ADS - Huge Vega Sale on Highly Elevated Vol

Discussion in 'Options' started by livevol_ophir, Jul 2, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    ADS is trading $56.64, down 4.8% today with IV30&#8482 up 6.6%.

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    The company has traded nearly 18,000 options in the first three hours on total daily average option volume of just 1,888. All but 2,156 contracts have been puts yielding over a 7:1 put:call ratio. The largest trade was 13,290 Sep 50 puts crossed electronically on the bid on CBOE; I believe that to be a sale. The Stats Tab and Day's biggest trades snapshots are included (<a href="">in the article</a>).

    The Options Tab (<a href="">in the article</a>) illustrates that the puts are opening (compare OI to trade size). I don't see any line in the front three months with more than 2,500 OI, so 13,290 is really big for this company.

    The trade printed at 10:45 EST. When I looked up Time & Sales for the stock, I see a 318,960 lot traded at 10:46 EST (i.e. one minute later). I have included the snap (<a href="">in the article</a>).

    The exchange reported the stock trade as "Regular," but it printed more than $0.50 out outside of the NBBO. The PnL chart is included below, but I am using $57.83 stock (the stock value according to the option trade) rather than the price the exchange reported which seems erroneous.

    <b>Trade Stats</b>
    Sell 13,290 ADS Sep 50 puts @ $2.30
    Sell 318,960 ADS stock @ $57.83
    That number shares works out to a 24 delta.
    Max Gain (at $50 at expo): $5,554,157
    Breakeven Low: $44.50
    Breakeven High: $67.41

    This trade is short $112,965.00/vol. In other words, each vol point carries over $100,000 in PnL. Note that vega is not constant (the second derivative of price with respect to vol is not zero). Let's get back to the vol in a sec. First the skew tab.

    The Skew Tab snap (<a href="">in the article</a>) illustrates the vols by strike by month.

    Pretty normal lookin' skew.

    Finally, the Charts Tab (6 months) is below (<a href="">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30&#8482 - red vs HV20&#8482 - blue). The yellow shaded area at the very bottom is the IV30&#8482 vs. the HV20&#8482 vol difference.

    We can see a sharp price decline and the IV30&#8482 (red line) moving well above the HV20&#8482 (blue line).

    I have also included the vol chart of HV90&#8482 (dark blue line) vs. the IV90&#8482 (green line).

    Note how far the implied (green) is trading above the historical (blue). The Sep options correspond more closely to the IV90&#8482 than the IV30&#8482 if looking to expo. Either way, this trade sells highly elevated vol in a stock that has dropped hard recently. The trade does have room for another ~$9 of stock drop before it loses money.

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, skews, charts here:
  2. There is more vanna than vomma (2nd moment) as the surface is flat and vol will rise/fall with spot and the sector and broader market. Doesn't it look to you that the stock was the upstairs-hedge since it was done under NBBO?Anyway, someone thinks the stock is neutral to higher.
  3. livevol_ophir

    livevol_ophir ET Sponsor

    It could be upstairs, but I don't think the trade was a naked put sale. Feels like a bet against vol and a delta bet. But I dunno for sure.
  4. I was thinking it was a neutral upstairs trade here. The floor would be a buyer of spot if upstairs sold it. Did you see any other blocks?
  5. livevol_ophir

    livevol_ophir ET Sponsor

    No other blocks I could see, the rest of the stock trades were very small. This one really stood out in size.
  6. Maybe too simplistic, but I assume the seller went neutral on the 50-strike position rather than selling the natural atm straddle. If there are any gamma trades forthcoming they won't be very large. I'll bet there was >normal volume overall in the stock as the trade went off. My guess is that the two trades were upstairs as the stock was a single print at ~25-delta.
  7. livevol_ophir

    livevol_ophir ET Sponsor

    Yup. I agree; that's what I assumed in the PnL chart. Lopsided straddle sale.