vol diff.

Here's where it gets a little more interesting -- if for nothing else, from a market sentiment point of view. Let's start with the Options Tab (below).



Note the 15 strike puts in Sep. Those are priced at ~87 vol, or ~$0.16 fair value. And why does that matter? Well, the 52 wk range in USB is [$20.15, $28.66]. Keep in mind, those Sep 15 puts are winners to the longs on expo "iff" USB stock dips to $14.85. Yeah, that's a lot lower than the 52 wk low. In fact, USB hasn't been below $20 in more than 2 years. I've included a long-term stock chart for USB from Yahoo! finance, below.



Potential Trades to Analyze
I've drawn a line at $15. The only time USB breached that level was at market bottom in 2009. Before that, it was September... of 1997... The financial companies, banks in particular, have near-term options priced for a legitimate possibility (or fear) of a drop akin to the 2009 massive market bottom -- which were bank stock levels in the late 90's.

Why does that matter? Well, for those that are willing to bet against that type of stock market drop, "normal" calendar spreads are on the board with the possibility of adding naked short puts at levels like... well, like $15 for USB.

I always say it, but I want to emphasize this time:
This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:
http://www.livevolpro.com/help/disclaimer_legal.html

Rubicon Technology (RBCN) - Elevated Vol That Doesn't Mirror the Market Pattern

RBCN is trading $12.43, down 2.9% with IV30™ up 3.9%. The LIVEVOL® Pro Summary is below.



-----------------------------------------------------------


Click for Free Trial

-----------------------------------------------------------

Rubicon Technology, Inc. (Rubicon) is an electronic materials provider, which develops, manufactures and sells monocrystalline sapphire and other crystalline products for light-emitting diodes (LEDs), radio frequency integrated circuits (RFICs), blue laser diodes, optoelectronics and other optical applications.

I found this stock using a real-time custom scan. This one hunts for high vols relative to the short-term and long-term hisorical realized vol. In this market, that's actually a unique set of phenomena.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 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 RBCN 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™: 97.38
HV20: 72.56
HV180: 53.47

To put the broader market in some perspective, I've included the same vol chart for SPY, below.



The vast majority of stocks I've looked at have this type of vol chart -- where the implied is substantially elevated to the recent past, but still also substantially depressed to the short-term realized. In English, most stocks I see have moved more than the implied has... well... implied...

Let's turn to the Skew Tab for the line-by-line and month-to-month vols.



We can see a pretty normal (ish) looking skew where the front is elevated to the back given the recent market action and the shape is bid to the OTM puts and decreasing from there to the higher strikes.

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



Possible Trades to Analyze
1. If looking for some vol to sell, the Sep 12.5 straddle covered with the Sep 11/14 strangle has an interesting payout if prices are good (i.e. if there's any liquidity inside the NBBO).

2. One sided vol sales either naked or with cover also seem reasonable to analyze. Nothing jumps out as obvious by strike, but there is some juicy juice, here. Then again, most other stocks have shown that the juicy juice has been too low... so...

And yeah, I called it juicy juice... It's Friday, cut me some slack... :-p

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:
http://www.livevolpro.com/help/disclaimer_legal.html

Hess Corporation (HES) - Calendar with Two Twists

HES is trading $55.77, up 0.3% with IV30™ down 1.2%. The LIVEVOL® Pro Summary is below.



-------------------------------------------------------------------


Click for Free Trial

-------------------------------------------------------------------

Hess Corporation (Hess) is a global integrated energy company that operates in two segments: Exploration and Production (E&P), and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas.

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the second and third months. But, there's an interesting twist to this one... two twists, actually...

Custom Scan Details
Stock Price GTE $5
Sigma2 - Sigma3 GTE 7
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 and LTE 50
Sigma2, Sigma3 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 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).



Twist #1: Check out the elevated vol in the options expiring today. In particular, that Aug 55 put vol at ~ 85 yields a put that's worth ~$0.40 to fair value but is $0.77 OTM with five hours left in this expiration cycle. Ooo...

