APOL - Earnings Vol Trade and Analysis

Discussion in 'Options' started by livevol_ophir, Oct 13, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    APOL is trading $49.93, down small with IV30™ down 1.6%. The <a href="http://www.livevol.com/">LIVEVOL™ Pro Summary</a> is <a href="http://livevol.blogspot.com/2010/10/apol.html">in the article</a>.

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

    -------------------------------------------------------------------
    <a href="http://www.livevolpro.com/help/free_trial.html"><img src="http://www.livevolpro.com/help/images/blog/lvp_trial_ad.gif" height="200" /></a>

    For a limited time we are offering a FREE real-time trial to Livevol Pro™ for non-professional traders. You can get your trial by following the directions here: <b><a href="http://www.livevolpro.com/help/free_trial.html">Click for Free Trial Offer</a></b>
    -------------------------------------------------------------------

    APOL has earnings today, AMC. I have included the earnings stats for the last 8 cycles for APOL (<a href="http://livevol.blogspot.com/2010/10/apol.html">in the article</a>).

    <b>What We're Lookin' At:</b>
    The result of a simple trade: Sell the ATM straddle the day before earnings, and buy it back the day after. We can see that the straddles are pretty fairly priced as a sale was a winner 4/8 times and a purchase was a winner the other 4/8 times. The average is for the sale to win a 4% gain, which is pretty small given the risk of a short earnings straddle.

    Also look at the "ATM Straddle IV" column. The average ATM vol the day before has been 74.63%, with a low of 50.58%. More on that in a sec. Let's look to the Options Tab (<a href="http://livevol.blogspot.com/2010/10/apol.html">in the article</a>).

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

    We can see the ATM straddle is trading at ~ 118 vol, with mid-market ~ $3.65. Keep in mind, the 118 vol isn't really a fair comparison to the other vols b/c expo is only three days away. That means the vol is almost entirely earnings related with no "dilution" of "normal" trading days. For a better explanation of this phenomenon, you can read the article I write for Bernie Schaeffer's mag, "Sentiment" here:<b><a href="http://www.schaeffersresearch.com/sentiment/pdfs/sentiment_2010_Summer.pdf">Sentiment Magazine</a></b>. Page 25-26, and check out the section "Scheduled Volatility Events."

    So, now what?...

    <b>Possible Trades to Analyze </b>
    1. Sell the ATM straddle @ $3.65 and hold on for dear life. Very risky... This is a pure short gamma trade.

    2. Make a delta bet and a vol bet. The for-profit education companies have been on an upswing of late. Sell the 50 puts @ $1.85, leave just one sided risk.

    3. Sell the 49/50 put spread @ $0.50 or better (not easy to get those prices). Then you have a 1:1 MaxLoss:MaxGain ratio, and you get to take a stand on the earnings vol. Keep in mind, you could buy the spread and make the opposite bet. I like the sale of put spreads the best.

    I am tantalized by the Oct 48/50 1 x 2 put spread - buy 1 Oct 50 put, sell 2 Oct 48 puts @ ~$0.15 net credit. Note the naked downside though below $46.

    These are all very risky. This would be a pure speculation play, not an "investment."

    This is trade analysis, not a recommendation.

    <b>Follow Live Trades and Order Flow on Twitter: @Livevol_Pro</b>

    Details, trades, prices, vols, skews, charts here:
    <a href="http://livevol.blogspot.com/2010/10/mtb.html">http://livevol.blogspot.com/2010/10/mtb.html</a>

    Legal Stuff:
    <a href="http://www.livevolpro.com/help/disclaimer_legal.html">http://www.livevolpro.com/help/disclaimer_legal.html</a>
     
  2. It doesn't look like those choices did very good :(.

    Of course, you can't win them all.

    Also, you wrote an article for Bernie Schaeffer!? Seriously, I thought his book was OK and he has some good ideas but when I got offered a super cheap subscription to his basic service (it was something like $50 for a year and a half, so I said what the heck), I tracked many of the trades and they didn't seem to be much better then flipping a coin.

    JJacksET4
     
  3. livevol_ophir

    livevol_ophir ET Sponsor

    I'll defer to your experience with Bernie Schaeffer. I just wrote an article on volatility at a sort of beginner/intermediate level. Thanks for your feedback.