ABK - What Option Prices Imply About the Stock

Discussion in 'Stocks' started by livevol_ophir, Apr 14, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    ABK is trading 1.85.

    <img src="http://1.bp.blogspot.com/_hMry1m7UF10/S8X7QB79Q1I/AAAAAAAABz0/pGyOTMDwyxc/s1600/abk_summary.gif"

    For those not following it - it's gone from as low as $0.51 on 3-29-2010 (i.e. 16 days ago) all the way to $3.39 yesterday finally to close at $1.62 and now it's $1.85. The low to high move in 16 days was a 564% gain. Even at 1.85 it's 262% - in the words of Adam Sandler - "not too shabby."

    I find a few things pretty interesting when looking at the Options Tab (in the article).

    First, the Aug and Nov 1.5 calls are the same price as their respective puts. Why is that weird? Becasue the stock is trading $1.85. The reversal is sitting up there for a fat credit - which implies that the rate is negative (hard to borrow). You can see this is not quite the case with the May 1.5 calls and puts (i.e. calls > puts as we would expect.)

    Hard to borrow means there are a lot of bets that this thing goes down...

    An interesting bet here is to sell the Nov 1.5 puts @ 0.75 naked. This has a max gain of $0.75 (i.e. the credit) and a max loss if the stock goes to $0.00 - also $0.75 (i.e. $1.5 - $0.75). This is a 1:1 payoff maxLoss:maxGain.

    So, sort of stretching the analysis it feels like the market is implying that there is a 1:1 (i.e. 50%) chance these things actually end up in the money (below 1.5). That's weird, b/c usually we think of stock as random in a small area (50% chance up or down) - so this would make more sense if the hypothetical Nov 1.85 calls and puts were equally valued, not the 1.5 strike.

    The option chain is full of trading opportunities really - whether you feel like this thing is worth zero or if you believe in a comeback - because the markets are tight (ish) and very liquid. You can find very strong opinions abound from it going to $0.00 or to as high as $5+.

    It's a cool stock to watch in the morning as it easily moves 20% in a few minutes for all of you stock day traders out there.

    This is trade analysis, not a recommendation.

    Details, prices, vols, options here:
  2. Yeah, I was looking at ABK earlier.

    I have no clue what it will do in the future. I would be afraid to sell the puts just to see it go under quickly and still lose the money.

    What's interesting to me is the high premiums for even such short terms in the front months. If a person tries they can construct a trade that could be good in just about any movement, provided the IV stays the same - granted, it most likely wont, but one reason it may not would be a sustained move in the stock (i.e. right now no one is sure what to expect so IV is high, but if something concrete happened good or bad that would move the stock and lower the IV.)

    I have posted a trade that I think would be interesting for a stock like that that as you say could go under or could go to several $s or so. This is of course just a sample and not a recommendation either.

  3. livevol_ophir

    livevol_ophir ET Sponsor

    Nice - when is the chart? i.e. when in time? Is that May expo?
  4. just a quick look at your trade jjack, seems too good to be true.

    are you making some assumptions that are not likely to occur?

    vol is all over the place and moving FAST.
  5. I Just made the chart about an hour ago (sorry, went for lunch after). Yes, you should be able to see on the right side, it is selling May and buying Aug options.

  6. The assumption that is being made here is basically IV remaining extremely high. I can't say that can't happen, but it could be unlikely to stay at the super high levels we see now. In other words, pretend that at May expiration, ABK was between 1.50 and 2.00 - you would now be long the 1.5/2.0 strangles for Aug - whatever they would be worth is very dependent on IV at the time since there would be no intrinsic value - on the other hand if ABK went up to say $4-5 before May expiration, you would have enough longs to cover the short May calls, plus an extra grouping of Aug longs that would have some intrinsic value and I would imagine still have some time value - the put side would probably all be worthless in that situation however.

    Basically though the trade could do poorly if the stock IV fell due to maybe the market paying less attention to it after a while and/or it just got stuck in a range. A person making the P/L chart such as I made there should play around with different IV assumptions to see how much effect exactly it would have.

  7. I would say that IV in the 200-300 range for that long a period is unlikely here, thus the apparent free money. There may be a good trade there, but it would require more than just putting it on and sitting.