Twist #2: HES's last released earnings on 7-27-2011; the last two years the next earnings cycle was 10-27-2010 and 10-28-2009... So?... Well, that means earnings are due out this year in the Nov cycle -- yeah, that green line. In other words, the month two to three calendar owns earnings vol for less than it sells "non-earnings" vol.

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).



It really is remarkable how every stock chart looks the same right now... ok, every is an overstatement, but ya know what I mean... The vol portion looks similar to the rest of the market as well -- the implied has popped, but not as much as the underlying has moved in the last 10 and/or 20 trading days. Specifically:

IV30™: 55.67
HV20: 63.23
HV10: 84.75
HV180: 35.87

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



Note the vol diff in teh three expiration cycles (including Aug):
Aug: 83.83
Sep: 56.26
Nov: 47.92

Potential Trades to Analyze
1. Vanilla calendar:
Spreading Sep to Nov, owning the vega in Nov protected by an earnings release seems like a reasonable position to analyze. The short gamma is a noteworthy risk here, as, obviously, stocks are moving.

2. Not a vanilla calendar
Trade #1 with a sale of the Aug 55 vol -- that's selling two legs against one long leg and gets super short the gamma (at least for a day). A slight alternative is to do a Aug/Nov spread, and then on close (or on Monday), sell the Sep options to re-up the calendar.

Just a reminder, I'm not kidding when I say the gamma risk right now is substantial. In my mind, 40 VIX isn't sustainable -- it's higher or lower, but it won't stay here. If that's the case (which it may not be), stocks are moving from here (in some direction).

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:
http://www.livevolpro.com/help/disclaimer_legal.html

Pre-Market: 8-19-2011

To get an e-mail alert when a new pre-market report is posted please send an e-mail to support (support (at) livevol.com) with "Pre-market" in the subject line.

-----------------------------------------------------------


Click for Free Trial

-----------------------------------------------------------



Download as .pdf: PDF Download

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:
http://www.livevolpro.com/help/disclaimer_legal.html

Con-Way (CNW) - New Lows on Exploding Vol and Order Flow

CNW is trading $23.76, down 7.5% with IV30™ up 23.6%. The LIVEVOL® Pro Summary is below.



-----------------------------------------------------------


Click for Free Trial

-----------------------------------------------------------

Con-way Inc. (Con-way) provides transportation, logistics and supply-chain management services for a wide range of manufacturing, industrial and retail customers.

The stock showed up on the high volume scan and the rising vol scan. Let's focus on both, but start with the vol. The scan details are below with a snapshot if you want to build it yourself in Livevol® Pro.

Custom Scan Details
Stock Price GTE 10
Average Option Volume GTE 1,200
Days After Earnings GTE 5 and LTE 60
IV30™ Percent Change GTE 10%
IV30™ GTE 10

The goal here is find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.



The CNW 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).



IV30™: 63.70
HV20: 74.26
HV180: 37.80
HV10: 103.09

Keep in mind the HV measures are close-to-close, so they do not include the move today, which will certainly elevate those numbers tomorrow. Looking to the chart, we can see the stock has been dipping hard. There was an earnings miss earlier this month and then the overall market downturn has certainly helped push this name lower on already "bad" news. Like a lot of companies of late, even though the implied has been exploding, it's still priced below the recent realized movement of the stock. In other words, that elevated vol was actually a purchase. Well there you go...

Let's turn to some order flow, today. The company has traded nearly 13,00 contracts on a daily average volume of just 604. Puts have traded on a 4.9:1 ratio to calls with the action in the Sep 20 and 25 puts. I actually believe both sides of those were purchases. The Stats and Day's Biggest Trades snaps are included below.





Turning to the Options Tab (below), we can see that both sides of that trade (both lines) are opening (compare trade volume to OI). The bets are rolling in for Sep, and they're opening long vol and likely short deltas.



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



I've highlighted the two strikes in Sep that have been trading. There is a noticeable increase in vol to those Sep 20 puts, but in general, the skew looks "normal(ish)." We can also note the elevated Sep to Dec vol, though Dec will have an earnings cycle, and Sep probably will not.

