ATPG - Depressed Vol into Earnings

Discussion in 'Options' started by livevol_ophir, Oct 25, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    ATPG closed at $14.73 on Friday, down 0.9%. The <a href="">LIVEVOL™ Pro Summary</a> is below.

    <img src="" />

    <a href=""><img height="200" src="" /></a>

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    ATPG is engaged in the acquisition, development and production of oil and natural gas properties in the Gulf of Mexico and the United Kingdom and Dutch Sectors of the North Sea (the North Sea). I found this stock using a real-time custom scan. This one hunts for low vols.

    <b>Custom Scan Details</b>
    Stock Price >= $7 and <= $70
    IV60™ >= 1
    IV60™ - HV60™ <= -8 and >= -40
    HV180™ - IV60™ >= 8
    Average Option Volume >= 1,200
    Industry != Bio-tech

    The goal with this scan is to identify intermediate-term implied vol (IV60™) that is depressed both to the intermediate stock movement (HV60™) 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) and want to avoid bio-techs (and their crazy vol).

    The ATPG Charts Tab (vol only) is included (<A href="">in the article</a>). IV60™ - yellow vs HV60™ - blue vs HV180™ - pink.

    <img src="" width="600" />

    We can see:
    IV60™: ~65.72
    HV60™: 74.93
    HV180™: 79

    So, IV60™ is depressed relative to the intermediate term and long term realized movement of the stock. Further, looking at the vol chart we can see a time when IV60™ traded at a substantial premium to the realized vol (around early June).

    Finally, let's look to the Options Tab (<a href="">in the article</a>).

    <img src="" width="600" />

    Note that earnings are projected to be in the Nov cycle, early to mid November so there is a vol event embedded in the Nov and Dec options.

    <b>Possible Trades to Analyze</b>
    1. Buy the Dec 15 straddle for 64 vol or $3.00. This requires ATPG to be outside the range [$12, $18] if held to Dec. expo. This trade also wins to increased vol in Dec if it is enough to overcome the theta (time decay). The 52 wk range for ATPG is [$8.16, $23.97]

    2. Sell something around that long straddle in #1. Maybe sell the Dec 12.5/18 strangle @ $1.05, reducing the total outlay to $1.95.

    3. Try #1 above, and sell more than 1:1 in Dec. Maybe sell 2 puts in the Dec 12.5/18 strangle, yielding a total debit of just ~$1.20.

    4. The alternative of course, is to do the opposite. Maybe the stock really is going to sit at $15; the De 14/15/16 butterfly looks like a MaxGain:MaxLoss payoff of ~ 7:1 on a pretty cheap $0.13 bet. Note that the payoff ratio is so big b\c the odds of max gain (ish) are low.

    This is trade analysis, not a recommendation.

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