APOL - Calendar Spread in Play After Earnings Collapse

Discussion in 'Options' started by livevol_ophir, Nov 8, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    APOL is trading $36.34, up 1.7% with IV30™ down 1.8%. The <a href="http://www.livevol.com/">LIVEVOL™ Pro Summary</a> is <a href="http://livevol.blogspot.com/2010/11/apol.html">in the article</a>.

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    I wrote about APOL a few weeks ago, the earnings vol looked elevated. Well... It wasn't a sale, the stock collapsed.

    The stock just came up again on a real-time custom scan. This one hunts for calendar spreads between the front two months.

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

    The snapshot of the scan is included (<a href="http://livevol.blogspot.com/2010/11/apol.html">in the article</a>) in case you want to build it yourself in Livevol Pro™.

    <img src="http://www.livevolpro.com/help/images/blog/calendar_spread_scan.gif" width="600" />

    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 (<a href="http://livevol.blogspot.com/2010/11/apol.html">in the article</a>), we can see the elevated vol in the front month (red line) relative to the second month (yellow line).

    Now we can turn to the Charts Tab (<a href="http://livevol.blogspot.com/2010/11/apol.html">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

    <img src="http://www.livevolpro.com/help/images/blog/apol_charts_11-8-2010.gif" width="600" />

    I've highlighted the recent earnings collapse - the stock dropped $11.50 to $38 and since has drifted a bit further down. That abrupt move has turned the skew a touch steeper to the downside, which may provide a trading opportunity.

    Finally, let's look to the Options Tab (<a href="http://livevol.blogspot.com/2010/11/apol.html">in the article</a>).

    <b>Potential Trades to Analyze</b>
    1. Buy Dec and Sell Nov ATM straddle. That looks like it would go for ~: $2.75 - $4.05 = $1.30 debit. This probably loses if APOL moves more than the $2.75 away from 36 in Nov. It sells 54 vol and purchases 47 vol.

    2. The OTM put calendar yields a slightly larger vol spread. The Nov/Dec 33 put spread purchases 50 vol and sells 59.

    3. Stepping out to a riskier trade, sell 2 options in Nov and purchase one in Dec. In this case, if doing the puts, a purchase of one strike higher in Dec gives a bit of cushion - so a Dec 34/ Nov 33 1x2 for example costs ~$0.20 but is naked downside below $32 (ish) in Nov.

    4. The call side is in play as well. OTM calendars look reasonable there as well.

    This is trade analysis, not a recommendation.

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    Details, trades, prices, vols, skews, charts here:
    <a href="http://livevol.blogspot.com/2010/11/apol.html">http://livevol.blogspot.com/2010/11/apol.html</a>

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  2. I took a look at this late this afternoon and the premium cost for the Nov/Dec calendar straddle was larger. You must have moved the market! :eek:

    Just curious... Is your program searching/calculating the IV of the bid for the options sold and for the ask of the options bot or is it using some sort of average? If it's the latter, I'd request that you consider setting the search criteria a tad wider (larger IV difference month to month) because even when I look at these in a timely fashion, they don't look as attractive to me. Is beauty in the eyes of the beholder? :)


    EDIT: I just read your THOR post and that's a better candidate vis a vis larger IV difference. Unfortunately, the spread is pretty wide, at least on the closing quotes. Worth a look tomorrow.
  3. livevol_ophir

    livevol_ophir ET Sponsor

    Thanks for the note. The vols are mid-market, but I try to adjust slightly for doing the trades inside NBBO (i.e. I report vols slightly worse than they are), but on the bad side. THOR is def a better candidate in terms of vol, there is liquidity there at slightly better than NBBO, or so I believe.