Possible Trades to Analyze
More holistic here, note the elevated vols that are below the realized returns. If the market really really goes into panic, the implied can return above the HV measures. In English, the market is down a lot, but panic is not here... yet...

The 52 wk range for CNW stock is [$23.93, 42.20]... i.e. it's hitting a new low right now, so those downside bets, especially to the 20 strike, are looking for even lower lows... If that happens, vol will rise more, I'm guessing. The 52 wk range in IV30™ is [27.75, 68.34]. A breach of 70 vol is quite possible if CNW dips another $2 soon.

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:
http://www.livevolpro.com/help/disclaimer_legal.html

Citigroup (C) - Popping Vol, Diagonal Calendar to Vega

C is trading $27.39, down 8.2% with IV30™ ripping up 35.3%. The LIVEVOL® Pro Summary is below.







-----------------------------------------------------------





Click for Free Trial



-----------------------------------------------------------



Citigroup Inc. (Citigroup) is a global diversified financial services holding company. Citigroup businesses provide consumers, corporations, governments and institutions with a range of financial products and services. Ya know… Citigroup….



The stock came up on a couple of scans today – both the calendar spread scan and the rising vol scan. It’s the rising vol that caught my attention, so we’ll focus on that. The scan details are below.



Custom Scan Details

Stock Price GTE 10

Average Option Volume GTE 1,200

Days After Earnings GTE 5 and LTE 60

IV30™ Percent Change GTE 10%

IV30™ GTE 10



The goal here is find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.



Let’s start with the stock and vol charts first, this time. The C 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).







On the stock side we can see that the price action has fallen to scary levels – the potential for new lows looms ever so large, whether it be by the end of the day, tomorrow, or in the near-future (read: this Fall).



On the vol side, we can see the massive spike in IV30™ of late – well above the long-term historical realized trend. But, the implied is actually printing well below the HV20 (and the HV10). In English, the rise in the implied vol has been less than the actual recent realized volatility in the stock price. Specifically we can see:



IV30™: 81.76

HV20: 101.07

HV180: 41.63

HV10: 140.54



Let’s turn to the Skew Tab snap (below) to examine the vols by strike by month.







I’ve included the Aug options (expiring tomorrow) and the Sep options. I’ve excluded the Aug (W) that expire next Friday. Note the parabolic skew in the Aug options which isn’t apparent in the Sep options. For pure calendar spreaders, that upside vol diff is quite large. That however, isn’t quite where my attention is. Let’s look to the Options Tab, and do a little math to discuss a different possibility.







I wrote about this one for TheStreet.com(OptionsProfits), so no specific trade analysis here. But, there's a lot to examine. First we can see that the Sep ATM are trading at around 82 vol while the Aug ATM are trading more like 100 vol. Keep in mind the vol comps above from the Charts Tab – 82 vol might actually be “cheap” relative to the movement of the stock in the recent past.



While a straight calendar spread is interesting, there is another alternative here given that the front month we’re examining expires in two days and the back has a full month to go. For example, if we look at owning the Sep 25 puts against a sale of the Aug 26 puts, that receives essentially 20% of the Sep premium for a day and a half in Aug. Granted, it’s a risky day and a half in Aug. Hypothetically, this trade could lose the entire premium paid AND the difference in the strike prices, so ~ $2.40.



But, with a little math, we can see that even if the stock gapped down to $25 tomorrow, the trade would still look like a win. Here’s the math:



Today:

Pay ~$1.40 to own the put spread.



Tomorrow (if vol stays the same in Sep):

Stock closes at $25

Short Puts PnL: ($0.32 - $1.00) = -0.68

Long Puts PnL: ($2.60 - $1.72) = +$0.88

So, a $0.20 win.



Another way to look at the spread value in this event, is simply to unwind @ $1.60 (which also yields the $0.20 gain). Of course, if the stock is down another $2.00, the vol will likely go up in Sep, making the trade a bigger winner.



Doing the same math if the stock goes to $24, yields a $1.04 value in the put spread (if vol stays the same), so ~ $0.36 loser. Should vol go up 10 points, that trade is close to breakeven. Obviously if C falls apart tomorrow (below $24), that diagonal strike difference will catch up to the trade an d create a loss (a least for the one day).



Yet another way to do this math, and in fact the way I do it so it takes just a few seconds, is to look at the calls in Sep. The puts are worth parity + calls (negligent interest rates right now), so move $1 away from the money and do some math that way.



Anyway, the point? The risk of this type of trade is to the upside, not the downside, even though the diagonal strikes are long delta as the stock drops. The opportunity to cover a short put (call) with a lower (higher) strike put (call) saves a lot of premium (in this case ~ $0.30, which protects an upside (downside) move) yet leaves the position fairly safe to the downside (upside). That means less upside (downside) risk (less premium invested) and still downside (upside) PnL likelihood if there’s another down (up) day and substantially better PnL if the stock stays here (ish) for one more day.



In times of extreme vol in the front, this type of diagonal calendar opportunity does appear fairly often as an alternative to a plain vanilla calendar spread.



This is trade analysis, not a recommendation.



Follow Live Trades and Order Flow on Twitter: @Livevol_Pro



Legal Stuff:

http://www.livevolpro.com/help/disclaimer_legal.html

GameStop (GME) - Earnings Preview and Patterns

GME is trading $20.51, down 4.1% with IV30™ up 13.7%. The LIVEVOL® Pro Summary is below.



-----------------------------------------------------------


Click for Free Trial

-----------------------------------------------------------

GameStop Corp. (GameStop) is a multichannel retailer of video game products and personal computer (PC) entertainment software.

The company has earnings due out tomorrow BMO -- so today is the last day to trade before the report and the vol is up with active options. GME has traded over 15,000 contracts on total daily average option volume of just 4,451. The action has been in the Aug 20 puts, Aug 22 calls, and Aug 21 calls, respectively. They all look like substantially purchases. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates that the Aug 22 calls are mostly opening (compare OI to trade size). The Sep 23 calls have traded nearly 1,900 on small OI as well.



Let's look at some earnings stats for GME from the last eight quarters, below.



The final column illustrates the results. In seven out of the last eight earnings cycles selling the one day ATM straddle has been a winner with a sale the day before earnings and a purchase the day after. The largest absolute move in the straddle value was, however, the one time the straddle was a purchase.

Let's turn to the Skew Tab snap (below) to examine the vols by strike by month.



We can see the elevated vol in the front which is normal given that earnings are out tomorrow. The front month shows a parabolic skew reflecting both upside and downside risk, whereas the back months look more normal (ish), with the downside priced higher than the upside (in terms of vol).

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 that the implied generally trades above the realized vol, or so it has for the last six months. Interestingly, the implied is lower now than it was on 8-8-2011 (IV30™ was 55.97 which is the 52 wk. high).

Possible Trades to Analyze
The front month is pure earnings vol at this point, so any trade that buys or sells that vol is firmly embedded in some type of earnings bet. Having said that, let's look at some possible trades to examine keeping the 7/8 trend from previous earnings results with respect to the ATM straddle.

1. For bulls:
An interesting position could be owning the Sep 21 calls for ~52 vol against a sale of the Aug 22 calls @ ~114 vol. That spread costs less than $1.00, so an upside spike would be a winner. Certainly an earnings release that pushes the stock down hard would hurt that trade.

2. For bears:
Owning the Sep 20 puts for ~53 vol against a sale of the Aug 19 puts @ ~122 vol, also costs less than $1, so a big move down down (or small move down) is likely a winner. A move up, especially a large one, could turn that into a loser.

3. For delta neutral:
An interesting trade could be a sale of the Aug 20/21 strangle @ ~115 vol against a purchase of the Sep 20/21 strangle for ~52 vol. There is some risk here of course that the stock gaps one way or the other. That would leave this trade a loser. Certainly wider strangles are also worth examining and have slightly different PnL ranges and risks.

All three of the trades above bet on a relatively small moves for the stock. A perfectly reasonable (and contrarian) approach would be to bet on a large move given the state of the market as a whole. That may mean owning that vol in Aug as opposed to selling it.

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:
http://www.livevolpro.com/help/disclaimer_legal.html